

[Federal Register: August 14, 2007 (Volume 72, Number 156)]
[Proposed Rules]               
[Page 45599-45610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14au07-32]                         


[[Page 45599]]

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Part V





 Securities and Exchange Commission





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17 CFR Parts 210, 228, 229 et al.



 Concept Release on Allowing U.S. Issuers To Prepare Financial 
Statements in Accordance With International Financial Reporting 
Standards; Proposed Rule


[[Page 45600]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 230, 239, 240 and 249

[Release No. 33-8831; 34-56217; IC-27924; File No. S7-20-07]
RIN 3235-AJ93

 
Concept Release on Allowing U.S. Issuers To Prepare Financial 
Statements in Accordance With International Financial Reporting 
Standards

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comment.

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SUMMARY: The Commission is publishing this Concept Release to obtain 
information about the extent and nature of the public's interest in 
allowing U.S. issuers, including investment companies subject to the 
Investment Company Act of 1940, to prepare financial statements in 
accordance with International Financial Reporting Standards as 
published by the International Accounting Standards Board for purposes 
of complying with the rules and regulations of the Commission. U.S. 
issuers presently prepare their financial statements in accordance with 
generally accepted accounting principles as used in the United States, 
referred to as U.S. GAAP.

DATES: Comments should be submitted on or before November 13, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/concept.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number S7-20-07 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.


Paper Comments

     Send paper submissions in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-20-07. The file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/concepts.shtml). Comments 

also are available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Questions on this Concept Release 
should be directed to Gina L. Even, Business Associate, or Katrina A. 
Kimpel, Professional Accounting Fellow, Office of the Chief Accountant 
at (202) 551-5300; Sondra L. Stokes, Associate Chief Accountant, 
Division of Corporation Finance at (202) 551-3400; or Richard F. 
Sennett, Chief Accountant, Division of Investment Management at (202) 
551-6918; U.S. Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-3628.
    SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. The Effect of IFRS on the U.S. Public Capital Market
    A. Financial Reporting in the United States
    B. Financial Reporting Outside the United States
    C. The Possible Use of IFRS by U.S. Issuers
    D. Convergence of IFRS and U.S. GAAP
III. Global Accounting Standards
    A. The Case for a Single Set of Globally Accepted Accounting 
Standards
    B. The International Accounting Standard Setter
    C. The Commission's Previous Consideration of International 
Accounting Standards
IV. IFRS Implementation Matters for U.S. Issuers
    A. Education and Training
    B. Application in Practice
    C. Auditing
    D. Regulation
    E. Integration With the Commission's Existing Requirements
    F. Transition and Timing
V. General Request for Comments

I. Introduction

    The Commission has long advocated reducing disparity between the 
accounting and disclosure practices of the United States and other 
countries as a means to facilitate cross-border capital formation while 
providing adequate disclosure for the protection of investors and the 
promotion of fair, orderly and efficient markets. The Commission also 
has encouraged the efforts of standard setters and other market 
participants to do the same.\1\ To those ends, as part of a 1988 Policy 
Statement, the Commission explicitly supported the establishment of 
mutually acceptable international accounting standards as a critical 
goal to reduce regulatory impediments that result from disparate 
national accounting standards without compromising investor 
protection.\2\
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    \1\ See ``Integrated Disclosure System for Foreign Private 
Issuers'' Securities Act Release No. 33-6360 (November 20, 1981) 
(the 1981 Proposing Release).
    \2\ See ``Regulation of the International Securities Markets'' 
Securities Act Release No. 33-6807 (November 14, 1988) (the 1988 
Policy Statement).
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    Further, in 1997, the Commission noted that for issuers wishing to 
raise capital in more than one country, preparing more than one set of 
financial statements to comply with differing jurisdictional accounting 
requirements increased compliance costs and created inefficiencies.\3\ 
In the study prepared pursuant to a mandate from Congress, the 
Commission encouraged the efforts of the International Accounting 
Standards Committee (``IASC''), the international accounting standard 
setting body at the time, to develop a core set of accounting standards 
that could serve as a framework for financial reporting in cross-border 
offerings, and indicated the Commission's intent to remain active in 
the development of those standards. These standards are now known as 
International Financial Reporting Standards (``IFRS'').
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    \3\ See ``Pursuant to Section 509(5) of the National Securities 
Markets Improvement Act of 1996 Report on Promoting Global 
Preeminance of American Securities Markets'' (October 1997) 
available at http://www.sec.gov/news/studies/acctgsp.htm.

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    In 2000, the Commission issued a Concept Release seeking input on 
convergence to a high quality global financial reporting framework 
while upholding the quality of financial reporting domestically.\4\ The 
2000 Concept Release sought comments as to the conditions under which 
the Commission should accept financial statements of foreign private 
issuers that are prepared using IFRS, and the use of the U.S. GAAP 
reconciliation of IFRS financial statements.\5\ The Commission

[[Page 45601]]

has continued to monitor the international developments that were 
discussed in the 2000 Concept Release.
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    \4\ See SEC Concept Release ``International Accounting 
Standards,'' Release No. 33-7801 (February 16, 2000) (the 2000 
Concept Release) available at http://www.sec.gov/rules/concept/34-42430.htm
.

    \5\ The term ``foreign private issuer'' is defined in Exchange 
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer 
means any foreign issuer other than a foreign government except an 
issuer that meets the following conditions: (1) More than 50 percent 
of the issuer's outstanding voting securities are directly or 
indirectly held of record by residents of the United States; and (2) 
any of the following: (i) The majority of the executive officers or 
directors are United States citizens or residents; (ii) more than 50 
percent of the assets of the issuer are located in the United 
States; or (iii) the business of the issuer is administered 
principally in the United States.
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    In October 2002, the Commission supported the announcement by the 
Financial Accounting Standards Board (``FASB'') and the International 
Accounting Standards Board (``IASB''), the successor of the IASC, of a 
Memorandum of Understanding, referred to as the Norwalk Agreement, to 
formalize their commitment to the convergence of U.S. and international 
accounting standards.\6\ In this agreement, the two standard-setting 
bodies acknowledged their joint commitment and pledged to use their 
best efforts to the development, ``as soon as practicable,'' of high 
quality, compatible accounting standards that could be used for both 
domestic and cross-border financial reporting.\7\ In addition to 
supporting the convergence efforts of the IASB and the FASB, we have 
long worked with each board on the development of their respective 
standards; however, the nature of our relationship with each board 
differs.
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    \6\ See Financial Accounting Standards Board and International 
Accounting Standards Board, Memorandum of Understanding, ``The 
Norwalk Agreement,'' (September 18, 2002) (the Norwalk Agreement) 
available at http://www.fasb.org/news/memorandum.pdf.

    \7\ Id.
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    In 2005, the Commission adopted an accommodation to allow foreign 
private issuers that are first-time adopters of IFRS to file two years 
rather than three years of IFRS financial statements in their 
Commission filings.\8\ Most recently, on June 20, 2007, the Commission 
approved for public comment a proposal to accept from foreign private 
issuers financial statements prepared in accordance with the English 
language version of IFRS as published by the IASB without the currently 
required accompanying reconciliation to U.S. GAAP.\9\
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    \8\ See ``First-time Application of International Financial 
Reporting Standards'' Securities Act Release No. 33-8567 (April 12, 
2005) (the 2005 Adopting Release) available at http://www.sec.gov/rules/final/33-8567.pdf
.

    \9\ See ``Acceptance from Foreign Private Issuers of Financial 
Statements Prepared in Accordance with International Financial 
Reporting Standards without Reconciliation to U.S. GAAP'' Securities 
Act Release No. 33-8818 (July 2, 2007) (the 2007 Proposing Release) 
available at http://www.sec.gov/rules/proposed/2007/33-8818.pdf.

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    Almost 100 countries now either require or allow the use of IFRS 
for the preparation of financial statements by listed companies, and 
other countries are moving to do the same. This recent movement to IFRS 
outside the United States has resulted in an increase, from a relative 
few in 2005 to approximately 110 in 2006, of filings with the 
Commission of foreign private issuers that represent in the footnotes 
to their financial statements that their financial statements comply 
with IFRS as published by the IASB.\10\ The Commission expects to see 
this number continue to increase in the future, particularly pursuant 
to Canada's announced move to IFRS, as there currently are 
approximately 500 foreign private issuers from Canada.\11\
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    \10\ Another approximately 70 foreign private issuers filed 
financial statements that they stated were prepared in accordance 
with solely a jurisdictional variation of IFRS. Approximately 50 
additional foreign private issuers that are incorporated in 
jurisdictions that have moved to IFRS included in their filings 
financial statements prepared in accordance with U.S. GAAP.
    \11\  See ``Implementation Plan for Incorporating International 
Financial Reporting Standards into Canadian GAAP,'' available at 
http://www.acsbcanada.org/client_asset/document/3/2/7/3/5/document_8B452E12-FAF5-7113-C4CB8F89B38BC6F8.pdf?sfgdata=4
.

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    This movement to IFRS also has begun to affect U.S. issuers, in 
particular those with a significant global footprint.\12\ For instance, 
certain U.S. issuers may compete for capital globally in industry 
sectors in which a critical mass of non-U.S. companies report under 
IFRS. Also, U.S. issuers with subsidiaries located in jurisdictions 
that have moved to IFRS may prepare those subsidiaries' financial 
statements in IFRS for purposes of local regulatory or statutory 
filings.
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    \12\ For purposes of this Concept Release, the term U.S. issuer 
encompasses any issuer other than a foreign private issuer reporting 
on Form 20-F or Form 40-F or filing a registration statement based 
on Form 20-F or Form 40-F. Form 20-F is the combined registration 
statement and annual report form for foreign private issuers under 
the Securities Exchange Act of 1934. It also sets forth disclosure 
requirements for registration statements filed by foreign private 
issuers under the Securities Act of 1933. Form 40-F is the combined 
registration statement and annual report form under the Exchange Act 
for Canadian foreign private issuers that file under the 
Multijurisdictional Disclosure System.
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    In light of the ongoing convergence efforts of the IASB and the 
FASB and the movement outside the United States towards accepting 
financial statements prepared in accordance with IFRS, the Commission 
is seeking input in this Concept Release regarding the role of IFRS as 
published by the IASB as a basis of financial reporting in the U.S. 
public capital market by U.S. issuers. Specifically, the Commission is 
seeking input to better understand the nature and extent of the 
public's interest in giving U.S. issuers, including investment 
companies, the option to file with the Commission financial statements 
prepared in accordance with IFRS as published by the IASB.\13\
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    \13\ The term ``investment company'' is defined in Section 3 of 
the Investment Company Act of 1940 [15 U.S.C. 80a-3].
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    We appreciate that the U.S. public capital market has not 
experienced the co-existence of two sets of accounting standards for 
use by U.S. issuers. The Commission is issuing this Concept Release to 
gather input on the potential significance and effect of any such 
change to investors, issuers and market participants as well as to the 
accounting profession in general. Given the potential significance and 
complexity of permitting U.S. issuers to prepare financial statements 
in accordance with IFRS as published by the IASB for purposes of 
complying with the rules and regulations of the Commission, as 
contemplated in this Concept Release, we encourage all interested 
parties to provide comments.

II. The Effect of IFRS on the U.S. Public Capital Market

A. Financial Reporting in the United States

    The mission of the Commission is to protect investors, maintain 
fair, orderly, and efficient markets, and facilitate capital 
formation.\14\ In carrying out this mission, the Commission 
historically has looked to private-sector bodies to provide standards 
for financial reporting by issuers in the U.S. public capital market. 
Since 1973, those standards have been set by the FASB, which is the 
independent, private-sector body whose pronouncements the Commission 
has recognized as ``authoritative'' and ``generally accepted'' for 
purposes of the federal securities laws, absent any contrary 
determination by the Commission.\15\ Over time, this body of standards 
has commonly come to be referred to as U.S. GAAP.
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    \14\ See U.S. Securities and Exchange Commission 2006 
Performance and Accountability Report available at http://www.sec.gov/about/secpar/secpar2006.pdf#sec1
.

    \15\ See ``Statement of Policy on the Establishment and 
Improvement of Accounting Principles and Standards,'' Accounting 
Series Release No. 150 (December 20, 1973) (expressing the 
Commission's intent to continue to look to the private sector for 
leadership in establishing and improving accounting principles and 
standards through the FASB) and ``Policy Statement: Reaffirming the 
Status of the FASB as a Designated Private-Sector Standard Setter,'' 
Securities Act Release No. 33-8221 (April 25, 2003) (the 2003 Policy 
Statement) available at http://www.sec.gov/rules/policy/33-8221.htm.

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    The FASB is overseen by the Financial Accounting Foundation 
(``FAF''), which has responsibility for selecting the seven full-time 
FASB

[[Page 45602]]

members.\16\ The FAF is an independent, non-profit organization that is 
run by a sixteen-member Board of Trustees. The FASB derives its funding 
from fees paid by issuers and has oversight of the Emerging Issues Task 
Force (``EITF''), which is the interpretive body for U.S. GAAP. The 
FASB also is supported by the Financial Accounting Standards Advisory 
Council (``FASAC''), which is responsible for consulting with the FASB 
as to technical issues on the FASB's agenda and project priorities.
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    \16\ See http://www.fasb.org/facts/bd_members.shtml.

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    Consistent with the FASB's objective to increase international 
comparability and the quality of standards used in the United States, 
the FASB participates in international accounting standard setting 
activities. This goal is consistent with the FASB's obligation to its 
domestic constituents, who benefit from comparability of information 
across national borders.\17\ The FASB pursues this objective in 
cooperation with the IASB, as discussed in more detail below, and with 
national accounting standard setters.
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    \17\ See http://www.fasb.org/intl/.

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    While the Commission consistently has looked to the private sector 
to set accounting standards, the federal securities laws, including the 
Sarbanes-Oxley Act of 2002,\18\ provide the Commission with the 
authority to set accounting standards for public companies and other 
entities that file financial statements with the Commission.\19\ The 
Commission oversees the activities of the FASB as part of its 
responsibilities under the securities laws. These oversight 
responsibilities include the Commission reviewing the FAF's and the 
FASB's annual budget and the FASB's accounting support fee, providing 
views regarding the selection of FASB members, and, in certain 
circumstances, referring issues relating to accounting standards to the 
FASB or the EITF. The Commission and its staff do not, however, 
prohibit the FASB from addressing topics of its choosing and do not 
dictate the outcome of specific FASB projects, so long as the FASB's 
conclusions are in the interest of investor protection.\20\
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    \18\ See Public Company Accounting Reform and Protection 
(Sarbanes-Oxley Act), Pub L. No. 107-204, 116 Stat. 745 (2002) 
(Sarbanes-Oxley Act) available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_cong_bills&docid=f:h3763enr.tst.pdf
.

    \19\ See for example, Section 108(c) of the Sarbanes-Oxley Act, 
which states, ``Nothing in this Act, including this section* * 
*shall be construed to impair or limit the authority of the 
Commission to establish accounting principles or standards for 
purposes of enforcement of the securities laws.''
    \20\ See the 2003 Policy Statement, supra note 15.
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B. Financial Reporting Outside the United States

    Almost 100 countries now either require or allow the use of IFRS 
for the preparation of financial statements by listed companies. 
Countries that require or allow the use of IFRS by listed companies 
also may allow the use of IFRS for local regulatory or statutory 
financial reporting by non-listed companies. The European Union 
(``EU''), for example, has, under a regulation adopted in 2002, 
required companies incorporated in its Member States and whose 
securities are listed on an EU-regulated market to report their 
consolidated financial statements using endorsed IFRS beginning in 
2005.\21\ Other countries, including Australia \22\ and New 
Zealand,\23\ have adopted similar requirements mandating the use of 
IFRS by public companies. More countries have plans to adopt IFRS as 
their national accounting standards in the future, including Canada 
\24\ and Israel.\25\
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    \21\ See Regulation (EC) No. 1606/2002 of the European 
Parliament and of the Council of 19 July 2002 on the application of 
international accounting standards, Official Journal L. 243, 11/09/
2002 P. 0001-0004 available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2002/l_243/l_24320020911en00010004.pdf
.

    \22\ See Australia Financial Reporting Council, Bulletin 2002/4 
(July 3, 2002) available at http://www.frc.gov.au/bulletins/2002/04.asp
; Australia Financial Reporting Council, Bulletin 2004/3 

(April 2004) available at http://www.frc.gov.au/bulletins/2004/03.asp
.

    \23\ See Accounting Standards Review Board News Release ``Stable 
Platform of Financial Standards Announced: NZ aligns with UK, Europe 
and Australia'' available at http://www.asrb.co.nz/documents/24Nov2004.doc
.

    \24\ See ``Implementation Plan for Incorporating International 
Financial Reporting Standards into Canadian GAAP,'' supra note 11.
    \25\ See Israel Accounting Standard No. 29 ``Adoption of 
International Financial Reporting Standards,'' stipulating that 
Israeli public companies that prepare their primary financial 
statements in accordance with Israeli GAAP are obliged to adopt IFRS 
unreservedly for years starting on January 1, 2008.
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    The Commission is aware of the transitions made by other countries 
to IFRS. For example, the vast majority of listed EU companies, 
including banks and insurance companies, moved to IFRS in 2005 with the 
remainder transitioning in 2007. Australian-listed companies also moved 
to IFRS in 2005. Under these transition approaches, in essence all or 
almost all of the listed companies transitioned to IFRS at the same 
time. Some foreign regulators have published reports relating to the 
implementation of IFRS in their country. For example, the U.K. 
Financial Reporting Review Panel and the Autorit[eacute] des 
March[eacute]s Financiers of France have both published reports making 
observations on IFRS as applied in their jurisdictions.\26\
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    \26\ For the report of the U.K Financial Reporting Review Panel, 
see ``Preliminary Report: IFRS Implementation'' available at http://www.frc.org.uk/images/uploaded/documents/IFRS%20Implementation%20-%20preliminary.pdf.
 For the report of the AMF, see ``Recommendations 

on accounting information reported in financial statements for 
2006,'' dated December 19, 2006, available at http://www.amf-france.org/documents/general/7565_1.pdf
.

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    The actual process of adopting the evolving body of IFRS as 
published by the IASB in any country may be subject to a clearance 
process, which, in some instances, may involve regulatory or 
legislative approval. In some jurisdictions, the decision of policy 
makers has resulted in some requirements of IFRS as published by the 
IASB becoming optional. This results in a choice for issuers in these 
jurisdictions to use either their jurisdictional version of IFRS (e.g., 
titled ``IFRS as adopted in Jurisdiction X'') or IFRS as published by 
the IASB; however, the two may not be mutually exclusive. In addition 
to adopting IFRS, policy makers also may choose to retain their 
national accounting standard setter to, among other things, establish 
standards for their local private capital market and to contribute to 
the IFRS standard setting work.
    Other countries have chosen to continue to have their own national 
accounting standard setter establish accounting standards applicable to 
entities in their jurisdiction. The national accounting standard setter 
also may monitor and consider the standard setting work of the IASB 
and, as it considers appropriate, adapt national standards so as to 
conform to some portions or all of IFRS as published by the IASB. For 
example, in the United States, the FASB and the IASB have adopted a 
best efforts convergence approach,\27\ while Japan's accounting 
standard setter and the IASB have ``* * * a joint project to reduce 
differences between International Financial Reporting Standards (IFRS) 
and Japanese accounting standards. * * * '' \28\
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    \27\ See the Norwalk Agreement, supra note 6.
    \28\ Press Release, International Accounting Standards Board, 
``IASB and Accounting Standards Board of Japan Agree to Next Steps 
in Launching Joint Project for Convergence'' (Jan. 21, 2005), 
available at http://www.iasb.org/news.

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C. The Possible Use of IFRS by U.S. Issuers

    The Commission's recent proposal to accept from foreign private 
issuers financial statements prepared in

[[Page 45603]]

accordance with the English language version of IFRS as published by 
the IASB without a U.S. GAAP reconciliation raises the question of 
whether the Commission also should accept financial statements prepared 
in accordance with IFRS as published by the IASB from U.S. issuers. The 
Commission has identified at least two market forces that may provide 
incentives for some market participants to request in the future that 
the Commission accept financial statements prepared in accordance with 
IFRS as published by the IASB from U.S. issuers.
    First, as a growing number of jurisdictions move to IFRS, more non-
U.S. companies will report their financial results in accordance with 
IFRS. If a critical mass of non-U.S. companies in a certain industry 
sector or market reports in accordance with IFRS, then there may be 
pressure for U.S. issuers in that industry sector or market to likewise 
report in accordance with IFRS to enable investors to compare U.S. 
issuers' financial results more efficiently with those of their 
competitors.
    Second, as more jurisdictions accept financial statements prepared 
in accordance with IFRS for local regulatory or statutory filing 
purposes, U.S issuers' subsidiaries based in these jurisdictions may be 
preparing and filing their local financial statements using IFRS as 
their basis of accounting. If U.S. issuers have a large number of 
subsidiaries reporting in this manner, then these U.S. issuers--most 
likely large, multinational corporations--may incur lower costs in 
preparing their consolidated financial statements using IFRS rather 
than U.S. GAAP. If an issuer can and does reallocate any financial 
statement preparation cost savings to higher earning opportunities and 
does not suffer a relatively greater increase in the cost of its 
capital as a result of using IFRS, investors will benefit in terms of a 
better rate of return.
    The Commission anticipates that not all U.S. issuers will have 
incentives to use IFRS. For example, U.S. issuers without significant 
customers or operations outside the United States--which may tend to be 
smaller public companies--may not have the market incentives to prepare 
IFRS financial statements for the foreseeable future. Additionally, the 
Commission recognizes that there may be significant consequences to 
allowing U.S. issuers to prepare their financial statements in 
accordance with IFRS as published by the IASB. If the Commission were 
to accept financial statements prepared in accordance with IFRS as 
published by the IASB from U.S. issuers, then investors and market 
participants would have to be able to understand and work with both 
IFRS and U.S. GAAP when comparing among U.S. issuers because not all 
U.S. issuers are likely to elect to prepare IFRS financial statements. 
On a more practical level, a U.S. issuer may have contracts such as 
loan agreements that include covenants based upon U.S. GAAP financial 
measures or leases for which rental payments are a function of revenue 
as determined under U.S. GAAP. Similarly, U.S. issuers may use their 
financial statements as the basis for filings with other regulators and 
authorities (e.g., local and federal tax authorities, supervisory 
regulators) that may require U.S. GAAP financial information.
Questions
    1. Do investors, U.S. issuers, and market participants believe the 
Commission should allow U.S. issuers to prepare financial statements in 
accordance with IFRS as published by the IASB?
    2. What would be the effects on the U.S. public capital market of 
some U.S. issuers reporting in accordance with IFRS and others in 
accordance with U.S. GAAP? Specifically, what would be the resulting 
consequences and opportunities, and for whom? For example, would 
capital formation in the U.S. public capital market be better 
facilitated? Would the cost of capital be reduced? Would comparative 
advantages be conferred upon those U.S. issuers who move to IFRS versus 
those U.S. issuers who do not (or feel they can not)? Would comparative 
advantages be conferred upon those investors who have the resources to 
learn two sets of accounting principles (IFRS and U.S. GAAP) as 
compared to those who do not?
    3. What would be the effects on the U.S. public capital market of 
not affording the opportunity for U.S. issuers to report in accordance 
with either IFRS or U.S. GAAP? Specifically, what would be the 
resulting consequences and opportunities, and for whom? Would capital 
formation in the U.S. public capital market be better facilitated? 
Would the cost of capital be reduced? Alternatively, are there certain 
types of U.S. issuers for which the Commission should not afford this 
opportunity?
    4. To what degree would investors and other market participants 
desire to and be able to understand and use financial statements of 
U.S. issuers prepared in accordance with IFRS? Would the desire and 
ability of an investor to understand and use such financial statements 
vary with factors such as the size and nature of the investor, the 
value of the investment, the market capitalization of the U.S issuer, 
the industry to which it belongs, the trading volume of its securities, 
or any other factors?
    5. What immediate, short-term or long-term incentives would a U.S. 
issuer have to prepare IFRS financial statements? Would the incentives 
differ by industry segment, geographic location of operations, where 
capital is raised, other demographic factors, or the aspect of the 
Commission's filing requirements to which the U.S. issuer is subject?
    6. What immediate, short-term or long-term barriers would a U.S. 
issuer encounter in seeking to prepare IFRS financial statements? For 
example, would the U.S. issuer's other regulatory (e.g., banking, 
insurance, taxation) or contractual (e.g., loan covenants) financial 
reporting requirements present a barrier to moving to IFRS, and if so, 
to what degree?
    7. Are there additional market forces that would provide incentives 
for market participants to want U.S. issuers to prepare IFRS financial 
statements?
    8. Are there issues unique to whether investment companies should 
be given the choice of preparing financial statements in accordance 
with IFRS? What would the consequences be to investors and other market 
participants of providing investment companies with that choice?
    9. Would giving U.S. issuers the opportunity to report in 
accordance with IFRS affect the standard setting role of the FASB? If 
so, why? If not, why not? What effect might there be on the development 
of U.S. GAAP?

D. Convergence of IFRS and U.S. GAAP

    In October 2002, the FASB and the IASB announced the Norwalk 
Agreement, which formalized their commitment to the convergence of U.S. 
and international accounting standards.\29\ In the Norwalk Agreement, 
the two bodies acknowledged their ``best efforts'' commitment to the 
development, ``as soon as practicable,'' of high quality, compatible 
accounting standards that could be used for both domestic and cross-
border financial reporting and to the coordination of their future work 
programs to ensure that, once achieved, compatibility is maintained. In 
a 2006 Memorandum of Understanding, the FASB and the IASB indicated 
that a common set of high quality global standards remains the long-
term strategic priority of both the

[[Page 45604]]

FASB and the IASB and set out a work plan covering the next two years 
for convergence with specific long- and short-term projects.\30\ Thus, 
convergence is the approach that for the last five years has been at 
work to align the financial reporting of U.S. issuers under U.S. GAAP 
with that of companies using IFRS. If there is a robust and active 
process in place for converging IFRS and U.S. GAAP, then it is likely 
that the current differences between them will be minimized in due 
course.
---------------------------------------------------------------------------

    \29\ See the Norwalk Agreement, supra note 6.
    \30\ See ``A Roadmap for Convergence between IFRS and U.S. 
GAAP--2006-2008 Memorandum of Understanding between the FASB and the 
IASB'', February 27, 2006 (the 2006 Memorandum of Understanding) 
available at http://72.3.243.42/intl/mou_02-27-06.pdf.

---------------------------------------------------------------------------

    As part of their commitment to convergence, both the IASB and the 
FASB are working together on several major projects and have 
coordinated agendas so that major projects that one board takes up also 
may be taken up by the other board. Also, both boards have been working 
on ``short-term convergence,'' under which convergence will occur 
quickly in certain areas. This process allows for incremental 
improvements and the opportunity to eliminate differences without 
rethinking an issue entirely. If the IASB and the FASB conclude that a 
short-term convergence project is not sufficient, they will consider a 
broader standard setting project. The Commission fully supports 
continued progress on convergence.
    If U.S. issuers were permitted to prepare IFRS financial 
statements, then some could conclude that the convergence process would 
no longer be warranted because those U.S. issuers that see a benefit to 
reporting under IFRS would be free to do so. Consequently, there is a 
risk that constituents of the two boards may not continue to support 
convergence efforts if financial statements prepared by U.S. issuers in 
accordance with IFRS as published by the IASB are accepted by the 
Commission. If convergence does not occur, the future work of the IASB 
and the FASB may result in standards that are significantly different 
or that are not timely in their development.
Questions
    10. What are investors', issuers' and other market participants' 
opinions on the effectiveness of the processes of the IASB and the FASB 
for convergence? Are investors and other market participants satisfied 
with the convergence progress to date, and the robustness of the 
ongoing process for convergence?
    11. How would the convergence work of the IASB and the FASB be 
affected, if at all, if the Commission were to accept IFRS financial 
statements from U.S. issuers? If the Commission were to accept IFRS 
financial statements from U.S. issuers, would market participants still 
have an incentive to support convergence work?
    12. If IFRS financial statements were to be accepted from U.S. 
issuers and subsequently the IASB and the FASB were to reach 
substantially different conclusions in the convergence projects, what 
actions, if any, would the Commission need to take?

III. Global Accounting Standards

A. The Case for a Single Set of Globally Accepted Accounting Standards

    The Commission recognizes that having a widely used single set of 
high quality globally accepted accounting standards accepted and in 
place could benefit both the global capital markets and investors. To 
date, the efforts in the United States have encompassed convergence, 
which involves the content of IFRS and U.S. GAAP coming together.
    Key forces favoring a single set of globally accepted accounting 
standards include, but are not limited to, the continued expansion of 
the capital markets across national borders, and the desire by 
countries to achieve strong, stable and liquid capital markets to fuel 
economic growth. A thriving capital market requires, among other 
things, a high degree of investor understanding and confidence. 
Converging towards or embracing a single set of high quality accounting 
standards could contribute to investor understanding and confidence.
    The use of a single set of accounting standards in the preparation 
of financial statements could help investors understand investment 
opportunities better than the use of multiple differing sets of 
national accounting standards. Without a single set of accounting 
standards, global investors must incur time, costs and effort to 
understand companies' financial statements so that they can adequately 
compare investment opportunities. In addition, presenting investors 
with financial information that varies substantially depending on which 
set of accounting standards is employed can cause confusion about the 
actual financial results of a company and result in a correspondingly 
adverse effect on investor confidence and cost of capital. Investor 
confidence in financial reporting also is likely to be stronger if the 
accounting standards used have been subject to appropriate due process 
and have gained wide acceptance in practice.
    Embracing a common set of accounting standards also can lower costs 
for issuers. When companies access capital markets beyond their home 
jurisdiction, they incur additional costs if they must prepare 
financial statements using different sets of accounting standards. 
These include the costs for company personnel and auditors to learn, 
keep current with and comply with the requirements of multiple 
jurisdictions. In addition to issuers facing lower costs, standard 
setters collectively worldwide also may incur lower costs because the 
use of resources dedicated to standards writing can potentially be 
reduced if fewer separate accounting models are pursued.
Question
    13. Do investors, issuers and other market participants believe 
giving U.S. issuers the choice to prepare financial statements in 
accordance with IFRS as published by the IASB furthers the development 
of a single set of globally accepted accounting standards? Why or why 
not, and if so, how?

B. The International Accounting Standard Setter

    The sustainability, governance and continued operation of the IASB 
are important factors for the development of a set of high quality, 
globally accepted accounting standards and are important factors in the 
Commission's consideration of the IASB's work. The IASB is based in 
London and is a stand-alone, privately funded accounting standard 
setting body established to develop global standards for financial 
reporting.\31\ It is committed to ``developing, in the public interest, 
a single set of high quality, understandable and enforceable global 
accounting standards that require high quality, transparent and 
comparable information in financial statements and other financial 
reporting to help participants in the world's capital markets and other 
users make economic decisions.'' \32\ The IASB assumed accounting 
standard setting responsibilities from the IASC in 2001 as the 
culmination of a reorganization of the IASC.\33\ The IASC had issued 41

[[Page 45605]]

standards through December 2000. Upon its formation, the IASB 
recognized those standards and thus they form part of the body of IFRS.
---------------------------------------------------------------------------

    \31\ For more information on the structure and operation of the 
IASB, see http://www.iasb.org.

    \32\ IASC Foundation Constitution, Paragraph 2a (2005) available 
at http://www.iasb.org/About+Us/About+the+Foundation/Constitution.htm
.

    \33\ For more information on the reorganization, see http://archive.iasb.org.uk/uploaded_files/documents/8_210_swp_rep.pdf
.

---------------------------------------------------------------------------

    The IASB is overseen by the International Accounting Standards 
Committee Foundation (``IASC Foundation''). The IASC Foundation is 
based in London and is a stand-alone, not-for-profit organization, 
incorporated in Delaware. It is responsible for the activities of the 
IASB and other work that centers on IFRS, such as initiatives related 
to translation of IFRS from the English language, education about IFRS 
and the development of Extensible Business Reporting Language 
(``XBRL'') taxonomies for IFRS. The IASC Foundation is governed by 22 
trustees (``IASC Foundation Trustees'') whose backgrounds are 
geographically diverse.
    To date, the IASC Foundation has financed IASB operations largely 
through voluntary contributions from companies, accounting firms, 
international organizations and central banks. Original commitments 
were made for the period 2001-2005 and have been extended for an 
additional two years through 2007. In June 2006, the IASC Foundation 
Trustees agreed on four elements that should govern the establishment 
of a funding approach designed to enable the IASC Foundation to remain 
a stand-alone, private-sector organization with the necessary resources 
to conduct its work in a timely fashion. The IASC Foundation Trustees 
determined that characteristics of the new scheme for 2008 would be:
     Broad-based: Fewer than 200 companies and organizations 
participate in the current financing system. A sustainable long-term 
financing system must expand the base of support to include major 
participants in the world's capital markets, including official 
institutions, in order to ensure diversification of sources.
     Compelling: Any system must carry with it enough pressure 
to make free riding very difficult. This could be accomplished through 
a variety of means, including official support from the relevant 
regulatory authorities and formal approval by the collecting 
organizations.
     Open-ended: The financial commitments should be open-ended 
and not contingent on any particular action that would infringe on the 
independence of the IASC Foundation and the International Accounting 
Standards Board.
     Country-specific: The funding burden should be shared by 
the major economies of the world on a proportionate basis, using Gross 
Domestic Product as the determining factor of measurement. Each country 
should meet its designated target in a manner consistent with the 
principles above.\34\
---------------------------------------------------------------------------

    \34\ http://www.iasb.org/About+Us/About+the+Foundation/Future+Funding.htm
.


The IASC Foundation Trustees continue to make progress in obtaining 
funding that satisfies those elements.
    The IASC Foundation Trustees select members of the IASB to comprise 
``a group of people representing, within that group, the best available 
combination of technical expertise and diversity of international 
business and market experience in order to contribute to the 
development of high quality, global accounting standards.'' \35\ The 
fourteen members of the IASB--twelve full-time and two part-time--serve 
five-year terms subject to one re-appointment. They are required to 
sever all employment relationships and positions that may give rise to 
economic incentives that might compromise a member's independent 
judgment in setting accounting standards. The IASB members come from 
eight countries and have a variety of backgrounds (e.g., auditors, 
users, preparers, and academics). In selecting IASB members, the IASC 
Foundation Trustees ensure that the IASB is not dominated by any 
particular constituency. Member selection is not based on geographic 
representation.
---------------------------------------------------------------------------

    \35\ IASC Foundation Constitution, Paragraph 19 (2005) available 
at http://www.iasb.org/About+Us/About+the+Foundation/Constitution.htm
.

---------------------------------------------------------------------------

    The IASB is free to choose and conduct projects necessary to 
promote convergence and develop high quality standards. The IASB 
solicits views and seeks input from the public throughout the standard 
setting process from selecting items for its agenda to developing and 
publishing a discussion paper and/or exposure draft and issuing a final 
standard. This input is derived from discussions at its project working 
group and roundtable meetings as well as written submissions from 
constituents. The IASB's meetings are open to public observers. Comment 
letters, summaries of comments received on discussion papers and 
exposure drafts are made publicly available on the IASB website.\36\ 
This transparent process is intended to enable the IASB to obtain 
relevant views from interested parties, and at the same time to 
conclude on final standards based on its own deliberations, and without 
undue external pressure. The IASB has an advisory council--the 
Standards Advisory Council (``SAC'')--that is composed of approximately 
40 geographically diverse individuals drawn from countries that use 
IFRS and also those that do not. The IASB is assisted on IFRS 
interpretive matters by its International Financial Reporting 
Interpretations Committee (``IFRIC'').
---------------------------------------------------------------------------

    \36\ See IASC Foundation Due Process Handbook for the IASB 
available at http://www.iasb.org/NR/rdonlyres/7D97095E-96FD-4F1F-B7F2-366527CB4FA7/0/DueProcessHandbook.pdf
.

---------------------------------------------------------------------------

    The Commission and its staff have for many years been involved in 
the IASB standard setting efforts and development of the interpretive 
guidance of IFRIC. The Commission through its staff serves as an 
Observer to the SAC.
    The Commission staff directly participates in the development of 
IFRS primarily through the work of the International Organization of 
Securities Commissions (``IOSCO'') whose membership regulates more than 
90% of the world's securities markets. IOSCO is the world's largest 
international cooperative forum for securities regulatory agencies.\37\ 
IOSCO has taken and continues to take an active role in the standard 
setting process undertaken by the IASC and now the IASB. Through 
membership in IOSCO's Standing Committee on Multinational Disclosure 
and Accounting, the Commission staff assists in writing IOSCO comment 
letters on exposure drafts of standards published by the IASB and 
serves as one of the IOSCO representatives on several of the IASB 
project working groups. As one of two IOSCO representatives, the 
Commission staff serves as a non-voting Observer to IFRIC.
---------------------------------------------------------------------------

    \37\ For more information about IOSCO, see http://www.iosco.org.

---------------------------------------------------------------------------

Questions
    14. Are investors, U.S. issuers and other market participants 
confident that IFRS have been, and will continue to be, issued through 
a robust process by a stand-alone standard setter, resulting in high 
quality accounting standards? Why or why not?
    15. Would it make a difference to investors, U.S. issuers and other 
market participants whether the Commission officially recognized the 
accounting principles established by the IASB?
    16. What are investors', U.S. issuers' and other market 
participants' views on how the nature of our relationship with the 
IASB, a relationship that is different and less direct than our 
oversight role with the FASB, affects the Commission's responsibilities 
under the U.S. securities laws?

[[Page 45606]]

C. The Commission's Previous Consideration of International Accounting 
Standards

    For the past several decades the Commission has been actively 
promoting the development of a set of international accounting 
standards. In the 1981 Proposing Release, revisions to Form 20-F were 
proposed and the Commission expressed its support for the work of the 
IASC in formulating guidelines and international disclosure 
standards.\38\ As part of the 1988 Policy Statement, the Commission 
urged ``securities regulators and members of the accounting profession 
throughout the world [to] continue efforts to revise and adjust 
international accounting standards with the aim of increasing 
comparability and reducing cost'' and reaffirmed its commitment to 
working with securities regulators around the world to achieve the goal 
of an efficient international securities market system.\39\
---------------------------------------------------------------------------

    \38\ See the 1981 Proposing Release, supra note 1.
    \39\ The 1988 Policy Statement, supra note 2.
---------------------------------------------------------------------------

    In a 1994 amendment to Form 20-F, the Commission accepted from 
foreign private issuers cash flow statements prepared in accordance 
with International Accounting Standards (``IAS'') No. 7, Cash Flow 
Statements, without reconciliation to U.S. GAAP. In proposing that 
amendment, the Commission noted that ``while there are differences 
between a cash flow statement prepared in accordance with IAS 7 and one 
prepared in accordance with U.S. GAAP * * * the Commission believes 
statements prepared in accordance with IAS 7 should provide an investor 
with adequate information regarding cash flows without the need for 
additional information or modification.'' \40\
---------------------------------------------------------------------------

    \40\ The Commission proposed these amendments in Release No. 33-
7029 (November 3, 1993) and adopted them in Release No. 33-7053 
(April 19, 1994) (the 1994 Adopting Release). Other examples in 
which the Commission amended its requirements for financial 
statements of foreign issuers to permit the use of certain IASC 
standards without reconciliation to U.S. GAAP are described in the 
2000 Concept Release, supra note 4.
---------------------------------------------------------------------------

    The Commission more closely examined efforts to develop high 
quality, comprehensive global accounting standards in a 1997 report 
undertaken at the direction of Congress.\41\ In that report, the 
Commission noted that for issuers wishing to raise capital in more than 
one country, compliance with differing accounting requirements to be 
used in the preparation of financial statements increased compliance 
costs and created inefficiencies. As a step towards addressing these 
concerns and to increase the access of U.S. investors to foreign 
investments in the U.S. public capital market, the Commission 
encouraged the IASC's efforts to develop a core set of accounting 
standards that could serve as a framework for financial reporting in 
cross-border offerings, and indicated an intent to remain active in the 
development of those standards. In that report, the Commission 
indicated that its evaluation of IASC core standards would involve an 
assessment of whether they constituted a comprehensive body of 
transparent, high quality standards that could be rigorously 
interpreted and applied.
---------------------------------------------------------------------------

    \41\ See ``Pursuant to Section 509(5) of the National Securities 
Markets Improvement Act of 1996 Report on Promoting Global 
Preeminence of American Securities Markets,'' supra note 3.
---------------------------------------------------------------------------

    In February 2000, the Commission issued a Concept Release on 
International Accounting Standards, seeking public comment on the 
elements necessary to encourage convergence towards a high quality 
global financial reporting framework while upholding the quality of 
financial reporting domestically.\42\ In that release, the Commission 
described high quality standards as consisting of a ``comprehensive set 
of neutral principles that require consistent, comparable, relevant and 
reliable information that is useful for investors, lenders and 
creditors, and others who make capital allocation decisions.'' \43\ The 
Commission also expressed the view that high quality accounting 
standards ``must be supported by an infrastructure that ensures that 
the standards are rigorously interpreted and applied.''\44\
---------------------------------------------------------------------------

    \42\ See the 2000 Concept Release, supra note 4.
    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    In 2003, the Commission staff issued a study on the adoption of a 
principles-based accounting system, as mandated by Congress in the 
Sarbanes-Oxley Act.\45\ The conclusion of that study was that an 
optimal approach to accounting standard setting would be based on a 
consistently applied conceptual framework and clearly stated objectives 
rather than solely on either rules or principles, one benefit of which 
would be the facilitation of greater convergence between U.S. GAAP and 
international accounting standards. By taking an objectives-based 
approach to convergence, the study noted, standard setters would be 
able to arrive at an agreement on a principle more quickly than would 
be possible for a detailed rule. The Commission staff's report to 
Congress interpreted convergence as a ``process of continuing discovery 
and opportunity to learn by both U.S. and international standard 
setters,'' the benefits of which include greater comparability and 
improved capital formation globally.\46\
---------------------------------------------------------------------------

    \45\ See the Study Pursuant to Section 108(d) of the Sarbanes-
Oxley Act of 2002 on the Adoption by the United States Financial 
Reporting System of a Principles-Based Accounting System (July 25, 
2003) available at http://www.sec.gov/news/studies/principlesbasedstand.htm
.

    \46\ Id.
---------------------------------------------------------------------------

    In 2004, a Deputy Chief Accountant joined a team of experienced 
professionals within the Office of the Chief Accountant, all devoted 
full-time to international work. The Commission staff tracks 
developments in IFRS similar to the manner in which it follows the work 
of the FASB and the EITF.
    In 2005, the Commission adopted amendments to Form 20-F to permit 
foreign private issuers--for their first year of reporting under IFRS 
as published by the IASB--to file two years rather than three years of 
statements of income, changes in shareholders' equity and cash flows 
prepared in accordance with IFRS, with appropriate related 
disclosure.\47\ The Commission recognized that these amendments would 
reduce costs to foreign private issuers and encourage their continued 
participation in the U.S. public capital market, which would benefit 
investors by increasing investment possibilities and furthering the 
efficient allocation of capital.
---------------------------------------------------------------------------

    \47\ See the 2005 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    In February 2006, Chairman Cox reaffirmed his commitment to the 
``Roadmap'' that was first described by a former Chief Accountant of 
the Commission in April 2005.\48\ The Roadmap sets forth the goal of 
achieving one set of high quality, globally accepted accounting 
standards and suggested several considerations that could affect the 
achievement of that goal. It also discusses the possibility for the co-
existence of financial statements prepared pursuant to IFRS and U.S. 
GAAP in the U.S. public capital market.
---------------------------------------------------------------------------

    \48\ See SEC Press Release No. 2006-17, ``Accounting Standards: 
SEC Chairman Cox and EU Commissioner McCreevy Affirm Commitment to 
Elimination of the Need for Reconciliation Requirements'' (Feb. 8, 
2006) (SEC Press Release No. 2006-17) available at http://www.sec.gov/news/press/2006-17.htm
.

---------------------------------------------------------------------------

    In March 2007, the Commission staff held a Roundtable discussion to 
seek input on the potential effects of the co-existence of IFRS and 
U.S. GAAP financial statements in the U.S. public capital market.\49\ 
In particular, the Roundtable participants discussed the potential 
effect on the U.S. public capital market if foreign private issuers

[[Page 45607]]

have the choice to file with the Commission financial statements 
prepared in accordance with IFRS as published by the IASB without 
reconciliation to U.S. GAAP.
---------------------------------------------------------------------------

    \49\ The transcript of this SEC Roundtable is available at 
http://www.sec.gov/spotlight/ifrsroadmap/ifrsroadmap-transcript.txt.

---------------------------------------------------------------------------

    As previously discussed, on June 20, 2007, the Commission voted to 
issue a proposal to accept from foreign private issuers their financial 
statements prepared in accordance with IFRS as published by the IASB 
without reconciliation to U.S. GAAP.\50\
---------------------------------------------------------------------------

    \50\ See the 2007 Proposing Release, supra note 9.
---------------------------------------------------------------------------

IV. IFRS Implementation Matters for U.S. Issuers

    A move to a financial reporting environment in the U.S. public 
capital market in which U.S. issuers may provide investors with 
financial statements prepared in accordance with IFRS as published by 
the IASB would be a complex endeavor. There are many elements forming 
the infrastructure underpinning U.S. GAAP that keep it viable and 
functioning effectively. As is the case with U.S. GAAP, these 
underpinnings also would be relevant to keep IFRS viable and 
functioning effectively.
    Although both the 2007 Proposing Release and this Concept Release 
relate to the use of IFRS as published by the IASB in Commission 
filings, our consideration of the use of IFRS by foreign private 
issuers and U.S. issuers gives rise to some differing issues.\51\ For 
example, many foreign private issuers already have experience with the 
application of IFRS in practice because the use of IFRS is either 
required or permitted in their home market. Due to their experience, 
they are already confronting the potential difficulties that might face 
U.S. issuers, including for example, education and training of the 
accounting and auditing profession and other specialists such as 
actuaries and valuation experts.
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

A. Education and Training

    The use of IFRS by U.S. issuers would create the need for effective 
training and education. U.S. issuers would likely use IFRS only if they 
and their auditors had been thoroughly trained in IFRS and if their 
investors and other users of their financial statements, such as 
analysts and rating agencies, understood IFRS. However, the education 
of most accountants in the United States--be it collegiate or 
continuing education--includes a comprehensive curriculum around U.S. 
GAAP but does not include a similar curriculum around IFRS. Most 
specialists, such as actuaries and valuation experts, who are engaged 
by management to assist in measuring certain assets and liabilities 
likely were not taught IFRS.
    Consequently, all parties would likely need to undertake 
comprehensive training on IFRS. Professional associations and industry 
groups would need to integrate IFRS into their training materials, 
publications, testing and certification programs. Colleges and 
universities would need to include IFRS in their curricula. 
Furthermore, eventually it may be appropriate to include IFRS in the 
Uniform CPA Examination.
Questions
    17. In what ways might the Commission be able to assist in 
improving investors' ability to understand and use financial statements 
prepared in accordance with IFRS?
    18. What are the incentives and barriers to adapting the training 
curricula for experienced professionals to address both IFRS and U.S. 
GAAP? Separate from ongoing training, how long might it take for a 
transition to occur? How much would it cost?
    19. What are the incentives and barriers relevant to the college 
and university education system's ability to prepare its students for a 
U.S. public capital market in which U.S. issuers might report under 
IFRS? What are the incentives and barriers relevant to changing the 
content of the Uniform CPA Examination? How should the Commission 
address these incentives and barriers, if at all?

B. Application in Practice

    To provide effective financial reporting for investors, it is 
important that IFRS is properly applied in practice. In its 
considerations about the use of IFRS by foreign private issuers, the 
Commission has highlighted that proper application encompasses not only 
faithful adherence to the requirements of the standards, but also 
understandable standards such that across the spectrum of issuers those 
requirements are consistently understood and applied. As U.S. issuers 
do not file with us in IFRS today, in allowing U.S. issuers to do so, 
we would not have direct experience to assess the extent to which IFRS 
would be properly applied by U.S. issuers. Rather, we would make this 
assessment based upon the infrastructure that is in place in the United 
States to foster the high quality application of IFRS as well as, 
indirectly, the Commission's experience with the application of IFRS by 
foreign private issuers.
    The Commission's practical experience with IFRS began with the 
foreign private issuers that have reported on this basis in their 
filings with the Commission for several years. Further, as previously 
discussed, during the course of 2006, approximately 110 foreign private 
issuers filed with the Commission annual reports on Form 20-F that 
contained financial statements representing that they comply with IFRS 
as published by the IASB. This representation may have accompanied a 
representation that the financial statements comply with a 
jurisdictional version of IFRS. The Commission staff has conducted 
reviews of those IFRS financial statements as part of its normal 
function of reviewing the periodic reports of publicly registered 
companies, consistent with its practice in reviewing filings from U.S. 
issuers and from foreign private issuers pursuant to the provisions of 
the Sarbanes-Oxley Act. In conducting its reviews of IFRS financial 
statements, the staff made a number of comments regarding the 
application of IFRS, which have been brought to the attention of 
issuers through the comment process.\52\
---------------------------------------------------------------------------

    \52\ See http://www.sec.gov/divisions/corpfin/ifrs_staffobservations.htm
 for a link to the comment letters the staff 

issued on 2005 IFRS filings as well as a report outlining some of 
the staff's observations about those comments.
---------------------------------------------------------------------------

    In certain limited areas in which the IASB has yet to develop 
particular industry standards or in which IFRS permits disparate 
options, we have noted that the level of diversity that IFRS allows has 
manifested itself in the reporting practices of foreign private 
issuers. For example, there are two industry areas that have been 
identified by the IASB as lacking standards: insurance contracts and 
extractive activities. The IASB is in the process of developing a 
standard for insurance contracts to supplement IFRS 4, Insurance 
Contracts. IFRS 6, Exploration for and Evaluation of Mineral Resources, 
provides only limited guidance with respect to the accounting for 
exploration and evaluation activities undertaken by oil and gas and 
mining companies. On both of these projects, the IASB continues to make 
progress towards developing standards. Further, the body of IFRS does 
not have standards on the accounting for common control mergers, 
recapitalizations, reorganizations, acquisitions of minority interests 
and similar transactions.
    With respect to investment companies, there are particular 
differences between IFRS and U.S. GAAP that would result in different 
presentations in practice. For example, IFRS does not require a 
schedule of investments or financial highlights;

[[Page 45608]]

however, U.S. GAAP requires this information in an investment company's 
financial statements. As another example, IFRS does not provide an 
exemption from consolidation of subsidiaries in an investment company, 
whereas U.S. GAAP provides exemptions from consolidating subsidiaries 
in certain areas which could result, for example, in different 
treatment for master-feeder funds.\53\
---------------------------------------------------------------------------

    \53\ A master-feeder fund is a two-tiered arrangement in which 
one or more ``feeder'' funds hold shares of a single ``master'' fund 
in accordance with Section 12(d)(1)(E) of the Investment Company Act 
of 1940.
---------------------------------------------------------------------------

Questions
    20. What issues would be encountered by U.S. issuers and auditors 
in the application of IFRS in practice within the context of the U.S. 
financial reporting environment?
    21. How do differences between IFRS and U.S. GAAP bear on whether 
U.S. issuers, including investment companies, should be given the 
choice of preparing financial statements in accordance with IFRS?
    22. What do issuers believe the cost of converting from U.S. GAAP 
to IFRS would be? How would one conclude that the benefits of 
converting justify those costs?

C. Auditing

    The use of IFRS by U.S. issuers would affect the audit firms that 
are engaged both to audit a U.S. issuer's financial statements and to 
report on the effectiveness of its internal controls. The use of IFRS 
would arguably affect both the strategic decisions of those firms as 
well as the quality control systems that those firms employ to conduct 
their audits.
    From a strategic perspective, audit firms would need to determine 
whether it would be economically desirable to make the initial and 
ongoing investment necessary to ensure that audits of financial 
statements prepared in accordance with IFRS would be competently 
delivered and adequately supervised. This may be particularly 
challenging for smaller audit firms, which would need to balance the 
cost of the investments necessary to provide these services with the 
effects on their reputation that might result if they are unable or 
unwilling to do so.
    For audit firms that believe the benefits of the investment 
outweigh the associated costs, elements of their systems of quality 
control such as their practices related to hiring, assigning personnel 
to engagements, professional development and advancement activities 
would need to be adjusted. Because U.S. auditors have less experience 
with IFRS than with U.S. GAAP, in the short-term, audit firms may 
encounter challenges in establishing policies and procedures to provide 
them with reasonable assurance that their personnel possess knowledge 
appropriate to perform audits of U.S. issuers that apply IFRS. Even 
with appropriate systems of quality control, however, additional 
auditing guidance still may be necessary for auditors to appropriately 
address issues related to the transition to reporting on IFRS financial 
statements.
    Additionally, for the U.S. firms that are members of global audit 
networks, systems of quality control need to foster the high quality 
and consistent application of IFRS across national borders. If U.S. 
issuers were to apply IFRS, the U.S. firms of these global audit 
networks could be affected more than they are presently by the use of 
IFRS by audit clients of their foreign affiliates and by U.S. 
subsidiaries of those clients.
Questions
    23. Would audit firms be willing to provide audit services to U.S. 
issuers who prepare their financial statements in accordance with IFRS? 
How, if at all, would allowing U.S. issuers to prepare IFRS financial 
statements affect the current relative market shares of audit firms?
    24. What factors, if any, might lead to concern about the quality 
of audits of IFRS financial statements of U.S. issuers?
    25. Would any amendments or additions to auditing and other 
assurance standards be necessary if U.S. issuers were allowed to 
prepare IFRS financial statements?
    26. How could global consistency in the application of IFRS be 
facilitated by auditors of U.S. issuers?

D. Regulation

    The prospect of a single set of globally accepted accounting 
standards must occur within the reality that securities regulators all 
have national--as opposed to global--mandates for carrying out their 
work. As a result, U.S. issuers with listings in multiple securities 
markets could find more than one securities regulator commenting upon 
their IFRS financial statements, as many other securities regulators 
would have substantial experience in working with IFRS financial 
statements. Because it is likely that not everyone will apply 
accounting standards consistently or appropriately, securities 
regulators are developing infrastructure to identify and address the 
application of IFRS globally. This infrastructure, which starts with 
IOSCO, is designed to foster the consistent and faithful application of 
IFRS around the world. Through its work, IOSCO continues to support the 
implementation and consistent application of IFRS in the global 
financial markets. In January 2007, IOSCO's database for cataloguing 
and sharing securities regulators' experiences on IFRS application 
around the world became operational.\54\
    Further, on a bilateral basis, the Commission and the European 
Commission (``EC'') have agreed that regulators should endeavor to 
avoid conflicting conclusions regarding the application and enforcement 
of IFRS.\55\ To this end, the Commission and the Committee of European 
Securities Regulators (``CESR''), which the EC has charged with 
evaluating the implementation of IFRS in the EU, published a work plan 
in August 2006.\56\ This work plan covers information sharing regarding 
IFRS implementation in regular meetings of the Commission staff and 
CESR-Fin, the group within CESR focused on financial reporting. The 
SEC-CESR work plan also contemplates the confidential exchange of 
issuer-specific information between CESR members and the Commission, 
with implementing protocols. In addition, CESR has established among 
its members a forum and a confidential database for participants to 
exchange views and share experiences with IFRS.\57\ These mechanisms 
will allow securities regulators to endeavor to avoid conflicting 
decisions on IFRS application matters; nonetheless, each securities 
regulator retains the responsibility, and accordingly the right, to 
make its own final decisions.
---------------------------------------------------------------------------

    \54\ See IOSCO Press Release ``Regulators to Share Information 
on International Financial Reporting Standards'' available at http://www.iosco.org/news/pdf/IOSCONEWS92.pdf
.

    \55\ See SEC Press Release No. 2006-17, supra note 48.
    \56\ See ``SEC and CESR Launch Work Plan Focused on Financial 
Reporting'' SEC Press Release 2006-130 (August 2, 2006) available at 
http://www.sec.gov/news/press/2006/2006-130.htm.

    \57\ See ``CESR publishes key information from its database of 
enforcement decisions taken by EU National Enforcers of financial 
information (IFRS)'' CESR/07-163 (April 2007) available at http://www.cesr-eu.org/index.php?page=groups&mac=0&id=13
.

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    Despite these mechanisms, a question arises as to what should be 
done, if anything, in circumstances where neither the IASB nor IFRIC 
has addressed a particular IFRS accounting issue that causes 
significant difficulties in practice. A securities regulator, including 
the Commission, may find it necessary as an interim measure to state

[[Page 45609]]

a view on such an accounting issue. This is not new, as securities 
regulators have long been involved in resolving issues related to 
national accounting standards. If such a view were stated, the 
securities regulator subsequently could refer the accounting issue to 
the IASB or IFRIC for resolution of the issue for all constituencies. 
Any view expressed by the regulator may be rescinded upon the IASB or 
the IFRIC establishing authoritative literature addressing the issue. 
As referenced in the 2007 Proposing Release, if the Commission and the 
staff were to state a view on such an accounting issue, we would not 
expect it to be inconsistent with IFRS as published by the IASB, the 
interpretations provided by IFRIC, or the definitions, recognition 
criteria and measurement concepts in the IASB's Framework.
Question
    27. Do you think that the information sharing infrastructure among 
securities regulators through both multilateral and bilateral platforms 
will improve securities regulators' ability to identify and address 
inconsistent and inaccurate applications of IFRS?

E. Integration With the Commission's Existing Requirements

    The Commission has contemplated the operational considerations with 
respect to accepting financial statements prepared in accordance with 
IFRS from foreign private issuers and described these considerations in 
the 2007 Proposing Release.\58\ These operational considerations may be 
relevant to U.S. issuers if the Commission were to undertake rulemaking 
to accept financial statements prepared in accordance with IFRS as 
published by the IASB from U.S. issuers. However, the use of IFRS by 
U.S. issuers may give rise to additional issues. Additionally, the 
operational considerations applicable to investment companies may 
differ from those applicable to other entities, including foreign 
private issuers.
---------------------------------------------------------------------------

    \58\ See the 2007 Proposing Release, supra note 9.
---------------------------------------------------------------------------

    One area of consideration relating to the potential acceptance of 
IFRS financial statements would be how to address requirements for a 
foreign issuer that does not meet the definition of a foreign private 
issuer. A foreign issuer that is not a foreign private issuer (and is 
not a sovereign entity) is generally treated the same as a U.S. 
incorporated issuer under our rules and therefore must follow 
disclosure requirements applicable to U.S. issuers. If such a foreign 
issuer is subject to disclosure laws in another jurisdiction, it may 
find that it is required to prepare both IFRS financial statements for 
purposes of the other jurisdiction and U.S. GAAP financial statements 
for purposes of filings with the Commission.
    Another area of consideration relates to Regulation S-X. The 
Commission did give consideration to the application of the provisions 
of Regulation S-X in the 2007 Proposing Release, and we proposed that 
Regulation S-X would continue to apply to filings from foreign private 
issuers that include financial statements prepared in accordance with 
IFRS with the exception of the form and content portion of its 
financial statement requirements. For example, under Article 11 of 
Regulation S-X, issuers are required to prepare unaudited pro forma 
financial information to give effect as if a particular transaction, 
such as a significant recent or probable business combination, had 
occurred at the beginning of the period. In the 2007 Proposing Release, 
a foreign private issuer using IFRS would prepare the pro forma 
financial information by presenting its IFRS results and converting the 
financial statements of the business acquired (or to be acquired) into 
IFRS.
    Currently U.S. issuers are subject to Regulation S-X. For example, 
a U.S. issuer applies Article 4 and either Article 5, 6, 7 or 9 of 
Regulation S-X, as applicable, in determining the form and content of 
its financial statements. These requirements provide a substantial 
degree of specificity around the items to be presented on the balance 
sheet and income statement. IFRS does not provide specific conventions 
as to the format or content of the income statement.\59\
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    \59\ IAS 1, Presentation of Financial Statements, provides 
guidance regarding minimum required line items and provides examples 
to which entities may refer.
---------------------------------------------------------------------------

    Investment company financial statements have unique disclosure 
requirements. For example, Regulation S-X contains specific disclosure 
requirements for investment companies relating to investments in 
unaffiliated issuers, investments in affiliates, securities sold short, 
open option contracts written and investments other than 
securities.\60\ Also, Rule 6-05 of Regulation S-X permits investment 
companies to include a Statement of Net Assets in lieu of the balance 
sheet if at least 95 percent of the investment company's total assets 
are represented by investments in securities of unaffiliated issuers. 
The non-financial statement portion of an investment company's 
shareholder report may require disclosures that are based on financial 
statement information. For example, investment companies must include 
an expense table and a graphical representation of holdings.\61\ If 
investment companies were to prepare IFRS financial statements, 
questions related to these requirements would be relevant.
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    \60\ See Rules 12-12 through 12-14 of Regulation S-X [17 CFR 
210.12-12, 12-12A, 12-12B, 12-12C, 12-13 and 12-14.]
    \61\ See Items 22(d)(1), (2) of Form N-1A.
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    Regulation S-K contains the disclosure requirements for the non-
financial statement portion of filings made with the Commission. 
Several non-financial statement disclosure items required by Regulation 
S-K make reference to specific U.S. GAAP pronouncements, including 
Financial Accounting Standards and interpretations thereof. For 
example, U.S. issuers are required to provide disclosure of off-balance 
sheet arrangements under Item 303(a)(4) of Regulation S-K, which 
expressly refers to FASB Interpretations. If U.S. issuers were to 
prepare IFRS financial statements, the Commission would need to 
consider questions related to the application of these provisions of 
Regulation S-K.
    The Commission has provided its views and interpretations with 
respect to financial reporting in Accounting Series Releases (``ASRs'') 
and Financial Reporting Releases (``FRRs''). The SEC staff has given 
financial reporting guidance in various forms, including Staff 
Accounting Bulletins (``SABs''); Industry Guides; and Staff Frequently 
Asked Questions Publications. If U.S. issuers were to prepare IFRS 
financial statements, companies may find reference to these ASRs, FRRs, 
SABs, Industry Guides and other forms of U.S. GAAP guidance useful in 
the application of IAS 8, Accounting Policies, Changes in Accounting 
Estimates and Errors.\62\
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    \62\ Under IAS 8, in the absence of an IFRS standard or 
interpretation that specifically applies to a transaction or event, 
management should use its judgment in developing and applying a 
relevant and reliable accounting policy and look to other 
pronouncements in applying that judgment.
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Questions
    28. If the Commission were to consider rulemaking to allow U.S. 
issuers to prepare IFRS financial statements, are there operational 
issues relative to existing Commission requirements on which additional 
guidance would be necessary and appropriate? Would it be appropriate to 
have differing applicability for U.S. issuers of the form and content

[[Page 45610]]

provisions of Regulation S-X depending on whether they use IFRS in 
preparing their financial statements? Are there operational or other 
issues unique to investment companies? In preparing and auditing IFRS 
financial statements, should U.S. issuers and their auditors consider 
the existing guidance related to materiality and quantification of 
financial misstatements?
    29. Should there be an accommodation for foreign issuers that are 
not foreign private issuers regardless of whether the Commission were 
to accept IFRS financial statements from U.S. issuers? Should any 
accommodation depend upon whether the foreign issuer is subject to the 
laws of another jurisdiction which requires the use of IFRS, or if the 
issuer had previously used IFRS financial statements in its filings 
with the Commission?

F. Transition and Timing

    The Commission has not set out a path of the steps to any possible 
acceptance of financial statements from U.S. issuers prepared in 
accordance with IFRS as published by the IASB, nor the potential timing 
of any such steps. Rather, with this Concept Release, the Commission 
seeks input to identify what would be necessary to reach an appropriate 
level of acceptance and understanding if the Commission were to allow 
U.S. issuers to prepare their financial statements in accordance with 
IFRS as published by the IASB. The U.S. public capital market has 
experienced neither the wide co-existence of financial statements 
prepared under two sets of accounting standards, nor a change of a 
group of U.S. issuers from reporting under one set of accounting 
standards to another. The closest we have come is experiencing the 
change that occurs when amendments to U.S. GAAP necessitate that all 
U.S. issuers change their accounting for a particular area. However, 
this type of change is of a lesser magnitude as it is limited to one 
topical area. A U.S. issuer's change to IFRS may affect many topical 
areas, depending upon the degree to which financial statements prepared 
under IFRS differ from financial statements prepared under U.S. GAAP 
for that U.S. issuer's facts and circumstances. A U.S. issuer's 
assessment and reporting of the effectiveness of its internal controls 
over financial reporting also would likely need to be adjusted to 
encompass the preparation of financial information in accordance with 
IFRS.
    At a more detailed level, the Commission seeks input on U.S. 
issuers' potential first-time adoption of IFRS. Under such a change, a 
U.S. issuer's first set of IFRS financial statements would reflect the 
application of IFRS 1, First-Time Adoption of IFRS. IFRS 1 provides the 
requirements for transition from the prior basis of reporting, in this 
case U.S. GAAP, to IFRS including the restatement of and reconciliation 
from prior years' financial statements and the related disclosures.
Questions
    30. Who do commenters think should make the decision as to whether 
a U.S. issuer should switch to reporting in IFRS: a company's 
management, its board of directors or its shareholders? What, if any, 
disclosure would be warranted to inform investors of the reasons for 
and the timing to implement such a decision? If management were to make 
the decision to switch to IFRS, do investors and market participants 
have any concerns with respect to management's reasons for that 
decision?
    31. When would investors be ready to operate in a U.S. public 
capital market environment that allows the use of either IFRS or U.S. 
GAAP by U.S. issuers? When would auditors be ready? How about those 
with other supporting roles in the U.S. public capital market (e.g., 
underwriters, actuaries, valuation specialists, and so forth)? Is this 
conclusion affected by the amount of exposure to IFRS as it is being 
applied in practice by non-U.S. issuers?
    32. Should the Commission establish the timing for when particular 
U.S. issuers could have the option to switch from preparing U.S. GAAP 
to IFRS financial statements? Should market forces dictate when a U.S. 
issuer would make the choice to switch from U.S. GAAP to IFRS financial 
statement reporting? If the former, what would be the best basis for 
the Commission's determination about timing?
    33. Should the opportunity, if any, to switch to IFRS reporting be 
available to U.S. issuers only for a particular period of time? If so, 
why and for what period? At the end of that period of time, could 
commenters foresee a scenario under which it would be appropriate for 
the Commission to call for all remaining U.S. issuers to move their 
financial reporting to IFRS?
    34. What difficulties, if any, do U.S. issuers anticipate in 
applying IFRS 1's requirements on first-time adoption of IFRS, 
including the requirements for restatement of and reconciliation from 
previous years' U.S. GAAP financial statements?
    35. Would it be appropriate for U.S. issuers that move to IFRS to 
be allowed to switch back to U.S. GAAP? If so, under what conditions?

V. General Request for Comments

    In addition to the areas for comment identified above, we are 
interested in any other issues that commenters may wish to address and 
the benefits and costs relating to investors, issuers and other market 
participants of the possibility of accepting financial statements from 
U.S. issuers prepared in accordance with IFRS. Please be as specific as 
possible in your discussion and analysis of any additional issues. 
Where possible, please provide empirical data or observations to 
support or illustrate your comments.

     Dated: August 7, 2007.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-15865 Filed 8-13-07; 8:45 am]

BILLING CODE 8010-01-P
