
[Federal Register: August 18, 2010 (Volume 75, Number 159)]
[Notices]               
[Page 51150-51153]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18au10-174]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release Nos. 33-9134; 34-62700; File No. 4-608]

 
Notice of Solicitation of Public Comment on Consideration of 
Incorporating IFRS Into the Financial Reporting System for U.S. Issuers

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission is requesting public 
comment on behalf of the staff on three topics related to its ongoing 
consideration of incorporating International Financial Reporting 
Standards (``IFRS'') into the financial reporting system for U.S. 
issuers. These three topics, derived from the staff's Work Plan on 
considering the incorporation of IFRS into the financial reporting 
system for U.S. issuers, involve the impact of such incorporation on: 
Issuers' compliance with contractual arrangements that require the use 
of U.S. Generally Accepted Accounting Principles (``U.S. GAAP''); 
Issuers' compliance with corporate governance requirements; and the 
application of certain legal standards tied to amounts determined for 
financial reporting purposes.

DATES: Comments should be received on or before October 18, 2010.

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/other.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number 4-608 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. 4-608. This 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/other.shtml). Comments are also 
available for Web site viewing and printing 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: Tamara Brightwell, Senior Special 
Counsel, Larry Hamermesh, Attorney-Fellow, or Jennifer Zepralka, Senior 
Special Counsel, Division of Corporation Finance, at (202) 551-3500, or 
Jeffrey S. Cohan, Senior Special Counsel, Office of the Chief 
Accountant, at (202) 551-5300, 100 F Street, NE., Washington, DC 20549.

[[Page 51151]]

I. Introduction

    On February 24, 2010, the Commission issued a Statement in Support 
of Convergence and Global Accounting Standards (the ``Statement''), 
reiterating its belief ``that a single set of high-quality globally 
accepted accounting standards will benefit U.S. investors and that this 
goal is consistent with our mission of protecting investors, 
maintaining fair, orderly, and efficient markets, and facilitating 
capital formation.'' \1\ In this Statement, the Commission directed the 
Staff to develop and execute a work plan (``Work Plan''), the purpose 
of which is to consider specific areas and factors before potentially 
transitioning our current financial reporting system for U.S. issuers 
to a system incorporating IFRS.\2\
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    \1\ Release Nos. 33-9109; 34-61578 (Feb. 24, 2010) [75 FR 9494] 
(Mar. 2, 2010).
    \2\ Available at: http://www.sec.gov/spotlight/
globalaccountingstandards/globalaccountingstandards.pdf.
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    The Work Plan identifies a number of topics for further study, 
including the three topics that are the subject of this solicitation 
for comment.

II. Contractual Arrangements \3\

A. Background

    Companies' contracts often, either explicitly or implicitly, 
require reporting under U.S. GAAP or include metrics that are based off 
of current U.S. GAAP reporting. For example, companies may have issued 
debt instruments which include financial covenants based on U.S. GAAP 
or require periodic reporting of financial statements prepared in 
accordance with U.S. GAAP. Similarly, lease contracts and employee 
compensation plans may be based on metrics computed using U.S. GAAP 
financial information. Merger agreements may contain earn-out 
provisions that are to be calculated using U.S. GAAP.
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    \3\ See the Work Plan, 75 FR at 9511.
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    Commentators on the Commission's 2008 proposal regarding IFRS \4\ 
indicated that a move to IFRS for U.S. issuers may require contract 
renegotiation or the preparation of two sets of financial statements, 
depending on how IFRS is incorporated in the U.S. capital markets. In 
addition, performance under existing agreements could be affected if 
the changes in accounting standards result in financial reporting 
changes.
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    \4\ See Roadmap for the Potential Use of Financial Statements 
Prepared in Accordance with International Financial Reporting 
Standards by U.S. Issuers, Release No. 33-8982; 34-58960 (Nov. 14, 
2008) [73 FR 70816] (Nov. 21, 2008).
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B. Request for Comment

     To what extent and in what ways would incorporating IFRS 
into the financial reporting system for U.S. issuers be likely to 
affect the application, interpretation, or enforcement of contractual 
commercial arrangements such as financing agreements, trust indentures, 
merger agreements, executive employment agreements, stock incentive 
plans, leases, franchise agreements, royalty agreements, and preferred 
stock designations?
     What types of contractual commercial arrangements aside 
from those specifically identified in the previous question would 
likely be affected by the incorporation of IFRS into the financial 
reporting system for U.S. issuers, and in what ways?
     With respect to existing contractual commercial 
arrangements, would the incorporation of IFRS into the financial 
reporting system for U.S. issuers be treated differently as compared to 
how a change in an existing financial reporting standard under U.S. 
GAAP would be treated today? If so, how?
     To the extent that incorporating IFRS into the financial 
reporting system for U.S. issuers would affect the application, 
interpretation, or enforcement of contractual commercial arrangements, 
how would parties to such arrangements most likely address such effects 
(e.g., by modifying the contract, or adopting multiple accounting 
systems)?
     To what extent would any potential effects of 
incorporating IFRS into the financial reporting system for U.S. issuers 
on the application of contractual commercial arrangements likely be 
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the 
financial reporting system for U.S. issuers? What length of a 
transition or phase-in period would be necessary to reasonably mitigate 
the effects? Are there any other means by which such effects can be 
mitigated or avoided?

III. Corporate Governance; Stock Exchange Listing Requirements \5\

A. Background

    Incorporation of IFRS into the financial reporting system for U.S. 
issuers may affect an issuer's compliance with corporate governance 
requirements. For example, in 2003, as required by the Sarbanes-Oxley 
Act, the Commission adopted rules that require a registrant to disclose 
whether it has at least one ``audit committee financial expert,'' as 
defined, serving on its audit committee and, if so, the name of the 
expert and whether the expert is independent of management. Those rules 
also indicate the education and experience through which those 
attributes must have been acquired.\6\ Listing rules for U.S. 
securities exchanges also have requirements regarding the competence of 
audit committee members in accounting and financial reporting.\7\ In 
addition, U.S. securities exchanges have certain quantitative listing 
standards that could be affected by changes in financial reporting.\8\ 
Accordingly, incorporation of IFRS into the financial reporting system 
may result in challenges for U.S. issuers in identifying audit 
committee financial experts and in satisfying corporate governance and 
related quantitative stock exchange listing requirements, as well as, 
more broadly, compliance with other aspects of corporate governance.
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    \5\ See the Work Plan, 75 FR at 9511.
    \6\ Item 407(d)(5) of Regulation S-K.
    \7\ E.g., NYSE Listed Company Manual Sec.  303A.07; Nasdaq 
Listing Rule 5605(c)(2).
    \8\ E.g., NYSE Listed Company Manual Sec.  102.00; Nasdaq 
Listing Rule 5450.
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B. Request for Comment

     To what extent and in what ways would incorporating IFRS 
into the financial reporting system for U.S. issuers likely affect 
compliance with corporate governance and related disclosure 
requirements applicable to U.S. issuers, such as stock exchange listing 
requirements relating to the composition and function of audit 
committees of the boards of directors and disclosure requirements 
regarding audit committee financial experts?
     We understand that experienced professionals, including 
audit committee members, would likely need to enhance their knowledge 
of IFRS and develop further expertise, and we believe it would be 
important for audit committee members to do so in light of their 
responsibility for oversight of the preparation and audit of financial 
statements that are presented to U.S. investors. To what extent would 
current members of boards of directors likely have the education or 
experience needed to meet the requirements of the definition of ``audit 
committee financial expert'' \9\ or the stock exchange listing 
requirements related to accounting or financial management expertise 
\10\ following the incorporation of IFRS into the financial reporting 
system for U.S. issuers? Would there be adverse effects

[[Page 51152]]

if an issuer were required to disclose that it does not have any audit 
committee financial experts while its audit committee members are in 
the process of obtaining the necessary expertise?
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    \9\ Item 407(d)(5) of Regulation S-K.
    \10\ E.g., NYSE Listed Company Manual Sec.  303A.07; Nasdaq 
Listing Rule 5605(c)(2).
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     To the extent that incorporating IFRS into the financial 
reporting system for U.S. issuers would adversely affect board members' 
ability to meet the requirements or result in disclosure that the 
issuer does not have an audit committee financial expert, how would 
issuers and individual directors most likely address such effects 
(e.g., by additional training)? To what extent and in what ways would 
such effects be likely to differ from similar effects in jurisdictions 
that have adopted, or are in the process of adopting, IFRS?
     To what extent and in what ways would incorporating IFRS 
into the financial reporting system for U.S. issuers likely affect an 
issuer's ability to comply with quantitative securities exchange 
listing standards?
     To what extent would any potential adverse effects of 
incorporating IFRS into the U.S. financial reporting system on issuers' 
compliance with corporate governance and related disclosure 
requirements likely be mitigated or otherwise affected by providing for 
a transition or phase-in period for compliance with the incorporation 
of IFRS into the financial reporting system for U.S. issuers? What 
length of a transition or phase-in period would be necessary to 
reasonably mitigate the adverse effects? Are there any other means by 
which such effects can be mitigated or avoided?
     To what extent would any potential adverse effects of 
incorporating IFRS into the U.S. financial reporting system on issuers' 
compliance with quantitative stock exchange listing standards likely be 
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the 
financial reporting system for U.S. issuers? What length of a 
transition or phase-in period would be necessary to reasonably mitigate 
the adverse effects? Are there any other means by which such effects 
can be mitigated or avoided?
     Are there any corporate governance and related disclosure 
requirements other than those identified above that would be affected 
by incorporating IFRS into the financial reporting system for U.S. 
issuers?

IV. Statutory Distribution Restrictions and Other Legal Standards Tied 
to Financial Reporting Standards \11\

A. Background

    Certain legal standards in State laws may be tied to amounts 
determined for financial reporting purposes. For example, while the 
amount, timing, and manner of the payment of dividend distributions and 
repurchases of stock are typically determined by companies' boards of 
directors, the actual amounts available to distribute or to repurchase 
may be restricted by State statute. Some jurisdictions provide in this 
regard that dividends may be paid only from retained earnings or may be 
paid from current earnings despite an accumulated deficit.
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    \11\ Work Plan, 75 FR at 9508-9.
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    To the extent that jurisdictions base legal standards on amounts 
determined for financial reporting purposes, incorporation of IFRS into 
the financial reporting system for U.S. issuers could affect a 
company's ability to undertake certain actions, such as declaring 
dividends or repurchasing stock, which would, in turn, affect 
investors' expectations. In addition, to the extent that legal 
standards do not change based on changes in financial reporting 
requirements, companies could need to maintain two sets of records.

B. Request for Comment

     To what extent and in what ways would incorporating IFRS 
into the financial reporting system for U.S. issuers likely affect the 
application of limits in State statutes on the ability of issuers to 
make distributions to holders of equity securities, either through 
dividends or similar distributions in respect of those securities, or 
to repurchase such securities? \12\
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    \12\ E.g., Del. Code Ann., tit. 8, Sec.  154 (defining surplus); 
Model Bus. Corp. Act Sec.  6.40 (prohibiting distributions to 
shareholders if total assets would be less than total liabilities).
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     Are there any particular distribution statutes from any 
particular jurisdictions the application of which are especially likely 
to be affected by incorporating IFRS into the financial reporting 
system for U.S. issuers? \13\ Which statutes, and why?
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    \13\ E.g., Cal. Corp. Code Sec.  500(c) (``The amount of any 
distribution payable in property shall, for the purposes of this 
chapter, be determined on the basis of the value at which the 
property is carried on the corporation's financial statements in 
accordance with generally accepted accounting principles.''); Ohio 
Rev. Code Sec.  1701.33(A) (including, in the formula for 
determining the permissible amount of a distribution, ``[t]he 
reduction in surplus that results from the immediate recognition of 
the transition obligation under statement of financial accounting 
standards no. 106 (SFAS no. 106), issued by the financial accounting 
standards board'').
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     To the extent that incorporating IFRS into the financial 
reporting system for U.S. issuers would affect the application of 
statutes governing distributions to equity security holders, how would 
the jurisdictions affected (or issuers in such jurisdictions) most 
likely address such effects?
     To what extent would any potential effects of 
incorporating IFRS into the financial reporting system for U.S. issuers 
on the application of statutes governing distributions to equity 
security holders be avoided or minimized by State law permitting the 
board of directors to rely on reasonable valuation methods, rather than 
on financial statements, in determining whether a distribution is 
permissible (e.g., when transitioning to IFRS, if the value of an asset 
is determined to be lower using IFRS than it would be using the current 
standard in U.S. GAAP, would the board be able to make a determination 
that the value of the asset is higher than as calculated under IFRS)? 
\14\
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    \14\ See Klang v. Smith's Food & Drug Ctrs., 702 A.2d 150, 152 
(Del. 1997) (``Regardless of what a balance sheet that has not been 
updated may show, an actual, though unrealized, appreciation 
reflects economic value that the corporation may borrow against or 
that creditors may claim or levy on. Allowing corporations to 
revalue assets and liabilities to reflect current realities complies 
with the statute [specifying permissible sources for distributions 
to stockholders] and serves well the policies behind this 
statute.''); Model Bus. Corp. Act Sec.  6.40(d) (permitting the 
board of directors to determine whether a distribution is 
permissible based ``either on financial statements prepared on the 
basis of accounting practices and principles that are reasonable in 
the circumstances or on a fair valuation or other method that is 
reasonable in the circumstances.'').
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     To what extent would any potential effects of 
incorporating IFRS into the financial reporting system for U.S. issuers 
on the application of statutory limits on distributions to equity 
security holders likely be mitigated or otherwise affected by providing 
for a transition or phase-in period for compliance with the 
incorporation of IFRS into the financial reporting system for U.S. 
issuers? What length of a transition or phase-in period would be 
necessary to reasonably mitigate the effects? Are there any other means 
by which such effects can be mitigated or avoided?
     To what extent and in what ways would incorporating IFRS 
into the financial reporting system for U.S. issuers likely affect the 
application of State statutes requiring a shareholder vote for a sale 
of ``all or substantially all'' of the issuer's property or assets? 
\15\ For example, would the determination of whether such a vote is 
required change

[[Page 51153]]

as a result of a change in accounting standards?
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    \15\ E.g., Del. Code Ann., tit. 8, Sec.  271(a); Model Bus. 
Corp. Act Sec.  12.02(a).
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     Are there any particular asset sale statutes from any 
particular jurisdictions the application of which is especially likely 
to be affected by incorporating IFRS into the financial reporting 
system for U.S. issuers? Which statutes, and why?
     To the extent that incorporating IFRS into the financial 
reporting system for U.S. issuers would affect the application of 
statutes governing sales of assets, how would the jurisdictions 
affected (or issuers in such jurisdictions) most likely address such 
effects?
     To what extent would any potential effects of 
incorporating IFRS into the financial reporting system for U.S. issuers 
on the application of statutes governing sales of assets be avoided or 
minimized by State law permitting the board of directors to rely on 
reasonable valuation methods, rather than financial statements, in 
determining whether a shareholder vote is required to approve a sale of 
assets? \16\
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    \16\ See Official Comment to Model Bus. Corp. Act Sec.  12.02(a) 
(stating that a board of directors may base a determination that a 
retained business represents at least 25% of total assets or 25% of 
total income ``either on accounting principles and practices that 
are reasonable in the circumstances or (in applying the asset test) 
on a fair valuation or other method that is reasonable in the 
circumstances.'').
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     To what extent are any potential effects of incorporating 
IFRS into the financial reporting system for U.S. issuers on the 
application of statutes governing sales of assets likely to be 
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the 
financial reporting system for U.S. issuers? What length of a 
transition or phase-in period would be necessary to reasonably mitigate 
the effects? Are there any other means by which such effects can be 
mitigated or avoided?
     Are there any other State statutes the application of 
which is likely to be affected by incorporating IFRS into the financial 
reporting system for U.S. issuers? \17\ To what extent and in what 
ways, and why?
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    \17\ E.g., Del. Code Ann., tit. 8, Sec.  503 (requiring, for 
purposes of determining corporate franchise tax, that ``[i]nterests 
in entities which are consolidated with the reporting company shall 
be included within `total assets' and `total gross assets' at a 
value determined in accordance with generally accepted accounting 
principles.'').
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    Persons submitting comments on any of these questions are invited 
to consider and comment on whether the manner in which IFRS 
incorporation is implemented would affect the responses to the 
questions above.
    All interested parties are invited to submit their views, in 
writing, on these questions.

    Dated: August 12, 2010.
    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-20358 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P

