SEC Proposes a Roadmap for Mandatory Adoption of International Financial Reporting Standards by U.S. Issuers

On November 14, 2008, the Securities and Exchange Commission (the “SEC”) proposed a roadmap for the use of International Financial Reporting Standards (“IFRS”) by U.S. issuers in an effort to move to a single set of high-quality global accounting standards (the “Roadmap”). Approximately 113 countries already require or permit IFRS. The SEC believes this method will provide the best common platform upon which companies can report and investors can compare financial information in a global capital market. The Roadmap sets forth several milestones that, if achieved, could lead to the required use of IFRS by U.S. issuers in 2014 if the SEC believes it to be in the public interest and for the protection of investors. As part of the Roadmap, the SEC is proposing amendments to various regulations, rules, and forms that would permit early use of IFRS by a limited number of U.S. issuers. The Roadmap also includes a discussion of various areas of consideration for market participants related to the eventual use of IFRS in the U.S.

Mandatory Use of IFRS

The Roadmap contains seven milestones which, if achieved, could lead to the mandatory use of IFRS by U.S. issuers beginning in 2014. The seven milestones set forth in the proposal relate to the following:

• improvements in current accounting standards, including continuation of the joint efforts of the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) to develop globally compatible accounting standards;
• accountability of the IASB to a proposed Monitoring Group and the stability of funding of the International Accounting Standards Committee Foundation;
• improvement in the ability of issuers to use interactive data for IFRS reporting;
• education and training related to IFRS for investors, accountants, auditors, and others involved in the preparation and use of financial statements;
• limited early use of IFRS permitted only where this would enhance the comparability of financial reporting for U.S. investors;
• anticipated timing of future rulemaking by the SEC; and
• implementation of the mandatory use of IFRS by U.S. issuers, possibly by means of a staged transition depending upon the issuer’s size, as opposed to requiring all U.S. issuers to transition at once.

Under the timetable laid out in the Roadmap, mandatory IFRS filings by U.S. issuers would begin for fiscal years ending on or after:

• December 15, 2014, for large accelerated filers;
• December 15, 2015, for accelerated filers; and
• December 15, 2016, for non-accelerated filers.

In addition, the proposed rule, if adopted, would apply solely to U.S. issuers with respect to their periodic reporting requirements under Sections 13 and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), including Form 8-K, proxy and information statements under Section 14 of the Exchange Act, and registration statements under Section 12 of the Exchange Act and Section 7 of the Securities Act of 1933 (the “Securities Act”).

The Roadmap, as currently proposed, does not include issuers that are investment companies under the Investment Company Act of 1940 or other types of financial reports that are filed or furnished to the SEC by regulated entities, such as registered broker-dealers.

Limited Early Use of IFRS

The SEC also proposes to allow qualifying U.S. issuers to elect to use IFRS, beginning with filings for fiscal years ending on or after December 15, 2009. Under the proposed rule, to qualify for early use of IFRS, an issuer must show:

(1) that IFRS is used as the basis of financial reporting more often than any other basis of financial reporting among the 20 largest listed companies worldwide in that industry; and

(2) that the issuer is among the 20 largest companies globally in its particular industry. In addition, an issuer would need to obtain a letter of no objection from the SEC staff for early use of IFRS financial statements in SEC filings. The SEC estimates that a minimum of approximately 110 U.S. issuers in 34 “IFRS industries” would qualify for early use of IFRS.

An eligible issuer that elects to file IFRS financial statements with the SEC would be required to:

• include in its annual report three years of audited IFRS financial statements in the initial filing; and
• prominently disclose in its Form 10-K that certain information related to the issuer’s decision to change to IFRS reporting, likely at the beginning of the Business section.

The SEC is considering whether a one-time reconciliation in accordance with IFRS would be sufficient or whether it should also require the ongoing disclosure of supplemental financial information, in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), by U.S. issuers that have elected to file IFRS financial statements.

Additionally, an eligible IFRS issuer would be able to use financial statements prepared in accordance with IFRS when conducting an offer or sale of securities that is exempt from registration under the Securities Act, where the exemption relied upon requires that financial statements be furnished to investors.

Other Considerations

The required use of IFRS by U.S. issuers would affect various federal and state regulators, including regulators of financial institutions, insurance companies, and public utilities, as well as certain provisions of the Internal Revenue Code. For instance, since IFRS does not currently allow for the use of the last-in, first-out (“LIFO”) method of accounting, U.S. issuers reporting in accordance with IFRS would be required to use the first-in, first-out (“FIFO”) method of valuing inventory. In addition, IFRS reporting might affect an issuer’s ability to be included in certain indices, such as the S&P 500, that currently include only those issuers reporting in accordance with U.S. GAAP.

In determining whether to proceed with the transition to IFRS, the SEC will consider the extent to which IFRS is used globally, is applied consistently, and supports the assertion of IFRS as the single set of high-quality global accounting standards. The SEC would determine, in 2011, whether to proceed with rules requiring U.S. public companies to file financial statements prepared in accordance with IFRS by 2014.

The comment period for the Roadmap expires on February 19, 2009. Any person who wishes to submit comments on this proposal or has questions regarding the Roadmap or its application may obtain additional guidance from a member of our Public Companies Practice Group.

Questions

Any person who has a question regarding the issues raised in this Corporate and Securities Update may obtain additional guidance from a member of our Public Companies Group.