• SEC Seeks Public Comment on IFRS Transition
  • August 26, 2010
  • Law Firm: Alston Bird LLP - Atlanta Office
  • The Securities and Exchange Commission (SEC) recently issued Release Nos. 33-9133  and 33-9134  pursuant to its ongoing consideration of whether to implement International Financial Reporting Standards (IFRS) for U.S. issuers in place of U.S. Generally Accepted Accounting Principals (GAAP). The two notices of solicitation of public comments follow directives in the SEC’s February 24, 2010  Statement of Support of Convergence and Global Accounting Standards, in which it instructed the SEC staff to develop and execute a work plan to identify areas upon which to concentrate fact-gathering efforts to determine whether, when and how to incorporate IFRS. The work plan follows the SEC’s earlier Proposed Roadmap, which outlined seven key milestones that, if met by 2011, would lead to a final determination by the SEC whether to make the use of IFRS mandatory beginning in 2014. Six topics for further study comprise the subjects of the respective releases as follows.

    Release No. 33-9133

    Investors’ Current Knowledge of IFRS and Preparedness for Incorporation of IFRS. Considering incorporating IFRS into the U.S. financial reporting system requires an evaluation of investor understanding and education regarding IFRS, because the primary value of a “single high-quality global standard” will only be realized if investors understand and are willing to rely on reported results. Because IFRS differs significantly from GAAP in a number of areas, the SEC needs information regarding investors’ likely response to changes in accounting standards.

    Investors’ Education Processes on Changes in Accounting Standards and Timeliness of Such Education. Incorporating IFRS into the U.S. financial reporting system may impact the education process of investors. The SEC needs information about the processes by which investors understand and maintain an understanding of changes to current accounting standards and how those processes would likely be affected by a transition to IFRS.

    Extent of, Logistics for, and Estimated Time Necessary to Undertake Necessary Changes. Any plan for implementation of IFRS must account for changes in the investor education process. The SEC needs information regarding the time, if any, needed by investors to improve their understanding of IFRS and related education processes so that they are fairly prepared in advance of incorporation. Additionally, the SEC must make determinations about which mechanisms would best assist investors in improving their understanding of IFRS and which entities could provide those mechanisms.

    Release No. 33-9134

    Contractual Arrangements. Companies’ contracts often require reporting under GAAP or compliance with standards that are derived from GAAP. Comments on the Proposed Roadmap identified significant issues potentially arising from IFRS implementation, including the need for contract negotiations and the preparation of two financial statements, depending on how IFRS is applied to U.S. capital markets. The SEC needs more information about the impact of IFRS implementation on the “application, interpretation and enforcement” of commercial contracts and the ways in which parties to such contracts would most likely address those effects.

    Corporate Governance; Stock Listing Requirements. Corporate governance and listing requirements may be affected by a transition to IFRS. For example, companies are required to identify at least one independent “audit committee financial expert” serving on its audit committee and indicate the education and experience through which the relevant expertise has been acquired. Listing rules for U.S. securities exchanges also require some manifestation by audit committee members of competence in accounting and financial reporting. The SEC needs more information regarding challenges that U.S. issuers may face in selecting audit committee members who would satisfy related corporate governance and listing requirements as IFRS are applied.

    Statutory Distribution Restrictions and Other Legal Standards Tied to Financial Reporting Standards. The implementation of IFRS may affect issuers in certain jurisdictions to the extent that those jurisdictions base legal standards, such as limitations on distributions and voting rights for shareholders in a sale of “all or substantially all” of an issuer’s property or assets, on balance sheet or income statement amounts determined for financial reporting. The SEC needs more information regarding state statutes that are especially likely to be affected by a transition to IFRS and how the relevant jurisdictions would likely address those effects.

    Both sets of topics presented will be subject to a 60-day public comment period.