September 25, 2007
Dear Ms. Morris,
Thank you for the opportunity to comment on the proposal to eliminate the reconciliation from IFRS to U.S. GAAP for issuers who use the public U.S. capital markets. My views represent my own views and not necessarily those of my employer.
Question 1: Do investors, issuers and other commenters agree that IFRS are widely used and have been issued through a robust process by a stand-alone standard setter, resulting in high-quality accounting standards?
YES, I believe that the International Accounting Standards Board (www.iasb.org) uses a robust transparent standard-setting process with transparent public exposure periods. Furthermore, I belelieve that the IASB is adequately organized and supervised and that all interest parties (preparers of financial informat#305on, auditors and users of financial information and regulators, such as the EU commission) are adequately represented and can provide their input. I am sure that the European Union (EU) commission and the European Accounting Association (the AAAs European counterpart) can provide valuable feedback to the SEC if the SEC requests their input.
Question 2: Should convergence between U.S. GAAP and IFRS as published by the IASB be a consideration in our acceptance in foreign private issuer filings of financial statements prepared in accordance with IFRS as published by the IASB without a U.S. GAAP reconciliation? If so, has such convergence been adequate? What are commenters views on the processes of the IASB and the FASB for convergence? Are investors and other market participants
comfortable with the convergence to date, and the ongoing process for convergence? How will this global process, and, particularly, the work of the IASB and FASB, be impacted, if at all, if we accept financial statements prepared in accordance with IFRS as published by the IASB without a U.S.
GAAP reconciliation? Should our amended rules contemplate that the IASB and the FASB may in the future publish substantially different final accounting standards, principles or approaches in certain areas?
YES, I think that existing and future convergence between IFRS and U.S. GAAP should be condition for not requiring a reconciliation from IFRS to US GAAP. I simply think that the cost of the added complexity and the need of users of financial information (securities analysts or private investors) is too high. I do not believe that the benefits of competition of accounting standards, such as increased innovation outweigh the benefits of having to understand multiple sets of accounting standards in a more and more globalised financial market world. I think that both the SEC as the endorsing authority of US GAAP as a whole and the EU Commission as the endorsing authority for individual IFRS for use in the European Union have sufficient means to assure continued convergence because both can threaten to (and should reserve the right to)(re-)introduce reconciliat#305ons from IFRS to US GAAP and vice-versa if they are not satisfied with the ongoing convergence of IFRS and US GAAP.
Question 3: Is there sufficient comparability among companies using IFRS as published by the IASB to allow investors and others to use and understand the financial
statements of foreign private issuers prepared in accordance with IFRS as published by the IASB without a U.S. GAAP reconciliation?
YES. I think that there can always be differences with a significant impact on the financial statements, which are the result of applying different estimates (e.g. of the useful lives of assets in asset intense industries where depreciation charges have material effect on the financial statements). However, I also think that the IASB should continue on a path to remove choices between alternative allowed treatments by issuers in order to improve comparability. I believe accounting standard setting is rather an art than a science and that willing parties in a robust due process for standard setting should be able to agree on ONE accounting treatment.
Question 4: Do you agree that the information-sharing infrastructure being built in which the Commission participates through both multilateral and bilateral platforms will lead to an improved ability to identify and address inconsistent and inaccurate applications of IFRS? Why or why not?
I guess the SEC is referring to the IFRS database maintained by stock exchanges, which are members of IOSCO. As far as I know only securities commissions and stock exchanges have access to the database. There should be a mechanism that allows to, at least periodically and on an aggregated basis, share prevalent industry and application practices with issuers and auditors to ensure a consistent application (with the risk of creating de-facto rules versus the principles based standards). Since I do not have access to this information sharing infrastructure and only read about it in an article in the Swiss CPA Journal by an employee of the Zurich stock exchange, it is hard to make a profound assessment, but what I read sounds like a reasonable tool.
Question 5: What are commenters views on the faithful application and consistent application of IFRS by foreign companies that are registered under the Exchange Act and those that are not so registered?
In my opinion, the audit of IFRS financial statements by certified public accountants should ensure the faithful application of IFRS.
Most funds of private equity funds are not listed evergreen (i.e. they have an indefinite life and are not self-liquidating trough ongoing full distribution of all proceeds) vehicles, but rather are pr#305vate self-liquidating funds with a limited life, which are primarily placed through private placements to institutional investors. There currently is an issue with IFRS not always fulfilling the usefulness criterion for users of financial statements. This has led to a situation where some European private equity funds do not use IFRS or carve out certain idividual IFRS, which do not provide useful information to investors. Typical areas of carve outs concern the requirement to consolidate investments over which the private equity fund has control, or to proportionlly consolidate investments or which there is joint control with other private eqhity funds or to use the equity method due to a significant influence. Since the goal of a private equity fund is to hold investments for a relatively short time (a few years) and sell them with a gain, investments are always "available for sale" and the investors care about the fair value of the investments and less about the underlying financial statements of those companies consolidated into a wild mix of a wide range of industries. Most private equity funds invest in a wide range of industries so financial statements, which consolidate the underlying financials from various industries result in information, which is not useful for users. Another common problem is the classification of partners capital in self-liquidating limited partnerships as debt solely due to the fact that partnership agreements typically contain a requirement to distribute all proceeds from investments after having paid or made reservations for the liabilities of the partnership. This results in the perverse situation where those partnerships have no equity and only debt and where investors see their capital as debt and distributions of profits as redemptions of debt or pseudo-interest on their debt. I gets even better: IFRS allow a choice to send gains from the periodic revaluation of investments to fair value over the income statement or over equity. If the private equity funds elects to send it over equity you have a situation where the unrealised gains are the onlz equity and the rest of the partners capital is debt, but as soon as an investment gets sold or written-off the equity suddenly turns to debt. Not really useful for investors. What happends in industry practice? In practice private equity funds carve-out the IFRS on the consolidation of subsidiaries and the IFRS on the classification of partnerscapital as debt and get an opinion on those hand-picked remaining IFRS and disclose which ones they apply in their accounting policy or they deliberately go for a qualified audit opinion or they choose other local GAAP.
The main problem behind the applicaton of accounting standards in the private equity industry is that the standard setting did not adequately consider the characteristics of the private equity industry and the needs of the users (investors) of the financial statements in this industry. Market forces will force the use of other GAAP and carve-outs if a standard setting process does not result in accounting standards that are not useful for the decision making of investors.
Question 6: Should the timing of our acceptance of IFRS as published by the IASB without a U.S. GAAP reconciliation depend upon foreign issuers, audit firms and other constituencies having more experience with preparing IFRS financial statements?
If you consult with the EU Commission and the Australian securities supervisor, you can determine since when European and Australian issuers have been required to use IFRS. Most issuers in the EU have been required to use IFRS for financial years starting with 2005. In addition, I know that some Swiss issuers (Switzerland not being an EU member) have voluntarily used IFRS even before 2005. This may be the case for a few isolated EU issuers as well. So if the SEC requires a reconciliation from IFRS to US GAAP for the financial year 2007 for the last time, then most European issuers will hav at least three years of IFRS experience under their belt. The commentary from the Czech gentleman from Prague (I think his name was Marek) that issuers from former communist Central and Eastern European countries, which are new EU members have insuffient experience due to a lack of qualified accountants and auditors may be valid. However, the SECs Division of Corporation Finance can easily confirm that the number of registered issuers from such Central and Eastern European countries is very limited (I think there is only one Czech issuer, one Hungarian issuer and no more Polish or Slovak issuers) and this problem will diminish over time through training and eperience and can even be addressed through assigning expatriates as a short-term measure.
Question 7: Should the timing of any adoption of these proposed rules be affected by the
number of foreign companies registered under the Exchange Act that use
NO. If the SECs Division of Coporporation Finance and Office of Economic Analysis look at the the Division of Coporporation Finances list of registered foreign private issuers by country of incorporation and use the full text search function to search for forms 15 and forms 15F filed by issuers from a certain country during 2007, they will notice that there is increased international competition between financial markets and that the number of foreign private issuers from members countries of the European Union (EU), the European Economic Area (EEA) (essentiallz Norway) and the European Free Trade Associaction (EFTA)(essentially Sw#305tzerland) has dramaticlly decreased between the end of 2001 and the end of 2006 (thus after the Sarbanes-Oxly Act in 2002). They will also notice that the numbers of issuers from EU, EEA and EFTA member countries have decreased by over a third in 2007 compared to the end of 2006. The SEC should update footnote 61 accordingly. The financial year 2006 was the first year for large accelerated foreign private issuers with a Sarbanes-Oxley Act section 404(b) auditor attestation and those financial statements were published in spring 2007. In addition the SECs new easier deregistration rules became effective in June. Average audit fees for large-accelerated European private issuers went up by over 50% based on item 16 disclosures in the first year of a Sarbanes-Oxley Act section 404(b) auditor attestation compared to the prev#305ous year. So much about section 404 efficiency gains from three years of experience with domestic US issuers. Issuers vote with their feet and retreat from the public US capital market if they can use their own or other capital markets. Any rigoros cost-benefit analysis of SOX section 404 for non-accelerated filers by the SECs Office of Economic Analysis and any empiric questionnaire of securities analysts and pr#305vate investors asking them "Do you think that the potential enhanced reliability of financial statements through an audit of internal control over financial reporting according to section 404 of the Sarbanes-Oxley Act outweighs the benefit of a reduction of your net profit by X% (insert the Office of Economic Analysis findings) caused by the annual cost of the section 404 evaluation and audit?". If X is 10%, investors will most likely tell you NO and you should exempt smaller public companies from section 404.
Question 8: The IASB Framework establishes channels for the communication of regulators and others views in the IFRS standard-setting and interpretive processes. How should the Commission and its staff further support the IFRS
standard-setting and interpretive processes?
Allowing domestic US issuers to use IFRS would increase the number of IFRS users in the US and provide a claim for adequate representation of the US in the IASBs process. The SEC like the EU should have an observer role if it allows the use of IFRS by foreign issuers without a reconcilication and the use of IFRS by domestic US issuers. This and participation by the FASB should ensure ongoing convergence between IFRS and US GAAP.
Question 9: How should the Commission consider the implication of its role with regard to
the IASB, which is different and less direct than our oversight role with the
I believe the SECs role should be similar to the one of the EU. There could be an recognition process by the SEC of individual IFRS as sufficiently converged to not require a reconciliation. The process should allow reasonably short recognition process and should be coordinated with the EU Commission.
Question 10: The Commission has gathered certain information from representatives of issuers, investors, underwriters, exchanges and other market participants at its
public roundtable on IFRS. We are interested in receiving information from a broader audience. Is the development of a single set of high-quality globally accepted standards important to investors? To what degree are investors and
other market participants able to understand and use financial statements prepared in accordance with IFRS as published by the IASB without a U.S. GAAP reconciliation? We also encourage commenters to discuss ways in which the Commission may be able to assist investors and other market
participants in improving their ability to understand and use financial statements prepared in accordance with IFRS. How familiar are investors with financial statements prepared in accordance with IFRS as published by the IASB? Will the ability of an investor to understand and use financial statements that comply with IFRS as published by the IASB vary with the size and nature of the investor, the value of the investment, the market capitalization of the issuer, the industry to which the issuer in question belongs, the trading volume of its securities, the foreign markets on which those securities are traded and the regulation to which they may be subjected, or any other factors? If so, should any removal of the reconciliation
requirement be sensitive to one or more of these matters, and, if so, how?
The Commission should analyze how much investment in foreign private issuers is made indirectly through pupblic or coporate pension plans, through mutual funds or through advice from investment advisors. The main question is if the number of private unsophisticated investors in foreign private issuers who need to understand IFRS financial statements of foreign private issuers is material. I encourage an analysis by the SECs Office of Economic Analysis. Another question is if unsophisticated investors understand US GAAP financial statements any better.
The institutional investors have not communicated any problems with IFRS financial statements of our private equity funds and have accepted IFRS as the accounting standard of the funds in the funds limited partnership agreements. That means the market for capital from US institutional investors accepts IFRS (the issues I decribed for private equity funds above apply to funds of funds to a lesser extent). The only US institutional investors, which require a reconcilication from IFRS to US GAAP are US insurance companies. The reason is that rules by State Insurance Commissioners allocate investments in private equity funds that do not use US GAAP to a less attractive regulatory category. The SEC should liaise with the National Association of Insurance Commissioners and Federal and State Banking Supervisors to ensure that any acceptance of IFRS without a reconciliation to US GAAP is also accepted by other federal and state regulatory authorities with a role in capital markets regulation.
Question 11: Without a reconciliation, will investors be able to understand and use financial statements prepared using IFRS as published by the IASB in their evaluation of the financial condition and performance of a foreign private issuer? How useful is the reconciliation to U.S. GAAP from IFRS as published by the IASB as a basis of comparison between companies using different bases of accounting? Is there an alternative way to elicit important information without a reconciliation?
YES. I think that the reconciliation is not very useful and its usefulness will dimisnish with further convergence of IFRS and US GAAP. The SEC can evaluate the usefulness by asking US securities analysts and the CFA Institute how much the US GAAP information on form 20-F is actually used and the magnitude of the impact of this information on stock prices. I am convinced that the American Accounting Association can provide the SEC with references to empiric research on the use of US GAAP reconciliations in form 20-F if IFRS information is published earlier. The timeliness of information is very relevant for the usefulness of information for decision making. Most foreign private issuers publish their national financial statements using IFRS much ealier and some use the full 6 month period until they publish their annual report on form 20-F with the reconciliation to US GAAP. If the SEC accepts IFRS without a reconciliation it should impose the same form 20-F filing deadlines as domestic issuers have for their form 10-K.
Question 12: In addition to reconciling certain specific financial statement line items, issuers presenting an Item 18 reconciliation provide additional information in accordance with U.S. GAAP. What uses do investors and other market participants make of these additional disclosures?
Question 13: Should we put any limitations on the eligibility of a foreign private issuer that uses IFRS as published by the IASB to file financial statements without a U.S. GAAP reconciliation? If so, what type of limitations? For example, should the option of allowing IFRS financial statements without reconciliation be
phased in? If so, what should be the criteria for the phase-in? Should only foreign private issuers that are well-known seasoned issuers, or large accelerated filers, or accelerated filers,74 and that file IFRS financial statements be permitted to omit the U.S. GAAP reconciliation?
No. There also was no experience or size limitation for foreign private issuers using a reconciliation to US GAAP or using US GAAP. If a foreign private issuer was small and did not have much experience with US GAAP that was no problem and the issuers financial statements were accepted by the SEC. If IFRS and US GAAP are considered equivalent and sufficiently converged, why should this be different just because the accounting standard is different?
Question 14: At the March 2007 Roundtable on IFRS, some investor representatives commented that IFRS financial statements would be more useful if issuers filed their Form 20-F annual reports earlier than the existing six-month
deadline. We are considering shortening the deadline for annual reports on Form 20-F. Should the filing deadline for annual reports on Form 20-F be accelerated to five, four or three months, or another date, after the end of the financial year? Should the deadline for Form 20-F be the same as the deadline for an issuers annual report in its home market? Should we adopt the same deadlines as for annual reports on Form 10-K? Why or why not? Would the
appropriateness of a shorter deadline for a Form 20-F annual report depend on whether U.S. GAAP information is included? If a shorter deadline is appropriate for foreign private issuers that would not provide a U.S. GAAP reconciliation under the proposed amendments, should other foreign private issuers also have a shorter deadline? Should it depend on the public float of the issuer?
I am not an expert on differnces between disclosure on form 10-K and disclosure on form 20-F. However, unless there is significant additi#305onal time consuming disclosure on form 20-F compared to form 10-K (such as a voluntary or mandatory reconciliation to US GAAP), the filing deadlines for form 20-F should be the same as the ones for form 10-K. In additition, since the filing deadlines for domestic issuers depend on the public float, the same should apply to foreign private issuers. If foreign private issuers publish financial statements or earnings releases in their home markets earlier, the same princpiples that apply for domestic issuers that do the same should apply (i.e. filing the information on a form 6-K or some other form altough a special form type that allows automated identification and XBRL analysis would be preferred).
In general, I believe that the current filing deadline of 6 months for form 20-F even with a US GAAP reconcilication is very generous. If you use the EDGAR full text search capability to analyze the actual filing dates of forms 20-F compared to the fiscal year end, you will see that many foreign private issuers voluntarily were able to meet much shorter deadlines in the past.
Question 15: Although reconciliation to U.S. GAAP of interim periods is not ordinarily required under the Exchange Act, foreign private issuers that conduct
continuous offerings on a shelf registration statement under the Securities Act may face black-out periods that prevent them from accessing the U.S. public capital market at various times during the year if their interim financial
information is not reconciled. Even if commenters believe we should continue the U.S. GAAP reconciliation requirement for annual reports that include IFRS financial statements, to address this issue should we at least eliminate the need for the U.S. GAAP reconciliation requirement with respect
to required interim period financial statements prepared using IFRS as published by the IASB for use in continuous offerings?75 Should we extend this approach to all required interim financial statements?
Yes. If there is any reconciliation requirement left, foreign private issuers will have the cost burden of and the added comlexity as a source for errors of having to collect information to accounting for transactions using at least two sets of different accounting standards. If the SEC wants to reduce this cost and complexity, ALL reconciliation requirements to US GAAP need to be waived. I think the massive delistings and deregistrations by European foreign private issuers and reports by various committees have shown that there is an urgent need for a cost efficient and competitive regulation of the US capital market in order to remain competitive.
Question 16: Is there any reason why an issuer should not be able to unreservedly and explicitly state its compliance with IFRS as published by the IASB? Is there any reason why an audit firm should not be able to unreservedly and explicitly opine that the financial statements comply with IFRS as published by the IASB? What factors may have resulted in issuers and, in particular, auditors
refraining from expressing compliance with IFRS as published by the IASB?
I answers with a counter-question: How does the SEC currently handle forms 20-F or 10-K with a negative opinion, a qualified opinion or a disclaimer of an opinion? Unless that leads to an immediate deregistration of the issuers security, there is a similar problem. I guess the SECs question only relates to situations where there is no audit opinion that the issuer complies with IFRS as published by the IASB.
The SEC should accept audit opinions from that the financial statements are in compliance with IFRS as endorsed by the EU and only require a reconiliation between IFRS as endorsed by the EU and IFRS as publ#305shed by the IASB or IFRS as endorsed by the SEC (after all the SEC may agree with EU carve outs). This will hopefully keep the cost of isolated exceptional cases to a minimum.
As the SEC already knows and the EU Commission will most probably state in a comment letter, the EU Commission needs to endorse every individual International Financial Reporting Standard before it can be used in the European Union. The SEC can ask the EU Commission for a comparison of the mandatory compliance dates for each IFRS and the date on which the IFRS was endorsed by the EU. Similarly, there should be a list of IFRS and a comment if they were endorsed in their entirety or if there was any carve-outs. The SEC can ask the IASB and the EU what they think about the one carve-out from IAS 32 (I think it was IAS 32) and if they think that the current standard setting process is likeiy to prevent such problems in the future.
The EU requires audit opinions that the financial statements are in compliance with IFRS as endorsed by the EU. I do not think that it is efficient that the SEC tries to oursource the question whether there are differences between IASB as endorsed by the EU and IFRS as published by the IASB to the auditors. This is a generic question and it is more efficient if the SEC centrally determines this through its Office of the Chief Accountant instead of having the same question answered by each auditor of each issuer and companies having to produce two sets of audit opinions for at least two sets of securities regulators. If the EU Commission gets its act together and has an efficient endorsement process and if there is an ongoing information exchange with the SEC, there will not be any differences between IASB as endorsed by the EU and IFRS as published by the IASB anyhow.
Question 17: If the proposed amendments are adopted, should eligible issuers be able to file financial statements prepared using IFRS as published by the IASB without a U.S. GAAP reconciliation for their first filing containing audited annual financial statements? If the amendments are adopted, what factors should we consider in deciding when issuers can use them? For example, should we consider factors such as the issuers public float (either in the United States or world wide), whether the issuer has issued only public debt, or the nature of the filing to which the amendments would be applied? Will investors be prepared to analyze and interpret IFRS financial statements without the
reconciliation by 2009? If not, what further steps, ncluding investor education, may be necessary?
Yes. I do not think that a differentiation by public float, size or experience is necessary. The quest#305on if smaller issuers or issuers that do not have a long experience with a set of accounting standards that are different from the issuers local GAAP are likey to have more errors in US GAAP or IFRS financial statements is the same. The question is whether US GAAP or IFRS are new for them and not if it is US GAAP and IFRS. In fact US GAAP are even more complex and hard to understand than IFRS.
Question 18: Do we need to make any other changes to Items 17 or 18 or elsewhere to implement fully the proposed elimination of the reconciliation requirement for issuers using IFRS as published by the IASB?
Question 19: Is any revision necessary to clarify that the provisions relating to issuers that use proportionate consolidation contained in Item 17(c)(2)(vii) would not
apply to IFRS financial statements that are not reconciled to U.S. GAAP under the proposed amendments? If so, what changes would be appropriate?
Quest#305on 20: Is the IAS 21 accommodation still useful for non-IFRS issuers? Is it clear that an issuer using IFRS would not need to provide disclosure under Item
17(c)(2)(iv)? If not, what changes would be necessary to make it clear?
Question 21: Would issuers have any difficulty in preparing interim period financial statements that are in accordance with IFRS as published by the IASB?
I recommend to the SEC to liaise with its EU and Australian counterparts to determine the current rules on interm financial statements in those jurisdictions. There has been a certain degree of mandatory and voluntary interim disclosure in the EU. As a consequence, I do not see a problem for issuers. However, the intensity of disclosure should be the same as in the EU to avoid additional costs of issuers and to maintain the US capital markets competitive position.
Question 22: Do foreign private issuers that have changed to IFRS generally prepare interim financial statements that are in accordance with IFRS, and do they make express statements to that effect?
I am not sure if current EU interim disclosure is as detailed as the IFRS on interim financial statements. Please refer to the respective IFRS on interim financial disclosure whether it needs to be applied in order to get an IFRS opinion. As far as I recall, it can be carved out if a jurisdiction does not chose to require this IFRS.
Question 23: How significant are the differences between IAS 34 and Article 10? Is the information required by IAS 34 adequate for investors? If not, what would be the best approach to bridge any discrepancy between IAS 34 and Article 10? Should issuers be required to comply with Article 10 if their interim period financial statements comply with IAS 34? Should we consider any revision to
existing rules as they apply to an issuer that would not be required to provide a U.S. GAAP reconciliation under the proposed rules?
Question 24: Are there accounting subject matter areas that should be addressed by the IASB before we should accept IFRS financial statements without a U.S. GAAP reconciliation?
No, but the IASB and the FASB should converge retirement benefits since they may have a significant impact on financial statments. If the SEC wants to wait for convergence in certain accounting standards that pertain to certain industries than these delays should only apply to issuers with a material exposure to those industries.
Question 25: Can investors understand and use financial statements prepared using IFRS as published by the IASB in those specific areas or other areas that IFRS does not address? If IFRS do not require comparability between companies in these areas, how should we address those areas, if at all? Would it be appropriate for the Commission to require other disclosures in these areas not
inconsistent with IFRS published by the IASB?
IFRS should address all relevant industries that require a specific accounting treatment of transactions in those industries and disclosure that is useful for investors in those industr#305es. I think the IASB should address the problems related to private equity funds. I think the issue of consolidation should be addressed on a broad basis. It is important if the economic substance of a group is that of a long-term integrated economic entity or a non-integrated short-term collection of companies for investment purposes. Problems related to the protection of investors from distorting financial statements through related party transactions can be addressed through adequate disclosre on arms length principles used in related party transactions. In addition, there is segment disclosure anyhow and each individual portfolio company in a private equity fund could be a separate reporting segment. The decision usefulness for investors of consolidated financial statements is the main question.
Question 26: Should issuers that are permitted to omit a U.S. GAAP reconciliation for their current financial year or current interim period be required to disclose in their selected financial data previously published information based on the U.S. GAAP reconciliation with respect to previous financial years or interim
No. Disclosure for different time periods using the same accounting standards is more comparable and more useful for investors. If prior period information in IFRS is available it should be used. If prior period information in IFRS is unavailable US GAAP information should be used and clearly labelled as US GAAP.
Question 27: With regard to references to U.S. GAAP in non-financial statement disclosure requirements, should we amend the references to U.S. GAAP pronouncements
that are made in Form 20-F to also reference appropriate IFRS guidance, and, if so, what should the references refer to? Would issuers be able to apply the proposed broad approach to U.S. GAAP pronouncements and would this
approach elicit appropriate information for investors? Should we retain the U.S. GAAP references for definitional purposes?
Yes. The references on form 20-F should refer to both the applicable US GAAP and the applicable IFRS pronouncements. If the issuers uses an IFRS opinion in the financial statements it should be able to only use the applicable IFRS pronouncements. After all, not all foreign private issuers that use form 20-F will use IFRS. Some may use local GAAP and a reconciliation to US GAAP and some may chose to use US GAAP.
Question 28: Should foreign private issuers that prepare financial statements in accordance
with IFRS as published by the IASB be required to continue to comply with
the disclosure requirements of FAS 69? What alternatives may be available to
elicit the same or substantially the same disclosure?
Question 29: Should the Commission address the implications of forward-looking disclosure contained in a footnote to the financial statements in accordance with IFRS 7? For example, would some kind of safe harbor provision or other
relief or statement be appropriate?
Yes. A safe harbor provision would be in order. The availability of a safe harbor should not depend on the accounting standard.
Question 30: Are there issues on which further guidance for IFRS users that do not reconcile to U.S. GAAP would be necessary and appropriate? Should issuers and auditors consider guidance related to materiality and quantification of financial misstatements?
Materiality and quantification guidance in IFRS and US GAAP and in PCAOB Auditing Standards and in International Auditing Standards issued by the International Auditing and Assurance Standards Board (IAASB) should be identical. The needs of the users of the financial statements should be the same.
Question 31: If a first-time IFRS adopter provides, in a registration statement filed during the year in which it changes to IFRS, three years of annual financial statements under a Previous GAAP and two years of interim financial
statements prepared under IFRS as published by the IASB, should we continue to require that the interim financial statements be reconciled to U.S. GAAP?
Question 32: Would a U.S. GAAP reconciliation be a useful bridge from Previous GAAP financial statements to annual financial statements prepared under IFRS as published by the IASB that are not reconciled to U.S. GAAP?
No. A reconciliation to IFRS would be more meaningful, but I think the the cost will probably outweigh the benefits depending on the materiality of the differences between previous GAAP and IFRS.
Question 33: Should the Commission extend the duration of the accommodation contained in General Instruction G for a period longer or shorter than the proposed five
years? Would seven years, ten years or an indefinite period be appropriate? If so, why?
Question 34: Should any extension of the accommodation to first-time adopters be tied in any way to U.S. GAAP reconciliation? If so, how?
Question 35: Are the proposed changes to Rules 3-10 and 4-01 sufficient to avoid any ambiguity about our acceptance of IFRS financial statements without reconciliation? If not, what other revisions would be necessary?
Question 36: Are there other rules in Regulation S-X that should be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as
published by the IASB without a reconciliation to U.S. GAAP? If so, how would the application of those rules be unclear if there were no changes to those rules, and what changes would be suggested in order to make them
Question 37: Is the application of the proposed rules to the preparation of financial statements provided under Rules 3-05, 3-09, 3-10 and 3-16 sufficiently clear?
If not, what areas need to be clarified? Are any further changes needed for issuers that prepare their financial statements using IFRS as published by the
Question 38: Are the proposed changes in Forms F-4 and S-4, and in Rule 701, sufficient to avoid any ambiguity about our acceptance of IFRS financial statements
without reconciliation? If not, how should we revise those forms or rule?
Question 39: Under Part F/S of Form 1-A relating to offerings conducted under Regulation
A, Canadian issuers may use unaudited financial statements that are reconciled to U.S. GAAP. Should we amend Form 1-A to permit the use by Canadian companies of financial statements prepared in accordance with IFRS as published by the IASB without a reconciliation? Does the fact that
financial statements under Form 1-A are not required to be audited militate in favor of retaining a U.S. GAAP reconciliation whenever a Canadian issuer uses a GAAP other than U.S. GAAP?
Question 40: Are there other rules or forms under the Securities Act that should be specifically amended to permit the filing of financial statements prepared in
accordance with IFRS as published by the IASB without a reconciliation to U.S. GAAP? If so, how would the rules or forms be unclear if there were no changes to those forms, and what changes would be suggested in order to
make them clear?
Question 41: Should Schedule TO and Schedule 13E-3 be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as published by the IASB without a reconciliation to U.S. GAAP? If so, how would the rules or forms be unclear if there were no changes to those Schedules, and what changes would be suggested in order to make them clear?
Question 42: Without the reconciliation to U.S. GAAP, should we be concerned about member firm requirements to have persons knowledgeable in accounting, auditing and independence standards generally accepted in the United States review IFRS financial statements filed with the Commission? Are there
alternative ways in which concerns may be addressed?
It should be sufficient that member audit firms have sufficient knowledge of PCAOB auditing and indepdendence standards and of IFRS. If there is no reconciliation to US GAAP, a familiarity with US GAAP is not required. Only a familiarity with SEC forms should be required for reviews of SEC forms. In the medium-term, the SEC should consider the convergence of PCAOB Auditing Standards and International Auditing Standards and whether to accept International Auditing Standards with additional PCAOB procedures where requ#305red (i.e. Sarbanes-Oxley section 404 atttestations).
Question 43: Should Form 40-F or F-10 be specifically amended to permit the filing of financial statements prepared in accordance with IFRS as published by the IASB without a reconciliation to U.S. GAAP? If so, how would the forms be unclear if there were no changes to those forms, and what changes would be suggested in order to make them clear?
Question 44: If progress does not continue towards implementing a single set of highquality globally accepted accounting standards, will investors and issuers be served by the absence of a U.S. GAAP reconciliation for financial statements prepared using IFRS as published by the IASB?
No. Progress should continue. The ultimate goal should be that local GAAP including US GAAP will be predominantly used for private companies and that public companies use IFRS.
Question 45: Where will the incentives for continued convergence lie for standard setters, issuers, investors and other users of financial statements if the reconciliation to U.S. GAAP is eliminated for issuers whose financial statements are prepared using IFRS as published by the IASB?
The incentive will be the continuing threat to reintroduce a reconciliation requirement if convergence is not maintained. The SEC may also consider an endorsement mechanism similar to the one used by the EU Commission.
Question 46: Are there additional interim measures, beyond the proposed elimination of the U.S. GAAP reconciliation from IFRS financial statements, that would advance the adoption of a single set of high-quality globally accepted
accounting standards? If so, what are they? Who should undertake them?
The US should continue with its project to reduce the complexity of US GAAP. The results may be useful for continued IFRS standard setting and vice-versa. Codification and a logical sequence aid preparers in finding all relevant information in one place. The FASBs and the IASBs convergence project should continue and be based on a prioritization by the manitude of differences, the number of issuers affected and the time required to resolve the differences.
Question 47: Do you agree with our assessment of the costs and benefits as discussed in this section? Are there costs or benefits that we have not considered? Are you aware of data and/or estimation techniques for attempting to quantify these costs and/or benefits? If so, what are they and how might the information be obtained?
Question 48: Which foreign private issuers would have the incentive to avail themselves of the proposed amendments, if adopted? Are there any reasons for which an issuer that is eligible to file IFRS financial statements without reconciliation under the proposed amendments would elect to file a reconciliation? If so, what are they?
I think it is unlikely that an issuers would voluntarily incur the cost of a US GAAP reconciliation without having to do so. If US GAAP fill certain gaps in IFRS in certain industries, it is more likely that issuers will only fill those gaps by interpreting general IFRS principles in the same way, but by still getting an IFRS audit opinion.
Question 49: Are there particular industry sectors for which a critical mass of the issuers who raise capital globally already report in IFRS? If so, which industries are
they and why?
The SECs Division can easily answer that question by analyzing the forms 20-F of foreign private issuers for the fiscal year 2006 by SIC code and accounting standard in the auditors opinion. This should be the case for pharmaceutical companies, consumre goods companies, telecom operators and oil and gas companies. Those are usualy large companies who use the international capital markets and there is a large number of issuers from different countries.