October 18, 2010
Q)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?
A)Since IFRS is in many ways similar to US GAAP and US GAAP is not a body of law there should be no conflict between accounting standards and contractual obligations arising from agreements, indentures, plans, and designations. Adopting IFRS does not change a single law, whether federal, state, local, or any law arising from an international treaty. Also, being principles based, IFRS does not contain as many technical prescriptions as to what the financial statement preparer needs to consider nor a multitude of safe harbors to comply with.
Q)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?
A)For the same reasons as stated above, IFRS does not in any way modify, change or affect any existing or future laws of the land, but rather presents a uniform framework to make financial information available to any interested party, within and outside of the United States.
Q)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?
A)For the same reasons as stated above, IFRS would not cause any different treatment of any legally binding agreements.
Q)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)?
A)Introducing additional accounting system is the most likely scenario when IFRS is being adopted. Since IFRS is not a law it will not affect any legal standing to a party to any contracts. Being subject to system upgrade and staying competitive in the technological plane requires at least as much effort in modifying accounting systems as the adoption of IFRS would.
Q)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?
A)Since there would be no impact, no mitigation is called for in incorporating IFRS. A transitional period should not be less than 18 months and not more than 3 years, driven mainly by technological adjustment like XBRL tagging and mapping of legacy reporting applications to the new interfaces required for presenting financial information to investors.
Q)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?
A)Incorporating IFRS will have an impact on compliance with exchange listing requirements and the composition of audit committees as additional education is required which should not be more effort than in educating relevant bodies about Accounting Standards Codification which has recently replaced SFAS and other forms of communication from FASB.
Q)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 or the stock exchange listing requirements related to accounting or financial management expertise following the incorporation of IFRS into the financial reporting system for U.S. issuers? Would there be adverse effects 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?
A)Current members of audit committees are unlikely to possess expert knowledge about IFRS, but it will be remedied by taking steps as listed above through continuing education and hiring those who are already experts. There would be an adverse effect were a committee member to admit lack of knowledge and experience in disseminating any information, including financial. With proper incentives the educational gap can be quickly closed as financial experts start perceiving passion of IFRS knowledge and expertise as competitive advantage over those who lack such knowledge.
Q)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?
A)Financial experts that are at the disposal of board members ensure the speedy and thorough education in IFRS and any other standard modification, just like todays marketplace and technology, through the competitive pressures, ensure that each financial professional is schooled in the latest requirements, reporting and any other financial educational requirement.
Q)To what extent and in what ways would incorporating IFRS into the financial reporting system for U.S. issuers likely affect an issuers ability to comply with quantitative securities exchange listing standards?
A)There should be no impact on quantitative standards, whether required by securities exchanges, by the Securities and Exchange Commission, the Internal Revenue Service, or any other governmental or private industry governing body.
Q)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?
A)Any adverse effects should be mitigated within 2-3 year timeframe. Since the adverse effects are minimal they can be avoided by continuing education and information exchange in the traditional and through the new social media. The traditional and new communication media are sufficient for mitigating any information deficiencies resulting from IFRS or any other financial reporting requirement.
Q)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?
A)Other changes that come mind are for example future press releases that may possibly start containing the new (IFRS) acronym and published figures that would start having a disclaimer non-IFRS earnings or similar. There should not be any other change in the behavior of registrants.
Q)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?
A)There will be no impact on state statutes just like there is no impact on federal statutes or international treaties. Existing and future equity securities holders have exactly the same rights and obligations whether IFRS are adopted by the US issuers or not.
Q)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? Which statutes, and why?
A)There are no such statutes to my knowledge and if they are they need to become a part of educating financial experts to evaluate financial information as drafted under IFRS.
Q)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?
A)Since there is no impact there is no need to address the issue. In case it is found that in fact there are such statutes they should be handled in the same way they would today in case of US GAAP.
Q)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)?
A)As long as the basis of valuation is provided, differences in the final result are permissible and inevitable, both when resulting in higher and lower valuations. IFRS by themselves do not ensure that there would be no attempts to misuse their intent.
Q)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?
A)There is no need for mitigation according to the rationale provided in earlier answers.
Q)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 issuers property or assets? For example, would the determination of whether such a vote is required change as a result of a change in accounting standards?
A)There should be no spillover effect between accounting standards and the law just like there is none between US GAAP and US statutes.
Q)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?
A)There are no such statutes to my knowledge and answers can be only provided by a competent legal rather than an accounting professional.
Q)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?
A)Since there is no impact there is no need to address unless legal professionals would find any jurisdictional or common law exposures that would need to be addressed.
Q)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?
A)The conclusions are the same as in the previous answer, but the risks can be avoided or mitigated by competent legal help.
Q)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?
A)Again, answers can be the same as previously, but and I defer this answer to those who are better equipped to answer any legal conflict questions.
Q)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? To what extent and in what ways, and why?
A)Ditto.