First-time Application of International Financial Reporting Standards (reference RIN 3235-AI92) (‘the proposals’)
We welcome the opportunity to comment on temporary accommodations included in the Securities and Exchange Commission’s proposals. We believe the proposed relief afforded to companies, in providing only two years of financial information in the first year of reporting under International Financial Reporting Standards (‘IFRS’), is important at a time when the transition to IFRS places significant pressure on a company’s reporting functions and a considerable demand on its resources. This pressure has been increased by the IASB’s issuance of a number of important and far-reaching standards during late 2003 and early 2004, with promise of yet further amendments and new standards to be published prior to 1 January 2005.
I would draw your attention to one area of the proposals with which we disagree. Section II.B.1 proposes that three years of condensed U.S. GAAP financial information be presented. Where publishing information as required by Items 17 and 18 of Form 20-F is appropriate in current filings, publishing a condensed U.S. GAAP income statement, consistent with that required by Article 10 of Regulations S-X, is far in excess of the information currently produced. We believe the cost and difficulty of preparing such information would outweigh the limited benefits to investors. First-time registrants are not required to present condensed U.S. GAAP financial information in their initial filing and we do not believe the provision of such information on the occasion of changing GAAP is justified on the grounds of investor benefit.
We believe the progress to date by the FASB and IASB in working towards a common set of high-quality standards means the SEC is in a position to accept financial statements prepared under IFRS without reconciliation to U.S. GAAP. IFRS and U.S. GAAP are now largely convergent in significant areas of accounting such as business combinations and goodwill, accounting for financial instruments and recognition of share-based payment transactions. We do not believe the remaining differences between IFRS and U.S. GAAP are of such a magnitude that they would confuse U.S. investors familiar with U.S. GAAP where the IFRS accounting policies are clearly explained in filings. We would strongly support such a move and urge the SEC to give this serious consideration.
Our detailed responses to published questions are attached.
Douglas Flint Group Finance Director
Appendix: HSBC responses to detailed questions
II. DISCUSSION OF PROPOSED ACCOMMODATION TO PERMIT OMISSION OF IFRS FINANCIAL STATEMENTS FOR THE THIRD FINANCIAL YEAR
A. Eligibility Requirements
Will the conversion to IFRS for year 2005 make it difficult for issuers to recast year 2003 results accurately? What specific issues will be encountered and how difficult will they be to address? What additional information would first-time adopters need to provide IFRS financial statements for the third-year back that they would not already have in connection with their reconciliation to U.S. GAAP? What other difficulties might the application of IFRS create for first-time adopters? Will first-time adopters in earlier or later years face similar issues? Are the proposed amendments appropriate to address those challenges? If not, what issues are not addressed by the proposed amendments? Should they be addressed, and, if so, how?
The conversion to IFRS in 2005 would present significant difficulties to issuers recasting 2003 results accurately. A number of significant changes to IFRS have only been (or will be) finalised during the first quarter of 2004, for example, a new standard on business combinations. Further new or amended standards are expected prior to 2005.
The most significant impact on banks such as HSBC are the significant amendments to IAS 32 ‘Financial Instruments: Disclosure and Presentation’ and IAS 39 ‘Financial Instruments: Recognition and Measurement’. These have far reaching systems consequences that require significant resources to meet the deadline for producing 2004 IFRS comparatives. Producing IFRS 2003 comparatives as well would materially add to this burden.
It is not generally the case that Tthe information required to prepare IFRS financial statements for the third-year back will not necessarily already be available in connection with the reconciliation to U.S. GAAP.
Hence, we welcome the main thrust of the SEC’s proposals and believe this will help ease the transition for issuers.
First-time adopters in 2006 and 2007 will face similar issues, albeit of less significance owing to the additional time available for revising and developing systems.
Will any first-time adopters be required by their home country to publish financial statements prepared in accordance with IFRS for the third year back? If so, should we require their inclusion in SEC filings? Why or why not? If a company publishes IFRS financial statements for the third year back but is not required to do so, should we require inclusion of those financial statements in SEC filings?
We believe that an issuer required by their home country to publish financial statements prepared in accordance with IFRS for the third year back would also wish to include such information in their SEC filing since this information would already be in the public domain. This would be allowed under the SEC proposals. We have no comment on whether the SEC should mandate such presentation.
Is the proposed time frame, which provides the accommodation to companies that switch to IFRS for any financial year beginning no later than January 1, 2007, appropriate? Would this date create eligibility concerns for issuers that have a 52-week financial year? If so, how should we address those concerns?
The proposed time frame appears reasonable.
Should the proposed accommodation be extended to apply in any other circumstances, such as for issuers that, either voluntarily or pursuant to a home country or other requirement, adopt IFRS for the first time for years after year 2007? Should the accommodation apply for an indefinite period? Are there other circumstances in which the proposed exception to the requirement to present three years of financial statements on a consistent basis should be considered? What are they?
The proposed accommodation is appropriate if a jurisdiction mandated that IFRS would become that country’s primary GAAP within a short time scale. The SEC would need to consider as a separate exercise whether a similar proposed accommodation was appropriate.
We believe the majority of companies will move to IFRS as a result of this being mandated by governments and local regulators.
If the SEC does not provide the temporary accommodations in the proposals, we do not believe this would not be an a realistic option available to issuers. Companies could not support the cost of maintaining two sets of books for preparing consolidated accounts in accordance with EU regulations (IFRS) and financial statements for SEC filings (Previous GAAP).
B. Primary Financial Statements
Is the proposed amendment to permit two years of IFRS financial statements for foreign private issuers adopting IFRS through year 2007, coupled with the permitted exclusion of financial statements prepared on the basis of Previous GAAP, consistent with the best interests of investors? Will investors receive adequate information on which to base investment decisions if two rather than three years of statements of income, changes in shareholders’ equity and cash flows are presented on a consistent basis?
We believe investors will be adequately served by presenting two years of statements of income, changes in shareholders’ equity and cash flows on a consistent basis, together with the disclosures as required by IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ which explain the impact of transition to IFRS.
No comment. We do not believe so.
The presentation of three years of condensed U.S. GAAP financial information would present a significant burden to issuers that do not already provide such information in their 20-F filings.
Where publishing information as required by Items 17 and 18 of Form 20-F is appropriate in current filings, publishing a condensed U.S. GAAP income statement, consistent with that required by Article 10 of Regulations S-X, is far in excess of the information currently produced. We believe the cost and difficulty of preparing such information would outweigh the limited benefits to investors.
First-time registrants are not required, as a rule, to present condensed U.S. GAAP financial information in their initial filing (which in effect means that the SEC has concluded that the costs of preparing such information outweigh their benefit). We do not believe the provision of such information on the occasion of changing GAAP is justified on the grounds of investor benefit.
We do not believe the proposed requirement would address the comparative information issues sufficiently to warrant the burden of producing this data; see our comments above.
We believe preparation of condensed U.S. GAAP financial information to be a significant and unwarranted burden. The requirement for further information would increase that burden.
We believe the proposed exemption for foreign private issuers filing initial registration documents from filing additional condensed U.S. GAAP financial information should be applied to all foreign private issuers filing a 20-F.
We agree that issuers should not be prohibited from including Previous GAAP financial information provided it is accompanied by suitable cautionary language. It may be appropriate in some circumstances to present such information in order to explain trends but such information should, generally, be kept to a minimum. We agree that issuers should determine the nature of the cautionary language according to their use of Previous GAAP financial information.
We believe current filings make it clear to investors what GAAP financial information is prepared under. An investor would not be confused by the absence of such a prohibition.
We believe it is appropriate to permit issuers to include, incorporate or refer to Previous GAAP financial information for any periods provided that information does not confuse investors. Issuers should not be required to provide operating and financial review disclosure related to that information.
We do not believe issuers should be required to provide Previous GAAP financial statements in their first IFRS filing; previous annual reports filed on Form 20-F should be sufficient.
Investors are likely to compare Previous GAAP and IFRS financial statements and, hence, IFRS 1 mandates disclosures to alleviate confusion.
Information based on Previous GAAP should be limited to the operating and financial review and should not form part of the financial statements and notes thereon.
No comment. Where the disclosure requirements of IFRS 1 and the guidance in the SEC proposals are followed, we believe this provides sufficient information to investors to alleviate confusion.
We do not believe the SEC should issue further guidance in this regard. It is the responsibility of issuers to avoid investor confusion by determining the format of disclosures and cautionary language according to their use of Previous GAAP financial information.
Should Previous GAAP financial information be presented in a “side-by-side” format with IFRS financial information? What additional disclosure would be necessary, if any? Should it be accompanied by a legend stating that the information is not comparable to financial information based on IFRS? If so, where should the legend be located? Would a “side-by-side” format present difficulties relating to disclosure contained in audit reports relating to the different bases of GAAP used? Similarly, how would the notes to the financial statements be presented in a clear manner if different GAAPs were presented therein?
No comment. As noted above, we believe it should be left to issuers to determine the most appropriate format of disclosures and cautionary language.
If issuers include, incorporate or refer to Previous GAAP financial statements or financial information in a disclosure document, should we require specific legends or other language? Should any Previous GAAP information included be presented in a separate section of the disclosure document?
C. Selected Financial Data
Should five years of selected financial data based on U.S. GAAP be required in a separate section of the document, rather than with the IFRS selected data?
We believe issuers should determine the format of presentation of information. If U.S. GAAP and IFRS selected data are published close together, issuers should make it clear to investors which information is presented under each GAAP.
Should we require selected financial data based on Previous GAAP? If so, where should it be located? Should we expressly prohibit a “side-by-side” disclosure format for selected financial data based on Previous GAAP and IFRS? Conversely, should we permit or require such a disclosure format? Would inclusion of Previous GAAP selected financial data, whether presented in a “side-by-side” format or otherwise, be likely to cause investor confusion regarding the basis of accounting used? If so, how could any confusion or the likelihood of comparison be minimised?
As noted in our response to questions in section B, we believe issuers should determine the format of presentation of information, provided it is clear to investors where information is presented under different GAAPs.
D. Operating and Financial Review and Prospects
Is there additional information that would be useful to investors that should be included in the disclosure of operating and financial review and prospects? If so, what is it?
We do not believe there is any such information that should be mandatorily disclosed.
Should we require that disclosure of operating and financial review and prospects based on Previous GAAP financial information, if included, refer to the reconciliation to U.S. GAAP? If so, why? How is that information likely to benefit investors? Would requiring that information create undue burdens for issuers?
We do not believe the SEC should prescribe that discussion based on previous GAAP included in the disclosure of operating and financial review and prospects be referred to the reconciliation to U.S. GAAP. It is important that cautionary language is used but the form of this should be determined by the issuer. For example, it may be appropriate to refer to the reconciliations between Previous GAAP and IFRS as mandated by IFRS 1.
Referring all such discussion to the U.S. GAAP reconciliations may be unduly burdensome to companies.
E. Other Disclosures
Business and Derivatives Disclosure: comment on whether the proposed requirement, which clarifies that companies preparing their financial statements under IFRS should also base their Item 4 company information and Item 11 derivatives disclosure on IFRS, is sufficient. If the proposal is not sufficient, comment on what additional information related to business operations and the use of derivatives should be required.
We agree with the proposal and believe it is sufficient.
Disclosure Pursuant to Industry Guides: comment on whether amendments would be appropriate to address the information required under Industry Guide 3 or Industry Guide 6 in the context of first-time adopters changing their basis of accounting to IFRS. We agree that no amendment is required to these Industry Guides and that issuers will be able to continue to present all essential and material information to investors under IFRS.
We believe the SEC should permit companies to present only two years’ of the information required by Industry Guide 3 or Industry Guide 6 under IFRS, consistent with the presentation of their primary financial statements. Such information is not necessarily purely statistical, for example, assets and liabilities may currently be measured and classified under Previous GAAP rather than U.S. GAAP.
Data required under Securities Act Guide 3 where measurements and/or classifications may differ from U.S. GAAP, and it would be an unreasonable burden to restate the earliest year of three (or earliest three years of five in the case of Loan Portfolio) under IFRS, includes aspects of:
Where Industry Guide disclosures are presented under a Previous GAAP which differs from IFRS, issuers should make this clear by using appropriate cautionary language. We do not believe investors would gain any significant benefit from companies restating the earliest year(s) under IFRS measurement and classification rules.
F. Financial Statements and Information for Interim Periods for the Transition Year
To comply with these requirements, issuers may be required to maintain financial statements prepared in accordance with both Previous GAAP and IFRS for interim periods of the Transition Year. Would it be unduly burdensome to maintain books and records in accordance with both Previous GAAP and IFRS during this time? What costs and other burdens will this impose on issuers? Are companies that are mandated to switch to IFRS prohibited from continuing to publish financial statements prepared in accordance with Previous GAAP during their Transition Year? If so, who or what prohibits it?
It would be extremely burdensome to companies to maintain books and records and parallel running of systems during the Transition Year. For a multinational company, many of the subsidiaries will currently be maintaining books and records under:
For EU regulated companies, resources will be focussed in 2004 and 2005 on moving the presentation of financial information from Previous GAAP to IFRS. Financial information prepared under IFRS will be the focus of management from 2005. We do not believe companies should be required to continue to maintain Previous GAAP records, with the accompanying resource requirements, simply because the parent company may file a prospectus with the SEC during 2005.
We believe, as an alternative, that where an entity is in the year of transition to IFRS, filings made with the SEC contain financial statements prepared in accordance with IFRS for the last full financial year, with unaudited IFRS financial statements for interim periods in both years.
We are not aware of any prohibition from the EU from continuing to publish financial statements prepared in accordance with Previous GAAP during the Transition Year.
Will foreign issuers be likely to avoid registering securities under the Securities Act and the Exchange Act during the latter months of a Transition Year and early months of the year after in order to avoid being required to include interim financial statements in a disclosure document, and therefore be required to publish interim financial information in accordance with Previous GAAP? How can we reduce any impediment to foreign companies undertaking registered offerings during a Transition Year while ensuring that investors receive clear, sufficient, up-to-date information?
We believe that, after considering the costs and benefits, companies may decide to postpone the registration of securities in order to avoid the production of interim financial statements prepared under Previous GAAP during the Transition Year. Allowing preparation of interim financial statements under IFRS would reduce this impediment.
We believe that the following circumstance may be confusing to investors:
As noted, above, we also believe the maintenance of Previous GAAP book and records is overly burdensome.
As proposed, an issuer must include in its SEC filings both IFRS financial statements and Previous GAAP financial statements for current and prior year interim periods, when both are available. Should we provide issuers with a choice of whether to provide interim financial statements prepared under Previous GAAP or under IFRS, when both are available?
We believe issuers should have the choice of providing interim financial statements prepared under IFRS or Previous GAAP only.
When the Transition Year is year 2004 or 2005, in lieu of requiring both Previous GAAP and available IFRS interim financial statements for two years, would it be preferable to require audited financial statements prepared in accordance with IFRS for the last full financial year, with unaudited IFRS financial statements for interim periods in both years? This approach would not be in technical compliance with IFRS 1, which requires that first-time adopters include one year of comparative information under IFRS. Should we permit audit reports that are qualified as to this provision of IFRS 1? Should we make similar accommodations when an issuer’s Transition Year is later than year 2005? Why or why not?
We believe such an accommodation is preferable. Where an issuer chooses to present interim financial statements prepared under IFRS, we believe that the information for all periods should be audited.
When the Transition Year is year 2004 or 2005, would it be appropriate instead to require three years of audited financial statements prepared in accordance with Previous GAAP and unaudited financial statements prepared in accordance with IFRS for interim periods in two years with the same level of disclosure as in annual financial statements? Would issuers be likely to prepare full IFRS financial statements for interim periods? If not, why not? Should an issuer’s first set of IFRS financial statements filed with the SEC be audited if they are for two years of interim periods? Why or why not? How would issuers assess and prepare disclosure of their operating and financial review and prospects? What other specific issues would companies face in presenting financial statements under both Previous GAAP and IFRS? How could those issues be addressed? Should we make similar accommodations when an issuer’s Transition Year is later than year 2005?
No comment. See comment above.
III. DISCLOSURES ABOUT FIRST-TIME ADOPTION OF IFRS
A. Disclosure about Exceptions to IFRS
We believe the discussion of the use of exemptions allowed by IFRS 1, where material, would already be required under the general requirement of paragraph 38 of IFRS 1 on ‘Explanation of transition to IFRSs’. We agree with the SEC proposals to make this explicit.
Paragraph 44 of IFRS 1 already includes limited disclosure requirements in respect of the use of the ‘fair value as deemed cost’ exemption for property, plant and equipment, investment property or intangible assets.
No comment. We believe the proposed information to be disclosed is appropriate.
No comment. We believe issuers should determine what disclosure is required depending on what is most useful to investors.
B. Reconciliation from Previous GAAPQuestions
HSBC Holdings plc
HSBC Holdings plc
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