In Focus

SEC Seeks Comment on Impact of Incorporating IFRS Into Financial Reporting System

The SEC is seeking comment on whether to incorporate international financial reporting standards into the U.S. financial reporting system and the impact of that action on issuers and investors (Rel. Nos. 33-9133 and 33-9134, August 12, 2010). The SEC wants input on U.S. investors' current knowledge about IFRS, how they educate themselves about accounting standards and the time that would be needed to improve investors' understanding prior to adopting IFRS. With respect to issuers, the SEC is asking for information about the impact on contractual arrangements that require the use of U.S. generally accepted accounting principles and the application of certain legal standards tied to the amounts that are determined for financial reporting purposes. The comment period will remain open for 60 days.

On February 24, 2010, the SEC issued a statement in support of the convergence of global accounting standards. The SEC directed the staff to develop a work plan to determine the areas and factors that must be considered in connection with a transition to IFRS. Comments are sought on the topics that were identified by the staff as needing additional study.

The staff recognizes that the main benefits to investors of a single set of high quality globally accepted accounting standards will only be achieved if investors understand and have confidence in the basis for the reported results. IFRS differs from U.S. GAAP in a number of areas and may require significant investor education. The staff believes that U.S. investors have a certain level of understanding of IFRS based on global industries, cross-border investment decisions and investments in foreign private issuers. The convergence process which has been undertaken by FASB and the IASB will narrow the differences in the standards.

The staff is seeking information on how investors learn about accounting standards and the time that would be necessary to ensure that investors have a sufficient understanding of IFRS prior to a potential incorporation of those standards in the U.S.

In response to a 2008 proposal regarding IFRS, commenters advised that a move to international standards by U.S. issuers may require contract renegotiation or the preparation of two sets of financial statements. Company contracts often require reporting under U.S. GAAP or include metrics that are based on U.S. GAAP reporting. The performance under existing agreements could be affected if changes in accounting standards result in financial reporting changes.

The release also notes that the adoption of IFRS could affect issuers' compliance with corporate governance requirements. One example is the Sarbanes-Oxley Act requirement that registrants disclose whether they have at least one audit committee financial expert serving on the board. The audit committee members' education and experience are reported. The staff asked whether the incorporation of IFRS into the financial reporting system may result in challenges for U.S. issuers in identifying audit committee financial experts and in satisfying corporate governance and related quantitative stock exchange listing requirements.

The release also points out that certain legal standards in state laws may be tied to amounts determined for financial reporting purposes, including state-restricted amounts of dividend distributions or stock repurchases. The incorporation of IFRS may affect a company's ability to take certain actions which could have an impact on investors' expectations. Comments are also sought on whether the incorporation of IFRS would require companies to maintain two sets of records.

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