SEC Proposes Roadmap For U.S. Issuers To Switch To IFRS

On November 14, 2008, the U.S. Securities and Exchange

Commission (SEC) published its long-awaited "roadmap" to

a potential future mandatory requirement for U.S. issuers to

prepare and issue financial reports under International Financial

Reporting Standards (IFRS) as issued by the International

Accounting Standards Board (IASB) instead of U.S. generally

accepted accounting principles (U.S. GAAP). Comments on the rule

proposal are due no later than February 19, 2009.

The SEC's proposed rulemaking represents a significant step

in the ongoing collaborative effort among the SEC, IASB, Financial

Accounting Standards Board (FASB), and other international

securities and accounting regulators to promote the development of

a single high-quality set of global accounting standards to keep

pace with the increasingly global nature of the financial

marketplace, where even the most unsophisticated U.S. investor can

purchase foreign equity securities listed on a non-U.S. stock

market through a U.S. broker or even via the internet. The

SEC's proposed rulemaking is designed to provide a level

accounting playing field on which U.S. investors may make their

investment decisions. Given the broad and rapid worldwide

acceptance of the IFRS, the SEC acknowledged that IFRS "has

the potential to become the set of accounting standards that best

provide a common platform on which companies can report and

investors can compare financial information."

Companies should begin to prepare now for the potential switch

to IFRS and evaluate with their financial and legal advisors how to

manage the challenges and issues such an undertaking will involve.

As discussed below, the switch to IFRS may produce a number of

collateral consequences that issuers should plan for in advance

How We Got Here – The Move to IFRS

Since 2002, the mantra of the FASB and the IASB has been

"convergence"—that is, preservation of both

U.S. GAAP and IFRS, but elimination of the differences between the

two standards so that users of financial statements could

confidently compare the financial results of U.S. and non-U.S.

issuers without requiring a "reconciliation." The

fast-growing acceptance of IFRS around the world appears to have

overtaken efforts to harmonize the two different accounting

standards. IFRS is now either permitted or required in

approximately 113 countries worldwide, including the Member States

of the European Union, and approximately 110 foreign private

issuers filed financial statements prepared under IFRS in their

Form 20-F annual reports. Canada has also announced that it is

moving to incorporate IFRS into Canadian GAAP in 2011, adding more

than 450 SEC-registered Canadian companies to the IFRS sphere.

Historically, foreign private issuers that filed financial

statements with the SEC under foreign GAAP were required to prepare

burdensome and costly U.S. GAAP "reconciliations" to

include in the footnotes to the audited financial statements. In

recognition of the fast-growing acceptance of IFRS, in 2005, the

SEC allowed foreign private issuers that switched to IFRS to file

two years (rather than the full three years) of audited IFRS

financial statements in their SEC registration statements and

annual reports. In December 2007, the SEC completed the transition

for foreign private issuers by adopting amendments to their Form

20-F rules to accept financial statements prepared under IFRS

without any reconciliation to U.S. GAAP.

Recognizing that U.S. issuers, especially those with a large

global footprints that compete for capital against non-U.S.

competitors, would benefit as much from a transition to IFRS as

foreign private issuers, the SEC also issued a Concept Release

asking for feedback on the idea of allowing U.S. issuers to

similarly prepare their financial statements under IFRS. Based on

the feedback it received on the 2007 Concept Release, and the need

to lay down a concrete timetable and framework for a transition to

IFRS, the SEC published its roadmap.

The Roadmap – Timetable and Milestones

If adopted, the roadmap will require IFRS to replace U.S. GAAP

as the basis for financial reporting for U.S. issuers by as early

as 2014, assuming certain implementation milestones are deemed to

have been achieved by 2011. These milestones relate to the

following:

Improvements in accounting standards. Despite more

than six years of work towards "converging" IFRS and U.S.

GAAP, the SEC acknowledged that further work needs to be done to

fill the gaps in IFRS (e.g., IFRS currently provides

limited guidance on the accounting for insurance contracts and for

extractive enterprises) and eliminate the remaining significant

differences between IFRS and U.S. GAAP (discussed further below).

The 2011 date in the roadmap conveniently dovetails with the

expected date of completion of the joint work plan of the IASB and

FASB on the convergence project pursuant to its 2006 Memorandum of

Understanding.

Shoring up the accountability and funding of the

International Accounting Standard Committee (IASC) Foundation.

Unlike the...