On November 15, 2007, the U.S. Securities and Exchange Commission (SEC) voted unanimously to accept from "foreign private issuers" (FPIs) financial statements that are prepared using International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP). The SEC's vote represents the official adoption of a rule change that had been proposed earlier this year (see my blog post on the proposal here).
FPIs are private-sector companies based outside of the United States that, for a variety of possible reasons, fall under the jurisdiction of the SEC. Prior to the SEC's vote, FPIs had been required to file either (1) financial statements prepared in accordance with U.S. GAAP or (2) financial statements prepared in accordance with other standards plus a reconciliation of those statements to U.S. GAAP. Now, FPIs that prepare financial statements using IFRSs as issued by the IASB will no longer need to supply a U.S. GAAP reconciliation -- IFRS statements will be accepted "as is" by the SEC.
In contrast to the multiple filing options available to FPIs, domestic companies that fall under the jurisdiction of the SEC have no choice regarding the standards that they must use when preparing financial statements. All U.S. issuers continue to be required to prepare financial statements in accordance with U.S. GAAP.
The SEC's action had been widely expected. However, at the meeting in which the SEC voted to adopt its previously-proposed rule change, the SEC's staff introduced two "surprises," both of which were approved as a result of the subsequent vote. The first was a recommendation that the rule change should be effective immediately. This significantly accelerated the attainment of the objective of the SEC's "IFRS Roadmap," which had targeted the reconciliation requirement for FPIs who prepare financial statements using IFRSs to be removed by 2009. Thus, as adopted, the rule change provides IFRS-filing FPIs with relief from the requirement to provide a U.S. GAAP reconciliation for financial statements covering any fiscal year that ends after November 15, 2007.
The second surprise gives FPIs yet another filing option, albeit a temporary one. During the next two years, the SEC agreed to accept from FPIs financial statements prepared using IFRSs as adopted by the European Union if those statements are accompanied by a reconciliation to IFRSs as issued by the IASB. While this concession to European issuers is likely to have virtually no impact in practice, it was a moral victory for those who had advocated such permissiveness in the face of widespread opposition to the SEC's recognition of so-called "jurisdictional IFRSs."
The SEC's press release regarding its action also contains some surprises. First, there is no mention of the temporary concession made for FPIs preparing financial statements in accordance with IFRSs as adopted by the European Union. Second, the press release characterizes the SEC's action rather oddly -- the headline reads "SEC Takes Action to Improve Consistency of Disclosure to U.S. Investors in Foreign Companies." I'm baffled by the "Consistency" part.
From a historical perspective, the SEC's decision is truly unprecedented. No issuer has ever been allowed to prepare financial statements using standards other than U.S. GAAP without being required to reconcile those statements to U.S. GAAP. The decision is also unusual in that the SEC is giving some issuers a significant filing option that is unavailable to other issuers, i.e., foreign issuers may now choose between IFRSs and U.S. GAAP while domestic issuers must continue to use U.S. GAAP.
For anyone who wants to see and hear exactly what transpired in Thursday's meeting, here's a link to a recorded version of the original webcast. The portion of the meeting related to the rule change for FPIs begins 55 minutes into the recording and ends at 2:34. Bonus: Watch for an "America's Funniest Videos" moment between 1:54 and 1:55 during Commissioner Atkins' Q&A.
Next Week: My post-Thanksgiving post will address the implications of the SEC's action for both public and private U.S. companies.
SEC to FPIs: No need to reconcile IFRSs to U.S. GAAP
On November 15, 2007, the U.S. Securities and Exchange Commission (SEC) voted unanimously to accept from "foreign private issuers" (FPIs) financial statements that are prepared using International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB) without reconciliation to U.S. Generally Accepted Accounting Principles (GAAP). The SEC's vote represents the official adoption of a rule change that had been proposed earlier this year (see my blog post on the proposal here).
FPIs are private-sector companies based outside of the United States that, for a variety of possible reasons, fall under the jurisdiction of the SEC. Prior to the SEC's vote, FPIs had been required to file either (1) financial statements prepared in accordance with U.S. GAAP or (2) financial statements prepared in accordance with other standards plus a reconciliation of those statements to U.S. GAAP. Now, FPIs that prepare financial statements using IFRSs as issued by the IASB will no longer need to supply a U.S. GAAP reconciliation -- IFRS statements will be accepted "as is" by the SEC.
In contrast to the multiple filing options available to FPIs, domestic companies that fall under the jurisdiction of the SEC have no choice regarding the standards that they must use when preparing financial statements. All U.S. issuers continue to be required to prepare financial statements in accordance with U.S. GAAP.
The SEC's action had been widely expected. However, at the meeting in which the SEC voted to adopt its previously-proposed rule change, the SEC's staff introduced two "surprises," both of which were approved as a result of the subsequent vote. The first was a recommendation that the rule change should be effective immediately. This significantly accelerated the attainment of the objective of the SEC's "IFRS Roadmap," which had targeted the reconciliation requirement for FPIs who prepare financial statements using IFRSs to be removed by 2009. Thus, as adopted, the rule change provides IFRS-filing FPIs with relief from the requirement to provide a U.S. GAAP reconciliation for financial statements covering any fiscal year that ends after November 15, 2007.
The second surprise gives FPIs yet another filing option, albeit a temporary one. During the next two years, the SEC agreed to accept from FPIs financial statements prepared using IFRSs as adopted by the European Union if those statements are accompanied by a reconciliation to IFRSs as issued by the IASB. While this concession to European issuers is likely to have virtually no impact in practice, it was a moral victory for those who had advocated such permissiveness in the face of widespread opposition to the SEC's recognition of so-called "jurisdictional IFRSs."
The SEC's press release regarding its action also contains some surprises. First, there is no mention of the temporary concession made for FPIs preparing financial statements in accordance with IFRSs as adopted by the European Union. Second, the press release characterizes the SEC's action rather oddly -- the headline reads "SEC Takes Action to Improve Consistency of Disclosure to U.S. Investors in Foreign Companies." I'm baffled by the "Consistency" part.
From a historical perspective, the SEC's decision is truly unprecedented. No issuer has ever been allowed to prepare financial statements using standards other than U.S. GAAP without being required to reconcile those statements to U.S. GAAP. The decision is also unusual in that the SEC is giving some issuers a significant filing option that is unavailable to other issuers, i.e., foreign issuers may now choose between IFRSs and U.S. GAAP while domestic issuers must continue to use U.S. GAAP.
For anyone who wants to see and hear exactly what transpired in Thursday's meeting, here's a link to a recorded version of the original webcast. The portion of the meeting related to the rule change for FPIs begins 55 minutes into the recording and ends at 2:34. Bonus: Watch for an "America's Funniest Videos" moment between 1:54 and 1:55 during Commissioner Atkins' Q&A.
Next Week: My post-Thanksgiving post will address the implications of the SEC's action for both public and private U.S. companies.