Davis Polk & Wardwell Newsflash

SEC Proposes Roadmap for Use of International Financial Reporting Standards by US Issuers

August 28, 2008

At an open meeting yesterday, the SEC voted to publish for public comment a proposed roadmap (“Roadmap”) for the use by US issuers of financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) for purposes of their filings with the SEC. The Roadmap will propose certain milestones that, if achieved, could lead to the use of IFRS by most US issuers by 2014. The SEC is considering requiring the largest US issuers to use IFRS for their 2014 financial statements, with smaller ones required to make the move in 2015 and the smallest allowed to delay until 2016. In addition, certain large US issuers could voluntarily adopt IFRS for their 2010 financial statements. The SEC will make a decision in 2011 as to whether the adoption of IFRS is in the public interest and would benefit investors. The Roadmap, if adopted, would be a crucial step towards the implementation of a single set of globally accepted accounting standards and an important element in the increasing trend towards convergence of disclosure, accounting and other standards relating to how companies, especially the world's largest companies, report their results and offer their securities in the world's capital markets.

All of the big four accounting firms and a number of major trade groups, such as the Securities Industry and Financial Markets Authority, the American Institute of Certified Public Accountants and the Center for Audit Quality are supporting the SEC's decision to publish the Roadmap.  However, prominent figures, such as Senate Banking Committee Chairman Chris Dodd and Sen. Jack Reed, the head of the securities subcommittee, have already criticized the Roadmap as premature, considering that the convergence of US GAAP and IFRS isn’t expected to be achieved until 2011. It should also be expected that there will be many comments from US companies facing transition costs and from others concerned about the impact on investor protection and the SEC's role in the review of financial statements.

According to the SEC's press release and statements made by the SEC staff and Commissioners at yesterday's open meeting, the key points for consideration are:

The Identification of Key Milestones by Which to Determine a “Date Certain” for the Mandatory Use of IFRS by US Issuers. The Roadmap will outline a multi-year plan that will identify key milestones to be evaluated by the SEC in determining a mandatory “date certain” by which US issuers would be required to use IFRS as issued by the IASB. These specified milestones would include:

  • continued improvements in accounting standards;
  • the accountability and independent funding of the International Accounting Standards Committee Foundation (“IASC”);
  • improvements in the ability to use interactive data, such as XRBL, for IFRS reporting; and
  • education and training in the United States relating to IFRS.

In addition to these milestones, the SEC will consider whether IFRS is being consistently applied on a global basis. The press release and comments at the open meeting suggest that in 2011 the SEC will make a determination based on an evaluation of these milestones and whether the adoption of IFRS is in the public interest and would benefit investors. A mandatory “date certain” for the adoption of IFRS by US issuers could be set for as early as fiscal year 2014.

Permissive Early Use of IFRS by Certain US Issuers Prior to the SEC’s Consideration and Adoption of a Mandatory “Date Certain.” The Roadmap would also permit, subject to the satisfaction of certain requirements, the early use of IFRS by certain US issuers for financial statements pertaining to fiscal year 2009. Under the Roadmap, a US issuer would be eligible to use IFRS if (a) it is among the 20 largest global companies in its industry by market capitalization, and (b) IFRS, as promulgated by the IASB, is used more often than any other basis of accounting by the 20 the largest companies in that industry by market capitalization. US issuers who wish to adopt IFRS prior to the mandatory date could seek a “no-objection” letter from the Division of Corporate Finance with respect to their eligibility. The Roadmap will also set forth for public comment two alternatives by which eligible US issuers would be required to provide US GAAP information in their financial reports. Under the first alternative, eligible US issuers in the transition year would provide, in accordance with IFRS standard No. 1, a one-time US GAAP reconciliation as an audited footnote to their financial statements. Under the second alternative, eligible US issuers would provide, on an on-going basis in their annual reports on Form 10-K, an unaudited US GAAP reconciliation covering the three years of IFRS financial statements included in their annual reports. US issuers will still be required to provide three years of audited financial statements, as opposed to the two years typically required by IFRS. The SEC staff has estimated that at least 110 US issuers in 34 different industries would be eligible to opt in to early use of IFRS.

The Roadmap will be open for comment for a period of 60 days beginning after publication in the Federal Register, which is expected to occur by the end of this year. We plan to distribute a more detailed memorandum once the SEC publishes the Roadmap for comment. In the meantime, please do not hesitate to call your Davis Polk contact with questions.

See SEC press release describing the adoption of the Roadmap.

Davis Polk & Wardwell