Defining Issues Sec Proposes Ifrs Roadmap

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  • 1. Defining Issues ® KPMG LLP November 2008, No. 08-47 Proposed Roadmap for Mandatory IFRS Filings by U.S. Public Companies The SEC proposed a “roadmap” for phasing in mandatory IFRS filings by U.S. public companies beginning for years ending on or after December 15, 2014.1 The roadmap is conditional on progress towards “milestones” that would demonstrate improvements in both the infrastructure of international standard setting and the preparation of the U.S. financial-reporting community. If the conditional milestones are satisfactorily achieved by 2011, the SEC would then consider rulemaking to phase in requirements for U.S. public companies to file financial statements using IFRS as issued by the IASB. However, the proposed roadmap excludes registered investment companies and registered broker- dealers from its consideration. Some U.S. public companies that operate within an “IFRS industry” would be permitted to begin using IFRS as soon as next year’s financial statements if the proposal is adopted unchanged. The comment period ends February 19, 2009. If the proposal is adopted, the final roadmap would next be published in the SEC’s Codification of Financial Reporting Policies, a step that would allow the SEC to update or revise the The Milestones 1 roadmap, including its timeline, as circumstances change. Optional IFRS Filings by The Milestones Some Companies Operat- The proposal would commit the SEC staff to monitor four of seven identified milestones ing in “IFRS Industries” 2 through 2011. If the SEC believes these four are achieved by 2011, it would also consider Anticipated Rulemaking 3 whether IFRS as issued by the IASB is a globally accepted set of accounting standards and whether it is consistently applied when determining whether to mandate its use by U.S. Phased-in Mandatory Use public companies. of IFRS 3 Revisions to Regulations These four milestones would be monitored by the SEC staff between now and 2011: S-X and S-K 3 • Improved IFRS. The IASB would have to continue to improve IFRS through its independent standard setting and its convergence work with the FASB. The proposal “urges the [FASB and IASB] to continue working towards the completion of their joint work plan estimated ©2001-2008 KPMG LLP a U.S. limited liability partnership and a member , firm of the network of independent member firms affiliated with KPMG to be completed in 2011,” but it does not identify either a specified level of convergence International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. 16334STM 1 SEC Release No. 33-8982, Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Photo: GettyImages/Stockbyte/The Map House of London dv115019 Financial Reporting Standards by U.S. Issuers, available at
  • 2. Defining Issues November 2008, No. 08-47 2 incorporate IFRS, and the CPA and other or completion of specific projects as to reporting in IFRS as issued by the IASB relevant professional exams would need to conditions of the milestone. The proposal and would have to be approved by the SEC cover IFRS. mentions that when the SEC addresses staff. Companies meeting both of these mandating the use of IFRS in 2011, it will criteria would qualify: The remaining three milestones are part also consider whether the standards are of the roadmap, but are not among the • The candidate U.S. company is in an high in quality and sufficiently compre- conditional milestones that are prerequisites industry group that reports using IFRS hensive, whether the standard-setting for the Commission’s rulemaking activity and more commonly than any other set of process is robust and independent with are as much action steps as milestones. financial-reporting standards. For this input and consideration of views from purpose, the relevant industry-group • Early, limited use of IFRS where it would investors and other affected parties, and companies would be the 20 largest enhance financial-reporting compara- whether the standards, when implemented, companies in the industry measured by bility for U.S. investors. This would are capable of improving the effectiveness market capitalization. coincide with the staff’s monitoring of financial reporting and providing activity in connection with the first • The candidate U.S. company is one of the financial information useful to investors. four milestones already described. It 20 largest companies in the industry. • Satisfactory accountability and funding also could provide useful input for the Candidate companies would be required to of the IASC Foundation. The Trustees of Commission’s anticipated decision on use a single, published, “widely-accepted” the IASC Foundation appoint members whether to mandate the use of IFRS industry source when determining the of the IASB, are responsible for its for all U.S. registrants and improve the industry group and identifying its members. funding, and oversee standard-setting ability of users of financial information The proposal allows choice in the classi- activities. The proposal points out that the and others to comment on future fication scheme. Potential candidates SEC will consider the degree to which proposals on the use of IFRS in the U.S. could use the North American Industry the Foundation has a secure, stable, and Classification System codes at the • Anticipated rulemaking in 2011. equitable funding mechanism that allows three-digit level, the Standard Industrial Assuming satisfactory achievement the IASB to function independently of any Classification codes at the two-digit level, of the first four milestones, the SEC specific constituent group. The SEC would or the International Standard Industrial will determine whether it is in the also consider how effectively regulators Classification codes at the “Division” interest of U.S. investors to proceed oversee the Foundation. level. In addition, candidate companies with rules that would require all U.S. • Improved ability to benefit from IFRS could use other published and widely public companies to use IFRS. reporting in XBRL.2 The SEC has accepted industry classification schemes at • Phased-in, mandatory use of IFRS. proposed rules that would require a similar level of detail, such as the Industry The proposal says that the SEC is public companies to provide financial Classification Benchmark at the “Sector” considering an approach that would information formatted in the XBRL level or the Global Industry Classification phase in requirements for the implemen- computer language.3 The level of detail in Standard at the “Industry” level. tation of IFRS over a three-year period, the existing IFRS XBRL taxonomy would When determining the top 20 companies in beginning with the largest companies for have to be improved, according to the the industry, market capitalization would years ending on or after December 15, proposal, in order to realize the benefits of have to be determined on the same day 2014, rather than having all U.S. public IFRS reporting in XBRL. for all companies. Market capitalization companies convert to IFRS at one time. • Progress in education and training. The refers to the worldwide market value of a proposal holds that a significant investment Optional IFRS Filings by company’s outstanding voting and nonvoting in preparing investors, management and Some Companies Operating common equity securities determined from financial-statement preparers, auditors, in “IFRS Industries” a “widely-accepted” source. The date for audit committees, specialists (such as U.S. public companies that meet two criteria the determination would have to be within actuaries and valuation professionals), and would be allowed to begin filing IFRS 180 days of the date that the SEC receives regulators would be needed before IFRS financial statements as soon as for years a request for a no-objection letter with is widely understood in the U.S. College ending on or after December 15, 2009. respect to the company’s determination of and university curricula would need to However, the permission would be restricted its eligibility. Companies would then need 2 XBRL is an abbreviation of “Extensible Business Reporting Language. ” 3 SEC Release No. 33-8924, Interactive Data to Improve Financial Reporting, available at © 2001-2008 KPMG LLP a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG , International, a Swiss cooperative. All rights reserved. 16334STM
  • 3. Defining Issues November 2008, No. 08-47 3 to determine the basis of accounting used company must also explain the material IFRS by all U.S. public companies would by each of the 20 identified companies. An adjustments to the statements of cash flows. affect investors and other market participants. industry would be considered an “IFRS Under the proposed roadmap, U.S. public The proposal requests comments on whether industry” only if IFRS is used by more of the companies adopting IFRS would have to there should be an ongoing requirement to 20 members of the industry group than any provide three years of audited IFRS financial disclose outside of the financial statements other basis of accounting. For example, if 8 information in all annual filings with the an unaudited reconciliation of IFRS to U.S. companies use IFRS, 7 use U.S. GAAP, and Commission, including the filing in the year GAAP amounts. Under such a requirement, 5 use other bases of accounting, the industry IFRS is initially adopted. Finally, because the balance sheet, statement of compre- would be an IFRS industry. Conversely, if 7 the roadmap is to be published as a financial hensive income, statement of cash flows, and companies use IFRS, 7 use U.S. GAAP, and reporting release rather than a rule, the timing statement of equity would be reconciled from 6 use other bases of accounting, the industry outlined in the roadmap could more easily be IFRS to U.S. GAAP, not just in the year IFRS would not be an IFRS industry. modified depending on progress towards the is first adopted, but also in each subsequent achievement of the milestones. A U.S. company that concluded it is eligible year until the SEC decides whether to require to elect to use IFRS would then be required all U.S. public companies to begin using Phased-in Mandatory Use of IFRS to submit a description of its analysis of IFRS. This proposal, if adopted, would Under the proposal, the mandatory use of eligibility to the Division of Corporation compel companies that elect to adopt IFRS IFRS would be phased in over three years Finance. The company would need to obtain early to maintain financial records on both beginning with large accelerated filers for a no-objection letter from the staff in order a U.S. GAAP and IFRS basis. The prospect fiscal years ending on or after December 15, to file using IFRS. However, receipt of a of the obligation could affect eligible 2014, followed by accelerated filers for fiscal no-objection letter would not commit the companies’ decisions about whether to adopt years ending on or after December 15, 2015, company to begin using IFRS. The company IFRS early. and by all other filers for fiscal years ending would have up to three years from the date of on or after December 15, 2016. The supplemental U.S. GAAP information the SEC staff response to begin using IFRS. would have to be certified by the principal The proposal does not address the method Companies electing to adopt IFRS would executive and financial officers as required by the SEC would use to mandate IFRS for be required to do so in an annual report on Sections 302 and 906 of the Sarbanes-Oxley U.S. public companies. One of the options Form 10-K containing three years of audited Act and would be subject to the disclosures would be for the FASB to continue to be the IFRS financial statements. Initial adoption and certifications relating to disclosure designated standard setter for purposes of of IFRS would not be permitted in a Form controls and procedures. However, the establishing financial-reporting standards 10-Q, registration statement, proxy, or other preparation of the supplemental information, for filings with the SEC. Under this option, information statement. Audits would continue the underlying books and records used to the FASB would incorporate all current to be conducted in accordance with PCAOB prepare it, and the related internal accounting provisions of IFRS and all future changes audit standards. controls and procedures would not be to them directly into U.S. GAAP. This type subject to management’s assessment of of approach has been used in a number of IFRS 1 provides guidance to companies internal control over financial reporting jurisdictions that have adopted IFRS. preparing their first set of IFRS financial under Section 404 of the Sarbanes-Oxley Act statements.4 It requires each company to Revisions to Regulations S-X and S-K or the independent auditor’s report on the disclose in the notes an audited reconcil- Regulation S-X contains the requirements for effectiveness of the controls. iation from U.S. GAAP to IFRS of its the form and content of financial statements equity at the date of transition and at the Anticipated Rulemaking included in filings with the SEC. The SEC end of the latest period presented in its The proposed roadmap envisions the SEC staff has begun a comprehensive review of most recent annual financial statements considering in 2011 whether to mandate all SEC rules relating to financial reporting under U.S. GAAP. IFRS 1 also requires that all U.S. public companies apply IFRS so that it can make recommendations to the each company to provide a reconciliation as issued by the IASB in their filed financial Commission on amendments that may be of its total comprehensive income “for statements. The SEC would consider needed to fully implement IFRS reporting. In the latest period in the most recent annual achievement of the first four milestones and the mean time, in order to accommodate the financial statements.” The objective is to the results of a study that would be conducted limited early use of IFRS the new category enable users to understand the material by the SEC’s Office of the Chief Accountant “IFRS issuer” would be incorporated into adjustments from U.S. GAAP to IFRS. The on how the mandatory implementation of Regulation S-X, and it would allow those 4 IFRS 1, First-time Adoption of International Financial Reporting Standards. © 2001-2008 KPMG LLP a U.S. limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG , International, a Swiss cooperative. All rights reserved. 16334STM
  • 4. companies to prepare their financial statements in accordance with IFRS as issued by the IASB. However, the reach of this proposed change would go beyond the limited number of earlier users. It would establish requirements that could affect all future IFRS filings. The SEC would establish a new Article 13 in Regulation S-X that sets out requirements governing the application of SEC Rules and Regulations that apply to any issuer that prepares financial statements in accordance with IFRS as issued by the IASB for filings with the SEC. New Article 13 would apply to IFRS financial statements filed by a U.S. company, a foreign private issuer, or an issuer with regard to nonissuer financial statements pursuant to Rule 3-05, 3-09, or 3-14 of Regulation S-X. Under New Article 13, the financial statements would have to contain a note in which the issuer unreservedly and explicitly states compliance with IFRS as issued by the IASB, and the accountant’s report would have to include an opinion on whether the financial statements comply with IFRS as issued by the IASB. Issuers using IFRS would generally not be required to comply with other provisions of Regulation S-X that specify financial presen- tation, disclosure content, or recognition and measurement of amounts within the financial statements. However, in many instances an IFRS issuer might be permitted to follow these types of provisions because they would be acceptable accounting policy choices under IAS 8.5 In addition, disclosures similar to those specified by Regulation S-X may be necessary in IFRS financial statements to fully comply with the general requirement for fair presentation under IAS 1.6 The requirements in both Article 11, Pro Forma Financial Information, and Article 12, This is a publication of KPMG's Form and Content of Schedules, would apply in their entirety to IFRS issuers. Department of Professional An IFRS issuer that changes the comprehensive set of accounting principles used in preparing Practice—Audit its primary financial statements to IFRS would have to prominently disclose the following 212-909-5600 information outside the financial statements in its first annual report on Form 10-K: Contributing authors: Paul H. Munter • That the financial statements are prepared using IFRS, Holger Erchinger • The reasons for the change, Kristopher A. McKinley • The corporate governance process followed in electing to make the change, and Earlier editions are available at: • The date the issuer submitted its request to the SEC demonstrating that it met the criteria to change to IFRS and the date the SEC issued its letter of no objection. Defining Issues® is a registered trademark of KPMG LLP. © 2001-2008 KPMG LLP a U.S. limited liability partnership and a member , firm of the network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss Registrants should not treat the descriptive and summary statements in this newsletter as a cooperative. 16334STM substitute for any accounting requirements, yet-to-be developed rules, or any related rules and proposals. When complying with related filing requirements, registrants should consult the text of all relevant final rules and accounting requirements, consider their particular circum- stances, and consult their accounting and legal advisors. 5 IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors. 6 IAS 1, Presentation of Financial Statements.
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