[Federal Register: August 14, 2007 (Volume 72, Number 156)]
[Proposed Rules]
[Page 45599-45610]
[DOCID:fr14au07-32]

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Part V

 Securities and Exchange Commission

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17 CFR Parts 210, 228, 229 et al.

 Concept Release on Allowing U.S. Issuers To Prepare Financial
Statements in Accordance With International Financial Reporting
Standards; Proposed Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 230, 239, 240 and 249

[Release No. 33-8831; 34-56217; IC-27924; File No. S7-20-07]
RIN 3235-AJ93

Concept Release on Allowing U.S. Issuers To Prepare Financial
Statements in Accordance With International Financial Reporting
Standards

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comment.

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SUMMARY: The Commission is publishing this Concept Release to obtain
information about the extent and nature of the public's interest in
allowing U.S. issuers, including investment companies subject to the
Investment Company Act of 1940, to prepare financial statements in
accordance with International Financial Reporting Standards as
published by the International Accounting Standards Board for purposes
of complying with the rules and regulations of the Commission. U.S.
issuers presently prepare their financial statements in accordance with
generally accepted accounting principles as used in the United States,
referred to as U.S. GAAP.

DATES: Comments should be submitted on or before November 13, 2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/concept.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-20-07 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper submissions in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-20-07. The file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/concepts.shtml). Comments

also are available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours of 10 a.m. and 3 p.m.
All comments received will be posted without change; we do not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Questions on this Concept Release
should be directed to Gina L. Even, Business Associate, or Katrina A.
Kimpel, Professional Accounting Fellow, Office of the Chief Accountant
at<PHONE_NUMBER>; Sondra L. Stokes, Associate Chief Accountant,
Division of Corporation Finance at<PHONE_NUMBER>; or Richard F.
Sennett, Chief Accountant, Division of Investment Management at (202)
551-6918; U.S. Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-3628.
    SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. The Effect of IFRS on the U.S. Public Capital Market
    A. Financial Reporting in the United States
    B. Financial Reporting Outside the United States
    C. The Possible Use of IFRS by U.S. Issuers
    D. Convergence of IFRS and U.S. GAAP
III. Global Accounting Standards
    A. The Case for a Single Set of Globally Accepted Accounting
Standards
    B. The International Accounting Standard Setter
    C. The Commission's Previous Consideration of International
Accounting Standards
IV. IFRS Implementation Matters for U.S. Issuers
    A. Education and Training
    B. Application in Practice
    C. Auditing
    D. Regulation
    E. Integration With the Commission's Existing Requirements
    F. Transition and Timing
V. General Request for Comments

I. Introduction

    The Commission has long advocated reducing disparity between the
accounting and disclosure practices of the United States and other
countries as a means to facilitate cross-border capital formation while
providing adequate disclosure for the protection of investors and the
promotion of fair, orderly and efficient markets. The Commission also
has encouraged the efforts of standard setters and other market
participants to do the same.\1\ To those ends, as part of a 1988 Policy
Statement, the Commission explicitly supported the establishment of
mutually acceptable international accounting standards as a critical
goal to reduce regulatory impediments that result from disparate
national accounting standards without compromising investor
protection.\2\
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    \1\ See ``Integrated Disclosure System for Foreign Private
Issuers'' Securities Act Release No. 33-6360 (November 20, 1981)
(the 1981 Proposing Release).
    \2\ See ``Regulation of the International Securities Markets''
Securities Act Release No. 33-6807 (November 14, 1988) (the 1988
Policy Statement).
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    Further, in 1997, the Commission noted that for issuers wishing to
raise capital in more than one country, preparing more than one set of
financial statements to comply with differing jurisdictional accounting
requirements increased compliance costs and created inefficiencies.\3\
In the study prepared pursuant to a mandate from Congress, the
Commission encouraged the efforts of the International Accounting
Standards Committee (``IASC''), the international accounting standard
setting body at the time, to develop a core set of accounting standards
that could serve as a framework for financial reporting in cross-border
offerings, and indicated the Commission's intent to remain active in
the development of those standards. These standards are now known as
International Financial Reporting Standards (``IFRS'').
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    \3\ See ``Pursuant to Section 509(5) of the National Securities
Markets Improvement Act of 1996 Report on Promoting Global
Preeminance of American Securities Markets'' (October 1997)
available at http://www.sec.gov/news/studies/acctgsp.htm.

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    In 2000, the Commission issued a Concept Release seeking input on
convergence to a high quality global financial reporting framework
while upholding the quality of financial reporting domestically.\4\ The
2000 Concept Release sought comments as to the conditions under which
the Commission should accept financial statements of foreign private
issuers that are prepared using IFRS, and the use of the U.S. GAAP
reconciliation of IFRS financial statements.\5\ The Commission

has continued to monitor the international developments that were
discussed in the 2000 Concept Release.
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    \4\ See SEC Concept Release ``International Accounting
Standards,'' Release No. 33-7801 (February 16, 2000) (the 2000
Concept Release) available at http://www.sec.gov/rules/concept/34-42430.htm
.

    \5\ The term ``foreign private issuer'' is defined in Exchange
Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer
means any foreign issuer other than a foreign government except an
issuer that meets the following conditions: (1) More than 50 percent
of the issuer's outstanding voting securities are directly or
indirectly held of record by residents of the United States; and (2)
any of the following: (i) The majority of the executive officers or
directors are United States citizens or residents; (ii) more than 50
percent of the assets of the issuer are located in the United
States; or (iii) the business of the issuer is administered
principally in the United States.
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    In October 2002, the Commission supported the announcement by the
Financial Accounting Standards Board (``FASB'') and the International
Accounting Standards Board (``IASB''), the successor of the IASC, of a
Memorandum of Understanding, referred to as the Norwalk Agreement, to
formalize their commitment to the convergence of U.S. and international
accounting standards.\6\ In this agreement, the two standard-setting
bodies acknowledged their joint commitment and pledged to use their
best efforts to the development, ``as soon as practicable,'' of high
quality, compatible accounting standards that could be used for both
domestic and cross-border financial reporting.\7\ In addition to
supporting the convergence efforts of the IASB and the FASB, we have
long worked with each board on the development of their respective
standards; however, the nature of our relationship with each board
differs.
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    \6\ See Financial Accounting Standards Board and International
Accounting Standards Board, Memorandum of Understanding, ``The
Norwalk Agreement,'' (September 18, 2002) (the Norwalk Agreement)
available at http://www.fasb.org/news/memorandum.pdf.

    \7\ Id.
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    In 2005, the Commission adopted an accommodation to allow foreign
private issuers that are first-time adopters of IFRS to file two years
rather than three years of IFRS financial statements in their
Commission filings.\8\ Most recently, on June 20, 2007, the Commission
approved for public comment a proposal to accept from foreign private
issuers financial statements prepared in accordance with the English
language version of IFRS as published by the IASB without the currently
required accompanying reconciliation to U.S. GAAP.\9\
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    \8\ See ``First-time Application of International Financial
Reporting Standards'' Securities Act Release No. 33-8567 (April 12,
2005) (the 2005 Adopting Release) available at http://www.sec.gov/rules/final/33-8567.pdf
.

    \9\ See ``Acceptance from Foreign Private Issuers of Financial
Statements Prepared in Accordance with International Financial
Reporting Standards without Reconciliation to U.S. GAAP'' Securities
Act Release No. 33-8818 (July 2, 2007) (the 2007 Proposing Release)
available at http://www.sec.gov/rules/proposed/2007/33-8818.pdf.

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    Almost 100 countries now either require or allow the use of IFRS
for the preparation of financial statements by listed companies, and
other countries are moving to do the same. This recent movement to IFRS
outside the United States has resulted in an increase, from a relative
few in 2005 to approximately 110 in 2006, of filings with the
Commission of foreign private issuers that represent in the footnotes
to their financial statements that their financial statements comply
with IFRS as published by the IASB.\10\ The Commission expects to see
this number continue to increase in the future, particularly pursuant
to Canada's announced move to IFRS, as there currently are
approximately 500 foreign private issuers from Canada.\11\
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    \10\ Another approximately 70 foreign private issuers filed
financial statements that they stated were prepared in accordance
with solely a jurisdictional variation of IFRS. Approximately 50
additional foreign private issuers that are incorporated in
jurisdictions that have moved to IFRS included in their filings
financial statements prepared in accordance with U.S. GAAP.
    \11\  See ``Implementation Plan for Incorporating International
Financial Reporting Standards into Canadian GAAP,'' available at
http://www.acsbcanada.org/client_asset/document/3/2/7/3/5/document_8B452E12-FAF5-7113-C4CB8F89B38BC6F8.pdf?sfgdata=4
.

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    This movement to IFRS also has begun to affect U.S. issuers, in
particular those with a significant global footprint.\12\ For instance,
certain U.S. issuers may compete for capital globally in industry
sectors in which a critical mass of non-U.S. companies report under
IFRS. Also, U.S. issuers with subsidiaries located in jurisdictions
that have moved to IFRS may prepare those subsidiaries' financial
statements in IFRS for purposes of local regulatory or statutory
filings.
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    \12\ For purposes of this Concept Release, the term U.S. issuer
encompasses any issuer other than a foreign private issuer reporting
on Form 20-F or Form 40-F or filing a registration statement based
on Form 20-F or Form 40-F. Form 20-F is the combined registration
statement and annual report form for foreign private issuers under
the Securities Exchange Act of 1934. It also sets forth disclosure
requirements for registration statements filed by foreign private
issuers under the Securities Act of 1933. Form 40-F is the combined
registration statement and annual report form under the Exchange Act
for Canadian foreign private issuers that file under the
Multijurisdictional Disclosure System.
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    In light of the ongoing convergence efforts of the IASB and the
FASB and the movement outside the United States towards accepting
financial statements prepared in accordance with IFRS, the Commission
is seeking input in this Concept Release regarding the role of IFRS as
published by the IASB as a basis of financial reporting in the U.S.
public capital market by U.S. issuers. Specifically, the Commission is
seeking input to better understand the nature and extent of the
public's interest in giving U.S. issuers, including investment
companies, the option to file with the Commission financial statements
prepared in accordance with IFRS as published by the IASB.\13\
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    \13\ The term ``investment company'' is defined in Section 3 of
the Investment Company Act of 1940 [15 U.S.C. 80a-3].
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    We appreciate that the U.S. public capital market has not
experienced the co-existence of two sets of accounting standards for
use by U.S. issuers. The Commission is issuing this Concept Release to
gather input on the potential significance and effect of any such
change to investors, issuers and market participants as well as to the
accounting profession in general. Given the potential significance and
complexity of permitting U.S. issuers to prepare financial statements
in accordance with IFRS as published by the IASB for purposes of
complying with the rules and regulations of the Commission, as
contemplated in this Concept Release, we encourage all interested
parties to provide comments.

II. The Effect of IFRS on the U.S. Public Capital Market

A. Financial Reporting in the United States

    The mission of the Commission is to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital
formation.\14\ In carrying out this mission, the Commission
historically has looked to private-sector bodies to provide standards
for financial reporting by issuers in the U.S. public capital market.
Since 1973, those standards have been set by the FASB, which is the
independent, private-sector body whose pronouncements the Commission
has recognized as ``authoritative'' and ``generally accepted'' for
purposes of the federal securities laws, absent any contrary
determination by the Commission.\15\ Over time, this body of standards
has commonly come to be referred to as U.S. GAAP.
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    \14\ See U.S. Securities and Exchange Commission 2006
Performance and Accountability Report available at http://www.sec.gov/about/secpar/secpar2006.pdf#sec1
.

    \15\ See ``Statement of Policy on the Establishment and
Improvement of Accounting Principles and Standards,'' Accounting
Series Release No. 150 (December 20, 1973) (expressing the
Commission's intent to continue to look to the private sector for
leadership in establishing and improving accounting principles and
standards through the FASB) and ``Policy Statement: Reaffirming the
Status of the FASB as a Designated Private-Sector Standard Setter,''
Securities Act Release No. 33-8221 (April 25, 2003) (the 2003 Policy
Statement) available at http://www.sec.gov/rules/policy/33-8221.htm.

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    The FASB is overseen by the Financial Accounting Foundation
(``FAF''), which has responsibility for selecting the seven full-time
FASB

members.\16\ The FAF is an independent, non-profit organization that is
run by a sixteen-member Board of Trustees. The FASB derives its funding
from fees paid by issuers and has oversight of the Emerging Issues Task
Force (``EITF''), which is the interpretive body for U.S. GAAP. The
FASB also is supported by the Financial Accounting Standards Advisory
Council (``FASAC''), which is responsible for consulting with the FASB
as to technical issues on the FASB's agenda and project priorities.
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    \16\ See http://www.fasb.org/facts/bd_members.shtml.

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    Consistent with the FASB's objective to increase international
comparability and the quality of standards used in the United States,
the FASB participates in international accounting standard setting
activities. This goal is consistent with the FASB's obligation to its
domestic constituents, who benefit from comparability of information
across national borders.\17\ The FASB pursues this objective in
cooperation with the IASB, as discussed in more detail below, and with
national accounting standard setters.
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    \17\ See http://www.fasb.org/intl/.

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    While the Commission consistently has looked to the private sector
to set accounting standards, the federal securities laws, including the
Sarbanes-Oxley Act of 2002,\18\ provide the Commission with the
authority to set accounting standards for public companies and other
entities that file financial statements with the Commission.\19\ The
Commission oversees the activities of the FASB as part of its
responsibilities under the securities laws. These oversight
responsibilities include the Commission reviewing the FAF's and the
FASB's annual budget and the FASB's accounting support fee, providing
views regarding the selection of FASB members, and, in certain
circumstances, referring issues relating to accounting standards to the
FASB or the EITF. The Commission and its staff do not, however,
prohibit the FASB from addressing topics of its choosing and do not
dictate the outcome of specific FASB projects, so long as the FASB's
conclusions are in the interest of investor protection.\20\
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    \18\ See Public Company Accounting Reform and Protection
(Sarbanes-Oxley Act), Pub L. No. 107-204, 116 Stat. 745 (2002)
(Sarbanes-Oxley Act) available at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=107_cong_bills&docid=f:h3763enr.tst.pdf
.

    \19\ See for example, Section 108(c) of the Sarbanes-Oxley Act,
which states, ``Nothing in this Act, including this section* *
*shall be construed to impair or limit the authority of the
Commission to establish accounting principles or standards for
purposes of enforcement of the securities laws.''
    \20\ See the 2003 Policy Statement, supra note 15.
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B. Financial Reporting Outside the United States

    Almost 100 countries now either require or allow the use of IFRS
for the preparation of financial statements by listed companies.
Countries that require or allow the use of IFRS by listed companies
also may allow the use of IFRS for local regulatory or statutory
financial reporting by non-listed companies. The European Union
(``EU''), for example, has, under a regulation adopted in 2002,
required companies incorporated in its Member States and whose
securities are listed on an EU-regulated market to report their
consolidated financial statements using endorsed IFRS beginning in
2005.\21\ Other countries, including Australia \22\ and New
Zealand,\23\ have adopted similar requirements mandating the use of
IFRS by public companies. More countries have plans to adopt IFRS as
their national accounting standards in the future, including Canada
\24\ and Israel.\25\
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    \21\ See Regulation (EC) No. 1606/2002 of the European
Parliament and of the Council of 19 July 2002 on the application of
international accounting standards, Official Journal L. 243, 11/09/
2002 P. 0001-0004 available at http://eur-lex.europa.eu/LexUriServ/site/en/oj/2002/l_243/l_24320020911en00010004.pdf
.

    \22\ See Australia Financial Reporting Council, Bulletin 2002/4
(July 3, 2002) available at http://www.frc.gov.au/bulletins/2002/04.asp
; Australia Financial Reporting Council, Bulletin 2004/3

(April 2004) available at http://www.frc.gov.au/bulletins/2004/03.asp
.

    \23\ See Accounting Standards Review Board News Release ``Stable
Platform of Financial Standards Announced: NZ aligns with UK, Europe
and Australia'' available at http://www.asrb.co.nz/documents/24Nov2004.doc
.

    \24\ See ``Implementation Plan for Incorporating International
Financial Reporting Standards into Canadian GAAP,'' supra note 11.
    \25\ See Israel Accounting Standard No. 29 ``Adoption of
International Financial Reporting Standards,'' stipulating that
Israeli public companies that prepare their primary financial
statements in accordance with Israeli GAAP are obliged to adopt IFRS
unreservedly for years starting on January 1, 2008.
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    The Commission is aware of the transitions made by other countries
to IFRS. For example, the vast majority of listed EU companies,
including banks and insurance companies, moved to IFRS in 2005 with the
remainder transitioning in 2007. Australian-listed companies also moved
to IFRS in 2005. Under these transition approaches, in essence all or
almost all of the listed companies transitioned to IFRS at the same
time. Some foreign regulators have published reports relating to the
implementation of IFRS in their country. For example, the U.K.
Financial Reporting Review Panel and the Autorit[eacute] des
March[eacute]s Financiers of France have both published reports making
observations on IFRS as applied in their jurisdictions.\26\
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    \26\ For the report of the U.K Financial Reporting Review Panel,
see ``Preliminary Report: IFRS Implementation'' available at http://www.frc.org.uk/images/uploaded/documents/IFRS%20Implementation%20-%20preliminary.pdf.
 For the report of the AMF, see ``Recommendations

on accounting information reported in financial statements for
2006,'' dated December 19, 2006, available at http://www.amf-france.org/documents/general/7565_1.pdf
.

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    The actual process of adopting the evolving body of IFRS as
published by the IASB in any country may be subject to a clearance
process, which, in some instances, may involve regulatory or
legislative approval. In some jurisdictions, the decision of policy
makers has resulted in some requirements of IFRS as published by the
IASB becoming optional. This results in a choice for issuers in these
jurisdictions to use either their jurisdictional version of IFRS (e.g.,
titled ``IFRS as adopted in Jurisdiction X'') or IFRS as published by
the IASB; however, the two may not be mutually exclusive. In addition
to adopting IFRS, policy makers also may choose to retain their
national accounting standard setter to, among other things, establish
standards for their local private capital market and to contribute to
the IFRS standard setting work.
    Other countries have chosen to continue to have their own national
accounting standard setter establish accounting standards applicable to
entities in their jurisdiction. The national accounting standard setter
also may monitor and consider the standard setting work of the IASB
and, as it considers appropriate, adapt national standards so as to
conform to some portions or all of IFRS as published by the IASB. For
example, in the United States, the FASB and the IASB have adopted a
best efforts convergence approach,\27\ while Japan's accounting
standard setter and the IASB have ``* * * a joint project to reduce
differences between International Financial Reporting Standards (IFRS)
and Japanese accounting standards. * * * '' \28\
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    \27\ See the Norwalk Agreement, supra note 6.
    \28\ Press Release, International Accounting Standards Board,
``IASB and Accounting Standards Board of Japan Agree to Next Steps
in Launching Joint Project for Convergence'' (Jan. 21, 2005),
available at http://www.iasb.org/news.

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C. The Possible Use of IFRS by U.S. Issuers

    The Commission's recent proposal to accept from foreign private
issuers financial statements prepared in

accordance with the English language version of IFRS as published by
the IASB without a U.S. GAAP reconciliation raises the question of
whether the Commission also should accept financial statements prepared
in accordance with IFRS as published by the IASB from U.S. issuers. The
Commission has identified at least two market forces that may provide
incentives for some market participants to request in the future that
the Commission accept financial statements prepared in accordance with
IFRS as published by the IASB from U.S. issuers.
    First, as a growing number of jurisdictions move to IFRS, more non-
U.S. companies will report their financial results in accordance with
IFRS. If a critical mass of non-U.S. companies in a certain industry
sector or market reports in accordance with IFRS, then there may be
pressure for U.S. issuers in that industry sector or market to likewise
report in accordance with IFRS to enable investors to compare U.S.
issuers' financial results more efficiently with those of their
competitors.
    Second, as more jurisdictions accept financial statements prepared
in accordance with IFRS for local regulatory or statutory filing
purposes, U.S issuers' subsidiaries based in these jurisdictions may be
preparing and filing their local financial statements using IFRS as
their basis of accounting. If U.S. issuers have a large number of
subsidiaries reporting in this manner, then these U.S. issuers--most
likely large, multinational corporations--may incur lower costs in
preparing their consolidated financial statements using IFRS rather
than U.S. GAAP. If an issuer can and does reallocate any financial
statement preparation cost savings to higher earning opportunities and
does not suffer a relatively greater increase in the cost of its
capital as a result of using IFRS, investors will benefit in terms of a
better rate of return.
    The Commission anticipates that not all U.S. issuers will have
incentives to use IFRS. For example, U.S. issuers without significant
customers or operations outside the United States--which may tend to be
smaller public companies--may not have the market incentives to prepare
IFRS financial statements for the foreseeable future. Additionally, the
Commission recognizes that there may be significant consequences to
allowing U.S. issuers to prepare their financial statements in
accordance with IFRS as published by the IASB. If the Commission were
to accept financial statements prepared in accordance with IFRS as
published by the IASB from U.S. issuers, then investors and market
participants would have to be able to understand and work with both
IFRS and U.S. GAAP when comparing among U.S. issuers because not all
U.S. issuers are likely to elect to prepare IFRS financial statements.
On a more practical level, a U.S. issuer may have contracts such as
loan agreements that include covenants based upon U.S. GAAP financial
measures or leases for which rental payments are a function of revenue
as determined under U.S. GAAP. Similarly, U.S. issuers may use their
financial statements as the basis for filings with other regulators and
authorities (e.g., local and federal tax authorities, supervisory
regulators) that may require U.S. GAAP financial information.
Questions
    1. Do investors, U.S. issuers, and market participants believe the
Commission should allow U.S. issuers to prepare financial statements in
accordance with IFRS as published by the IASB?
    2. What would be the effects on the U.S. public capital market of
some U.S. issuers reporting in accordance with IFRS and others in
accordance with U.S. GAAP? Specifically, what would be the resulting
consequences and opportunities, and for whom? For example, would
capital formation in the U.S. public capital market be better
facilitated? Would the cost of capital be reduced? Would comparative
advantages be conferred upon those U.S. issuers who move to IFRS versus
those U.S. issuers who do not (or feel they can not)? Would comparative
advantages be conferred upon those investors who have the resources to
learn two sets of accounting principles (IFRS and U.S. GAAP) as
compared to those who do not?
    3. What would be the effects on the U.S. public capital market of
not affording the opportunity for U.S. issuers to report in accordance
with either IFRS or U.S. GAAP? Specifically, what would be the
resulting consequences and opportunities, and for whom? Would capital
formation in the U.S. public capital market be better facilitated?
Would the cost of capital be reduced? Alternatively, are there certain
types of U.S. issuers for which the Commission should not afford this
opportunity?
    4. To what degree would investors and other market participants
desire to and be able to understand and use financial statements of
U.S. issuers prepared in accordance with IFRS? Would the desire and
ability of an investor to understand and use such financial statements
vary with factors such as the size and nature of the investor, the
value of the investment, the market capitalization of the U.S issuer,
the industry to which it belongs, the trading volume of its securities,
or any other factors?
    5. What immediate, short-term or long-term incentives would a U.S.
issuer have to prepare IFRS financial statements? Would the incentives
differ by industry segment, geographic location of operations, where
capital is raised, other demographic factors, or the aspect of the
Commission's filing requirements to which the U.S. issuer is subject?
    6. What immediate, short-term or long-term barriers would a U.S.
issuer encounter in seeking to prepare IFRS financial statements? For
example, would the U.S. issuer's other regulatory (e.g., banking,
insurance, taxation) or contractual (e.g., loan covenants) financial
reporting requirements present a barrier to moving to IFRS, and if so,
to what degree?
    7. Are there additional market forces that would provide incentives
for market participants to want U.S. issuers to prepare IFRS financial
statements?
    8. Are there issues unique to whether investment companies should
be given the choice of preparing financial statements in accordance
with IFRS? What would the consequences be to investors and other market
participants of providing investment companies with that choice?
    9. Would giving U.S. issuers the opportunity to report in
accordance with IFRS affect the standard setting role of the FASB? If
so, why? If not, why not? What effect might there be on the development
of U.S. GAAP?

D. Convergence of IFRS and U.S. GAAP

    In October 2002, the FASB and the IASB announced the Norwalk
Agreement, which formalized their commitment to the convergence of U.S.
and international accounting standards.\29\ In the Norwalk Agreement,
the two bodies acknowledged their ``best efforts'' commitment to the
development, ``as soon as practicable,'' of high quality, compatible
accounting standards that could be used for both domestic and cross-
border financial reporting and to the coordination of their future work
programs to ensure that, once achieved, compatibility is maintained. In
a 2006 Memorandum of Understanding, the FASB and the IASB indicated
that a common set of high quality global standards remains the long-
term strategic priority of both the

FASB and the IASB and set out a work plan covering the next two years
for convergence with specific long- and short-term projects.\30\ Thus,
convergence is the approach that for the last five years has been at
work to align the financial reporting of U.S. issuers under U.S. GAAP
with that of companies using IFRS. If there is a robust and active
process in place for converging IFRS and U.S. GAAP, then it is likely
that the current differences between them will be minimized in due
course.
---------------------------------------------------------------------------

    \29\ See the Norwalk Agreement, supra note 6.
    \30\ See ``A Roadmap for Convergence between IFRS and U.S.
GAAP--2006-2008 Memorandum of Understanding between the FASB and the
IASB'', February 27, 2006 (the 2006 Memorandum of Understanding)
available at http://<IP_ADDRESS>/intl/mou_02-27-06.pdf.

---------------------------------------------------------------------------

    As part of their commitment to convergence, both the IASB and the
FASB are working together on several major projects and have
coordinated agendas so that major projects that one board takes up also
may be taken up by the other board. Also, both boards have been working
on ``short-term convergence,'' under which convergence will occur
quickly in certain areas. This process allows for incremental
improvements and the opportunity to eliminate differences without
rethinking an issue entirely. If the IASB and the FASB conclude that a
short-term convergence project is not sufficient, they will consider a
broader standard setting project. The Commission fully supports
continued progress on convergence.
    If U.S. issuers were permitted to prepare IFRS financial
statements, then some could conclude that the convergence process would
no longer be warranted because those U.S. issuers that see a benefit to
reporting under IFRS would be free to do so. Consequently, there is a
risk that constituents of the two boards may not continue to support
convergence efforts if financial statements prepared by U.S. issuers in
accordance with IFRS as published by the IASB are accepted by the
Commission. If convergence does not occur, the future work of the IASB
and the FASB may result in standards that are significantly different
or that are not timely in their development.
Questions
    10. What are investors', issuers' and other market participants'
opinions on the effectiveness of the processes of the IASB and the FASB
for convergence? Are investors and other market participants satisfied
with the convergence progress to date, and the robustness of the
ongoing process for convergence?
    11. How would the convergence work of the IASB and the FASB be
affected, if at all, if the Commission were to accept IFRS financial
statements from U.S. issuers? If the Commission were to accept IFRS
financial statements from U.S. issuers, would market participants still
have an incentive to support convergence work?
    12. If IFRS financial statements were to be accepted from U.S.
issuers and subsequently the IASB and the FASB were to reach
substantially different conclusions in the convergence projects, what
actions, if any, would the Commission need to take?

III. Global Accounting Standards

A. The Case for a Single Set of Globally Accepted Accounting Standards

    The Commission recognizes that having a widely used single set of
high quality globally accepted accounting standards accepted and in
place could benefit both the global capital markets and investors. To
date, the efforts in the United States have encompassed convergence,
which involves the content of IFRS and U.S. GAAP coming together.
    Key forces favoring a single set of globally accepted accounting
standards include, but are not limited to, the continued expansion of
the capital markets across national borders, and the desire by
countries to achieve strong, stable and liquid capital markets to fuel
economic growth. A thriving capital market requires, among other
things, a high degree of investor understanding and confidence.
Converging towards or embracing a single set of high quality accounting
standards could contribute to investor understanding and confidence.
    The use of a single set of accounting standards in the preparation
of financial statements could help investors understand investment
opportunities better than the use of multiple differing sets of
national accounting standards. Without a single set of accounting
standards, global investors must incur time, costs and effort to
understand companies' financial statements so that they can adequately
compare investment opportunities. In addition, presenting investors
with financial information that varies substantially depending on which
set of accounting standards is employed can cause confusion about the
actual financial results of a company and result in a correspondingly
adverse effect on investor confidence and cost of capital. Investor
confidence in financial reporting also is likely to be stronger if the
accounting standards used have been subject to appropriate due process
and have gained wide acceptance in practice.
    Embracing a common set of accounting standards also can lower costs
for issuers. When companies access capital markets beyond their home
jurisdiction, they incur additional costs if they must prepare
financial statements using different sets of accounting standards.
These include the costs for company personnel and auditors to learn,
keep current with and comply with the requirements of multiple
jurisdictions. In addition to issuers facing lower costs, standard
setters collectively worldwide also may incur lower costs because the
use of resources dedicated to standards writing can potentially be
reduced if fewer separate accounting models are pursued.
Question
    13. Do investors, issuers and other market participants believe
giving U.S. issuers the choice to prepare financial statements in
accordance with IFRS as published by the IASB furthers the development
of a single set of globally accepted accounting standards? Why or why
not, and if so, how?

B. The International Accounting Standard Setter

    The sustainability, governance and continued operation of the IASB
are important factors for the development of a set of high quality,
globally accepted accounting standards and are important factors in the
Commission's consideration of the IASB's work. The IASB is based in
London and is a stand-alone, privately funded accounting standard
setting body established to develop global standards for financial
reporting.\31\ It is committed to ``developing, in the public interest,
a single set of high quality, understandable and enforceable global
accounting standards that require high quality, transparent and
comparable information in financial statements and other financial
reporting to help participants in the world's capital markets and other
users make economic decisions.'' \32\ The IASB assumed accounting
standard setting responsibilities from the IASC in 2001 as the
culmination of a reorganization of the IASC.\33\ The IASC had issued 41

standards through December 2000. Upon its formation, the IASB
recognized those standards and thus they form part of the body of IFRS.
---------------------------------------------------------------------------

    \31\ For more information on the structure and operation of the
IASB, see http://www.iasb.org.

    \32\ IASC Foundation Constitution, Paragraph 2a (2005) available
at http://www.iasb.org/About+Us/About+the+Foundation/Constitution.htm
.

    \33\ For more information on the reorganization, see http://archive.iasb.org.uk/uploaded_files/documents/8_210_swp_rep.pdf
.

---------------------------------------------------------------------------

    The IASB is overseen by the International Accounting Standards
Committee Foundation (``IASC Foundation''). The IASC Foundation is
based in London and is a stand-alone, not-for-profit organization,
incorporated in Delaware. It is responsible for the activities of the
IASB and other work that centers on IFRS, such as initiatives related
to translation of IFRS from the English language, education about IFRS
and the development of Extensible Business Reporting Language
(``XBRL'') taxonomies for IFRS. The IASC Foundation is governed by 22
trustees (``IASC Foundation Trustees'') whose backgrounds are
geographically diverse.
    To date, the IASC Foundation has financed IASB operations largely
through voluntary contributions from companies, accounting firms,
international organizations and central banks. Original commitments
were made for the period 2001-2005 and have been extended for an
additional two years through 2007. In June 2006, the IASC Foundation
Trustees agreed on four elements that should govern the establishment
of a funding approach designed to enable the IASC Foundation to remain
a stand-alone, private-sector organization with the necessary resources
to conduct its work in a timely fashion. The IASC Foundation Trustees
determined that characteristics of the new scheme for 2008 would be:
     Broad-based: Fewer than 200 companies and organizations
participate in the current financing system. A sustainable long-term
financing system must expand the base of support to include major
participants in the world's capital markets, including official
institutions, in order to ensure diversification of sources.
     Compelling: Any system must carry with it enough pressure
to make free riding very difficult. This could be accomplished through
a variety of means, including official support from the relevant
regulatory authorities and formal approval by the collecting
organizations.
     Open-ended: The financial commitments should be open-ended
and not contingent on any particular action that would infringe on the
independence of the IASC Foundation and the International Accounting
Standards Board.
     Country-specific: The funding burden should be shared by
the major economies of the world on a proportionate basis, using Gross
Domestic Product as the determining factor of measurement. Each country
should meet its designated target in a manner consistent with the
principles above.\34\
---------------------------------------------------------------------------

    \34\ http://www.iasb.org/About+Us/About+the+Foundation/Future+Funding.htm
.

The IASC Foundation Trustees continue to make progress in obtaining
funding that satisfies those elements.
    The IASC Foundation Trustees select members of the IASB to comprise
``a group of people representing, within that group, the best available
combination of technical expertise and diversity of international
business and market experience in order to contribute to the
development of high quality, global accounting standards.'' \35\ The
fourteen members of the IASB--twelve full-time and two part-time--serve
five-year terms subject to one re-appointment. They are required to
sever all employment relationships and positions that may give rise to
economic incentives that might compromise a member's independent
judgment in setting accounting standards. The IASB members come from
eight countries and have a variety of backgrounds (e.g., auditors,
users, preparers, and academics). In selecting IASB members, the IASC
Foundation Trustees ensure that the IASB is not dominated by any
particular constituency. Member selection is not based on geographic
representation.
---------------------------------------------------------------------------

    \35\ IASC Foundation Constitution, Paragraph 19 (2005) available
at http://www.iasb.org/About+Us/About+the+Foundation/Constitution.htm
.

---------------------------------------------------------------------------

    The IASB is free to choose and conduct projects necessary to
promote convergence and develop high quality standards. The IASB
solicits views and seeks input from the public throughout the standard
setting process from selecting items for its agenda to developing and
publishing a discussion paper and/or exposure draft and issuing a final
standard. This input is derived from discussions at its project working
group and roundtable meetings as well as written submissions from
constituents. The IASB's meetings are open to public observers. Comment
letters, summaries of comments received on discussion papers and
exposure drafts are made publicly available on the IASB website.\36\
This transparent process is intended to enable the IASB to obtain
relevant views from interested parties, and at the same time to
conclude on final standards based on its own deliberations, and without
undue external pressure. The IASB has an advisory council--the
Standards Advisory Council (``SAC'')--that is composed of approximately
40 geographically diverse individuals drawn from countries that use
IFRS and also those that do not. The IASB is assisted on IFRS
interpretive matters by its International Financial Reporting
Interpretations Committee (``IFRIC'').
---------------------------------------------------------------------------

    \36\ See IASC Foundation Due Process Handbook for the IASB
available at http://www.iasb.org/NR/rdonlyres/7D97095E-96FD-4F1F-B7F2-366527CB4FA7/0/DueProcessHandbook.pdf
.

---------------------------------------------------------------------------

    The Commission and its staff have for many years been involved in
the IASB standard setting efforts and development of the interpretive
guidance of IFRIC. The Commission through its staff serves as an
Observer to the SAC.
    The Commission staff directly participates in the development of
IFRS primarily through the work of the International Organization of
Securities Commissions (``IOSCO'') whose membership regulates more than
90% of the world's securities markets. IOSCO is the world's largest
international cooperative forum for securities regulatory agencies.\37\
IOSCO has taken and continues to take an active role in the standard
setting process undertaken by the IASC and now the IASB. Through
membership in IOSCO's Standing Committee on Multinational Disclosure
and Accounting, the Commission staff assists in writing IOSCO comment
letters on exposure drafts of standards published by the IASB and
serves as one of the IOSCO representatives on several of the IASB
project working groups. As one of two IOSCO representatives, the
Commission staff serves as a non-voting Observer to IFRIC.
---------------------------------------------------------------------------

    \37\ For more information about IOSCO, see http://www.iosco.org.

---------------------------------------------------------------------------

Questions
    14. Are investors, U.S. issuers and other market participants
confident that IFRS have been, and will continue to be, issued through
a robust process by a stand-alone standard setter, resulting in high
quality accounting standards? Why or why not?
    15. Would it make a difference to investors, U.S. issuers and other
market participants whether the Commission officially recognized the
accounting principles established by the IASB?
    16. What are investors', U.S. issuers' and other market
participants' views on how the nature of our relationship with the
IASB, a relationship that is different and less direct than our
oversight role with the FASB, affects the Commission's responsibilities
under the U.S. securities laws?

C. The Commission's Previous Consideration of International Accounting
Standards

    For the past several decades the Commission has been actively
promoting the development of a set of international accounting
standards. In the 1981 Proposing Release, revisions to Form 20-F were
proposed and the Commission expressed its support for the work of the
IASC in formulating guidelines and international disclosure
standards.\38\ As part of the 1988 Policy Statement, the Commission
urged ``securities regulators and members of the accounting profession
throughout the world [to] continue efforts to revise and adjust
international accounting standards with the aim of increasing
comparability and reducing cost'' and reaffirmed its commitment to
working with securities regulators around the world to achieve the goal
of an efficient international securities market system.\39\
---------------------------------------------------------------------------

    \38\ See the 1981 Proposing Release, supra note 1.
    \39\ The 1988 Policy Statement, supra note 2.
---------------------------------------------------------------------------

    In a 1994 amendment to Form 20-F, the Commission accepted from
foreign private issuers cash flow statements prepared in accordance
with International Accounting Standards (``IAS'') No. 7, Cash Flow
Statements, without reconciliation to U.S. GAAP. In proposing that
amendment, the Commission noted that ``while there are differences
between a cash flow statement prepared in accordance with IAS 7 and one
prepared in accordance with U.S. GAAP * * * the Commission believes
statements prepared in accordance with IAS 7 should provide an investor
with adequate information regarding cash flows without the need for
additional information or modification.'' \40\
---------------------------------------------------------------------------

    \40\ The Commission proposed these amendments in Release No. 33-
7029 (November 3, 1993) and adopted them in Release No. 33-7053
(April 19, 1994) (the 1994 Adopting Release). Other examples in
which the Commission amended its requirements for financial
statements of foreign issuers to permit the use of certain IASC
standards without reconciliation to U.S. GAAP are described in the
2000 Concept Release, supra note 4.
---------------------------------------------------------------------------

    The Commission more closely examined efforts to develop high
quality, comprehensive global accounting standards in a 1997 report
undertaken at the direction of Congress.\41\ In that report, the
Commission noted that for issuers wishing to raise capital in more than
one country, compliance with differing accounting requirements to be
used in the preparation of financial statements increased compliance
costs and created inefficiencies. As a step towards addressing these
concerns and to increase the access of U.S. investors to foreign
investments in the U.S. public capital market, the Commission
encouraged the IASC's efforts to develop a core set of accounting
standards that could serve as a framework for financial reporting in
cross-border offerings, and indicated an intent to remain active in the
development of those standards. In that report, the Commission
indicated that its evaluation of IASC core standards would involve an
assessment of whether they constituted a comprehensive body of
transparent, high quality standards that could be rigorously
interpreted and applied.
---------------------------------------------------------------------------

    \41\ See ``Pursuant to Section 509(5) of the National Securities
Markets Improvement Act of 1996 Report on Promoting Global
Preeminence of American Securities Markets,'' supra note 3.
---------------------------------------------------------------------------

    In February 2000, the Commission issued a Concept Release on
International Accounting Standards, seeking public comment on the
elements necessary to encourage convergence towards a high quality
global financial reporting framework while upholding the quality of
financial reporting domestically.\42\ In that release, the Commission
described high quality standards as consisting of a ``comprehensive set
of neutral principles that require consistent, comparable, relevant and
reliable information that is useful for investors, lenders and
creditors, and others who make capital allocation decisions.'' \43\ The
Commission also expressed the view that high quality accounting
standards ``must be supported by an infrastructure that ensures that
the standards are rigorously interpreted and applied.''\44\
---------------------------------------------------------------------------

    \42\ See the 2000 Concept Release, supra note 4.
    \43\ Id.
    \44\ Id.
---------------------------------------------------------------------------

    In 2003, the Commission staff issued a study on the adoption of a
principles-based accounting system, as mandated by Congress in the
Sarbanes-Oxley Act.\45\ The conclusion of that study was that an
optimal approach to accounting standard setting would be based on a
consistently applied conceptual framework and clearly stated objectives
rather than solely on either rules or principles, one benefit of which
would be the facilitation of greater convergence between U.S. GAAP and
international accounting standards. By taking an objectives-based
approach to convergence, the study noted, standard setters would be
able to arrive at an agreement on a principle more quickly than would
be possible for a detailed rule. The Commission staff's report to
Congress interpreted convergence as a ``process of continuing discovery
and opportunity to learn by both U.S. and international standard
setters,'' the benefits of which include greater comparability and
improved capital formation globally.\46\
---------------------------------------------------------------------------

    \45\ See the Study Pursuant to Section 108(d) of the Sarbanes-
Oxley Act of 2002 on the Adoption by the United States Financial
Reporting System of a Principles-Based Accounting System (July 25,
2003) available at http://www.sec.gov/news/studies/principlesbasedstand.htm
.

    \46\ Id.
---------------------------------------------------------------------------

    In 2004, a Deputy Chief Accountant joined a team of experienced
professionals within the Office of the Chief Accountant, all devoted
full-time to international work. The Commission staff tracks
developments in IFRS similar to the manner in which it follows the work
of the FASB and the EITF.
    In 2005, the Commission adopted amendments to Form 20-F to permit
foreign private issuers--for their first year of reporting under IFRS
as published by the IASB--to file two years rather than three years of
statements of income, changes in shareholders' equity and cash flows
prepared in accordance with IFRS, with appropriate related
disclosure.\47\ The Commission recognized that these amendments would
reduce costs to foreign private issuers and encourage their continued
participation in the U.S. public capital market, which would benefit
investors by increasing investment possibilities and furthering the
efficient allocation of capital.
---------------------------------------------------------------------------

    \47\ See the 2005 Adopting Release, supra note 8.
---------------------------------------------------------------------------

    In February 2006, Chairman Cox reaffirmed his commitment to the
``Roadmap'' that was first described by a former Chief Accountant of
the Commission in April 2005.\48\ The Roadmap sets forth the goal of
achieving one set of high quality, globally accepted accounting
standards and suggested several considerations that could affect the
achievement of that goal. It also discusses the possibility for the co-
existence of financial statements prepared pursuant to IFRS and U.S.
GAAP in the U.S. public capital market.
---------------------------------------------------------------------------

    \48\ See SEC Press Release No. 2006-17, ``Accounting Standards:
SEC Chairman Cox and EU Commissioner McCreevy Affirm Commitment to
Elimination of the Need for Reconciliation Requirements'' (Feb. 8,
2006) (SEC Press Release No. 2006-17) available at http://www.sec.gov/news/press/2006-17.htm
.

---------------------------------------------------------------------------

    In March 2007, the Commission staff held a Roundtable discussion to
seek input on the potential effects of the co-existence of IFRS and
U.S. GAAP financial statements in the U.S. public capital market.\49\
In particular, the Roundtable participants discussed the potential
effect on the U.S. public capital market if foreign private issuers

have the choice to file with the Commission financial statements
prepared in accordance with IFRS as published by the IASB without
reconciliation to U.S. GAAP.
---------------------------------------------------------------------------

    \49\ The transcript of this SEC Roundtable is available at
http://www.sec.gov/spotlight/ifrsroadmap/ifrsroadmap-transcript.txt.

---------------------------------------------------------------------------

    As previously discussed, on June 20, 2007, the Commission voted to
issue a proposal to accept from foreign private issuers their financial
statements prepared in accordance with IFRS as published by the IASB
without reconciliation to U.S. GAAP.\50\
---------------------------------------------------------------------------

    \50\ See the 2007 Proposing Release, supra note 9.
---------------------------------------------------------------------------

IV. IFRS Implementation Matters for U.S. Issuers

    A move to a financial reporting environment in the U.S. public
capital market in which U.S. issuers may provide investors with
financial statements prepared in accordance with IFRS as published by
the IASB would be a complex endeavor. There are many elements forming
the infrastructure underpinning U.S. GAAP that keep it viable and
functioning effectively. As is the case with U.S. GAAP, these
underpinnings also would be relevant to keep IFRS viable and
functioning effectively.
    Although both the 2007 Proposing Release and this Concept Release
relate to the use of IFRS as published by the IASB in Commission
filings, our consideration of the use of IFRS by foreign private
issuers and U.S. issuers gives rise to some differing issues.\51\ For
example, many foreign private issuers already have experience with the
application of IFRS in practice because the use of IFRS is either
required or permitted in their home market. Due to their experience,
they are already confronting the potential difficulties that might face
U.S. issuers, including for example, education and training of the
accounting and auditing profession and other specialists such as
actuaries and valuation experts.
---------------------------------------------------------------------------

    \51\ Id.
---------------------------------------------------------------------------

A. Education and Training

    The use of IFRS by U.S. issuers would create the need for effective
training and education. U.S. issuers would likely use IFRS only if they
and their auditors had been thoroughly trained in IFRS and if their
investors and other users of their financial statements, such as
analysts and rating agencies, understood IFRS. However, the education
of most accountants in the United States--be it collegiate or
continuing education--includes a comprehensive curriculum around U.S.
GAAP but does not include a similar curriculum around IFRS. Most
specialists, such as actuaries and valuation experts, who are engaged
by management to assist in measuring certain assets and liabilities
likely were not taught IFRS.
    Consequently, all parties would likely need to undertake
comprehensive training on IFRS. Professional associations and industry
groups would need to integrate IFRS into their training materials,
publications, testing and certification programs. Colleges and
universities would need to include IFRS in their curricula.
Furthermore, eventually it may be appropriate to include IFRS in the
Uniform CPA Examination.
Questions
    17. In what ways might the Commission be able to assist in
improving investors' ability to understand and use financial statements
prepared in accordance with IFRS?
    18. What are the incentives and barriers to adapting the training
curricula for experienced professionals to address both IFRS and U.S.
GAAP? Separate from ongoing training, how long might it take for a
transition to occur? How much would it cost?
    19. What are the incentives and barriers relevant to the college
and university education system's ability to prepare its students for a
U.S. public capital market in which U.S. issuers might report under
IFRS? What are the incentives and barriers relevant to changing the
content of the Uniform CPA Examination? How should the Commission
address these incentives and barriers, if at all?

B. Application in Practice

    To provide effective financial reporting for investors, it is
important that IFRS is properly applied in practice. In its
considerations about the use of IFRS by foreign private issuers, the
Commission has highlighted that proper application encompasses not only
faithful adherence to the requirements of the standards, but also
understandable standards such that across the spectrum of issuers those
requirements are consistently understood and applied. As U.S. issuers
do not file with us in IFRS today, in allowing U.S. issuers to do so,
we would not have direct experience to assess the extent to which IFRS
would be properly applied by U.S. issuers. Rather, we would make this
assessment based upon the infrastructure that is in place in the United
States to foster the high quality application of IFRS as well as,
indirectly, the Commission's experience with the application of IFRS by
foreign private issuers.
    The Commission's practical experience with IFRS began with the
foreign private issuers that have reported on this basis in their
filings with the Commission for several years. Further, as previously
discussed, during the course of 2006, approximately 110 foreign private
issuers filed with the Commission annual reports on Form 20-F that
contained financial statements representing that they comply with IFRS
as published by the IASB. This representation may have accompanied a
representation that the financial statements comply with a
jurisdictional version of IFRS. The Commission staff has conducted
reviews of those IFRS financial statements as part of its normal
function of reviewing the periodic reports of publicly registered
companies, consistent with its practice in reviewing filings from U.S.
issuers and from foreign private issuers pursuant to the provisions of
the Sarbanes-Oxley Act. In conducting its reviews of IFRS financial
statements, the staff made a number of comments regarding the
application of IFRS, which have been brought to the attention of
issuers through the comment process.\52\
---------------------------------------------------------------------------

    \52\ See http://www.sec.gov/divisions/corpfin/ifrs_staffobservations.htm
 for a link to the comment letters the staff

issued on 2005 IFRS filings as well as a report outlining some of
the staff's observations about those comments.
---------------------------------------------------------------------------

    In certain limited areas in which the IASB has yet to develop
particular industry standards or in which IFRS permits disparate
options, we have noted that the level of diversity that IFRS allows has
manifested itself in the reporting practices of foreign private
issuers. For example, there are two industry areas that have been
identified by the IASB as lacking standards: insurance contracts and
extractive activities. The IASB is in the process of developing a
standard for insurance contracts to supplement IFRS 4, Insurance
Contracts. IFRS 6, Exploration for and Evaluation of Mineral Resources,
provides only limited guidance with respect to the accounting for
exploration and evaluation activities undertaken by oil and gas and
mining companies. On both of these projects, the IASB continues to make
progress towards developing standards. Further, the body of IFRS does
not have standards on the accounting for common control mergers,
recapitalizations, reorganizations, acquisitions of minority interests
and similar transactions.
    With respect to investment companies, there are particular
differences between IFRS and U.S. GAAP that would result in different
presentations in practice. For example, IFRS does not require a
schedule of investments or financial highlights;

however, U.S. GAAP requires this information in an investment company's
financial statements. As another example, IFRS does not provide an
exemption from consolidation of subsidiaries in an investment company,
whereas U.S. GAAP provides exemptions from consolidating subsidiaries
in certain areas which could result, for example, in different
treatment for master-feeder funds.\53\
---------------------------------------------------------------------------

    \53\ A master-feeder fund is a two-tiered arrangement in which
one or more ``feeder'' funds hold shares of a single ``master'' fund
in accordance with Section 12(d)(1)(E) of the Investment Company Act
of 1940.
---------------------------------------------------------------------------

Questions
    20. What issues would be encountered by U.S. issuers and auditors
in the application of IFRS in practice within the context of the U.S.
financial reporting environment?
    21. How do differences between IFRS and U.S. GAAP bear on whether
U.S. issuers, including investment companies, should be given the
choice of preparing financial statements in accordance with IFRS?
    22. What do issuers believe the cost of converting from U.S. GAAP
to IFRS would be? How would one conclude that the benefits of
converting justify those costs?

C. Auditing

    The use of IFRS by U.S. issuers would affect the audit firms that
are engaged both to audit a U.S. issuer's financial statements and to
report on the effectiveness of its internal controls. The use of IFRS
would arguably affect both the strategic decisions of those firms as
well as the quality control systems that those firms employ to conduct
their audits.
    From a strategic perspective, audit firms would need to determine
whether it would be economically desirable to make the initial and
ongoing investment necessary to ensure that audits of financial
statements prepared in accordance with IFRS would be competently
delivered and adequately supervised. This may be particularly
challenging for smaller audit firms, which would need to balance the
cost of the investments necessary to provide these services with the
effects on their reputation that might result if they are unable or
unwilling to do so.
    For audit firms that believe the benefits of the investment
outweigh the associated costs, elements of their systems of quality
control such as their practices related to hiring, assigning personnel
to engagements, professional development and advancement activities
would need to be adjusted. Because U.S. auditors have less experience
with IFRS than with U.S. GAAP, in the short-term, audit firms may
encounter challenges in establishing policies and procedures to provide
them with reasonable assurance that their personnel possess knowledge
appropriate to perform audits of U.S. issuers that apply IFRS. Even
with appropriate systems of quality control, however, additional
auditing guidance still may be necessary for auditors to appropriately
address issues related to the transition to reporting on IFRS financial
statements.
    Additionally, for the U.S. firms that are members of global audit
networks, systems of quality control need to foster the high quality
and consistent application of IFRS across national borders. If U.S.
issuers were to apply IFRS, the U.S. firms of these global audit
networks could be affected more than they are presently by the use of
IFRS by audit clients of their foreign affiliates and by U.S.
subsidiaries of those clients.
Questions
    23. Would audit firms be willing to provide audit services to U.S.
issuers who prepare their financial statements in accordance with IFRS?
How, if at all, would allowing U.S. issuers to prepare IFRS financial
statements affect the current relative market shares of audit firms?
    24. What factors, if any, might lead to concern about the quality
of audits of IFRS financial statements of U.S. issuers?
    25. Would any amendments or additions to auditing and other
assurance standards be necessary if U.S. issuers were allowed to
prepare IFRS financial statements?
    26. How could global consistency in the application of IFRS be
facilitated by auditors of U.S. issuers?

D. Regulation

    The prospect of a single set of globally accepted accounting
standards must occur within the reality that securities regulators all
have national--as opposed to global--mandates for carrying out their
work. As a result, U.S. issuers with listings in multiple securities
markets could find more than one securities regulator commenting upon
their IFRS financial statements, as many other securities regulators
would have substantial experience in working with IFRS financial
statements. Because it is likely that not everyone will apply
accounting standards consistently or appropriately, securities
regulators are developing infrastructure to identify and address the
application of IFRS globally. This infrastructure, which starts with
IOSCO, is designed to foster the consistent and faithful application of
IFRS around the world. Through its work, IOSCO continues to support the
implementation and consistent application of IFRS in the global
financial markets. In January 2007, IOSCO's database for cataloguing
and sharing securities regulators' experiences on IFRS application
around the world became operational.\54\
    Further, on a bilateral basis, the Commission and the European
Commission (``EC'') have agreed that regulators should endeavor to
avoid conflicting conclusions regarding the application and enforcement
of IFRS.\55\ To this end, the Commission and the Committee of European
Securities Regulators (``CESR''), which the EC has charged with
evaluating the implementation of IFRS in the EU, published a work plan
in August 2006.\56\ This work plan covers information sharing regarding
IFRS implementation in regular meetings of the Commission staff and
CESR-Fin, the group within CESR focused on financial reporting. The
SEC-CESR work plan also contemplates the confidential exchange of
issuer-specific information between CESR members and the Commission,
with implementing protocols. In addition, CESR has established among
its members a forum and a confidential database for participants to
exchange views and share experiences with IFRS.\57\ These mechanisms
will allow securities regulators to endeavor to avoid conflicting
decisions on IFRS application matters; nonetheless, each securities
regulator retains the responsibility, and accordingly the right, to
make its own final decisions.
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    \54\ See IOSCO Press Release ``Regulators to Share Information
on International Financial Reporting Standards'' available at http://www.iosco.org/news/pdf/IOSCONEWS92.pdf
.

    \55\ See SEC Press Release No. 2006-17, supra note 48.
    \56\ See ``SEC and CESR Launch Work Plan Focused on Financial
Reporting'' SEC Press Release 2006-130 (August 2, 2006) available at
http://www.sec.gov/news/press/2006/2006-130.htm.

    \57\ See ``CESR publishes key information from its database of
enforcement decisions taken by EU National Enforcers of financial
information (IFRS)'' CESR/07-163 (April 2007) available at http://www.cesr-eu.org/index.php?page=groups&mac=0&id=13
.

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    Despite these mechanisms, a question arises as to what should be
done, if anything, in circumstances where neither the IASB nor IFRIC
has addressed a particular IFRS accounting issue that causes
significant difficulties in practice. A securities regulator, including
the Commission, may find it necessary as an interim measure to state

a view on such an accounting issue. This is not new, as securities
regulators have long been involved in resolving issues related to
national accounting standards. If such a view were stated, the
securities regulator subsequently could refer the accounting issue to
the IASB or IFRIC for resolution of the issue for all constituencies.
Any view expressed by the regulator may be rescinded upon the IASB or
the IFRIC establishing authoritative literature addressing the issue.
As referenced in the 2007 Proposing Release, if the Commission and the
staff were to state a view on such an accounting issue, we would not
expect it to be inconsistent with IFRS as published by the IASB, the
interpretations provided by IFRIC, or the definitions, recognition
criteria and measurement concepts in the IASB's Framework.
Question
    27. Do you think that the information sharing infrastructure among
securities regulators through both multilateral and bilateral platforms
will improve securities regulators' ability to identify and address
inconsistent and inaccurate applications of IFRS?

E. Integration With the Commission's Existing Requirements

    The Commission has contemplated the operational considerations with
respect to accepting financial statements prepared in accordance with
IFRS from foreign private issuers and described these considerations in
the 2007 Proposing Release.\58\ These operational considerations may be
relevant to U.S. issuers if the Commission were to undertake rulemaking
to accept financial statements prepared in accordance with IFRS as
published by the IASB from U.S. issuers. However, the use of IFRS by
U.S. issuers may give rise to additional issues. Additionally, the
operational considerations applicable to investment companies may
differ from those applicable to other entities, including foreign
private issuers.
---------------------------------------------------------------------------

    \58\ See the 2007 Proposing Release, supra note 9.
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    One area of consideration relating to the potential acceptance of
IFRS financial statements would be how to address requirements for a
foreign issuer that does not meet the definition of a foreign private
issuer. A foreign issuer that is not a foreign private issuer (and is
not a sovereign entity) is generally treated the same as a U.S.
incorporated issuer under our rules and therefore must follow
disclosure requirements applicable to U.S. issuers. If such a foreign
issuer is subject to disclosure laws in another jurisdiction, it may
find that it is required to prepare both IFRS financial statements for
purposes of the other jurisdiction and U.S. GAAP financial statements
for purposes of filings with the Commission.
    Another area of consideration relates to Regulation S-X. The
Commission did give consideration to the application of the provisions
of Regulation S-X in the 2007 Proposing Release, and we proposed that
Regulation S-X would continue to apply to filings from foreign private
issuers that include financial statements prepared in accordance with
IFRS with the exception of the form and content portion of its
financial statement requirements. For example, under Article 11 of
Regulation S-X, issuers are required to prepare unaudited pro forma
financial information to give effect as if a particular transaction,
such as a significant recent or probable business combination, had
occurred at the beginning of the period. In the 2007 Proposing Release,
a foreign private issuer using IFRS would prepare the pro forma
financial information by presenting its IFRS results and converting the
financial statements of the business acquired (or to be acquired) into
IFRS.
    Currently U.S. issuers are subject to Regulation S-X. For example,
a U.S. issuer applies Article 4 and either Article 5, 6, 7 or 9 of
Regulation S-X, as applicable, in determining the form and content of
its financial statements. These requirements provide a substantial
degree of specificity around the items to be presented on the balance
sheet and income statement. IFRS does not provide specific conventions
as to the format or content of the income statement.\59\
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    \59\ IAS 1, Presentation of Financial Statements, provides
guidance regarding minimum required line items and provides examples
to which entities may refer.
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    Investment company financial statements have unique disclosure
requirements. For example, Regulation S-X contains specific disclosure
requirements for investment companies relating to investments in
unaffiliated issuers, investments in affiliates, securities sold short,
open option contracts written and investments other than
securities.\60\ Also, Rule 6-05 of Regulation S-X permits investment
companies to include a Statement of Net Assets in lieu of the balance
sheet if at least 95 percent of the investment company's total assets
are represented by investments in securities of unaffiliated issuers.
The non-financial statement portion of an investment company's
shareholder report may require disclosures that are based on financial
statement information. For example, investment companies must include
an expense table and a graphical representation of holdings.\61\ If
investment companies were to prepare IFRS financial statements,
questions related to these requirements would be relevant.
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    \60\ See Rules 12-12 through 12-14 of Regulation S-X [17 CFR
210.12-12, 12-12A, 12-12B, 12-12C, 12-13 and 12-14.]
    \61\ See Items 22(d)(1), (2) of Form N-1A.
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    Regulation S-K contains the disclosure requirements for the non-
financial statement portion of filings made with the Commission.
Several non-financial statement disclosure items required by Regulation
S-K make reference to specific U.S. GAAP pronouncements, including
Financial Accounting Standards and interpretations thereof. For
example, U.S. issuers are required to provide disclosure of off-balance
sheet arrangements under Item 303(a)(4) of Regulation S-K, which
expressly refers to FASB Interpretations. If U.S. issuers were to
prepare IFRS financial statements, the Commission would need to
consider questions related to the application of these provisions of
Regulation S-K.
    The Commission has provided its views and interpretations with
respect to financial reporting in Accounting Series Releases (``ASRs'')
and Financial Reporting Releases (``FRRs''). The SEC staff has given
financial reporting guidance in various forms, including Staff
Accounting Bulletins (``SABs''); Industry Guides; and Staff Frequently
Asked Questions Publications. If U.S. issuers were to prepare IFRS
financial statements, companies may find reference to these ASRs, FRRs,
SABs, Industry Guides and other forms of U.S. GAAP guidance useful in
the application of IAS 8, Accounting Policies, Changes in Accounting
Estimates and Errors.\62\
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    \62\ Under IAS 8, in the absence of an IFRS standard or
interpretation that specifically applies to a transaction or event,
management should use its judgment in developing and applying a
relevant and reliable accounting policy and look to other
pronouncements in applying that judgment.
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Questions
    28. If the Commission were to consider rulemaking to allow U.S.
issuers to prepare IFRS financial statements, are there operational
issues relative to existing Commission requirements on which additional
guidance would be necessary and appropriate? Would it be appropriate to
have differing applicability for U.S. issuers of the form and content

provisions of Regulation S-X depending on whether they use IFRS in
preparing their financial statements? Are there operational or other
issues unique to investment companies? In preparing and auditing IFRS
financial statements, should U.S. issuers and their auditors consider
the existing guidance related to materiality and quantification of
financial misstatements?
    29. Should there be an accommodation for foreign issuers that are
not foreign private issuers regardless of whether the Commission were
to accept IFRS financial statements from U.S. issuers? Should any
accommodation depend upon whether the foreign issuer is subject to the
laws of another jurisdiction which requires the use of IFRS, or if the
issuer had previously used IFRS financial statements in its filings
with the Commission?

F. Transition and Timing

    The Commission has not set out a path of the steps to any possible
acceptance of financial statements from U.S. issuers prepared in
accordance with IFRS as published by the IASB, nor the potential timing
of any such steps. Rather, with this Concept Release, the Commission
seeks input to identify what would be necessary to reach an appropriate
level of acceptance and understanding if the Commission were to allow
U.S. issuers to prepare their financial statements in accordance with
IFRS as published by the IASB. The U.S. public capital market has
experienced neither the wide co-existence of financial statements
prepared under two sets of accounting standards, nor a change of a
group of U.S. issuers from reporting under one set of accounting
standards to another. The closest we have come is experiencing the
change that occurs when amendments to U.S. GAAP necessitate that all
U.S. issuers change their accounting for a particular area. However,
this type of change is of a lesser magnitude as it is limited to one
topical area. A U.S. issuer's change to IFRS may affect many topical
areas, depending upon the degree to which financial statements prepared
under IFRS differ from financial statements prepared under U.S. GAAP
for that U.S. issuer's facts and circumstances. A U.S. issuer's
assessment and reporting of the effectiveness of its internal controls
over financial reporting also would likely need to be adjusted to
encompass the preparation of financial information in accordance with
IFRS.
    At a more detailed level, the Commission seeks input on U.S.
issuers' potential first-time adoption of IFRS. Under such a change, a
U.S. issuer's first set of IFRS financial statements would reflect the
application of IFRS 1, First-Time Adoption of IFRS. IFRS 1 provides the
requirements for transition from the prior basis of reporting, in this
case U.S. GAAP, to IFRS including the restatement of and reconciliation
from prior years' financial statements and the related disclosures.
Questions
    30. Who do commenters think should make the decision as to whether
a U.S. issuer should switch to reporting in IFRS: a company's
management, its board of directors or its shareholders? What, if any,
disclosure would be warranted to inform investors of the reasons for
and the timing to implement such a decision? If management were to make
the decision to switch to IFRS, do investors and market participants
have any concerns with respect to management's reasons for that
decision?
    31. When would investors be ready to operate in a U.S. public
capital market environment that allows the use of either IFRS or U.S.
GAAP by U.S. issuers? When would auditors be ready? How about those
with other supporting roles in the U.S. public capital market (e.g.,
underwriters, actuaries, valuation specialists, and so forth)? Is this
conclusion affected by the amount of exposure to IFRS as it is being
applied in practice by non-U.S. issuers?
    32. Should the Commission establish the timing for when particular
U.S. issuers could have the option to switch from preparing U.S. GAAP
to IFRS financial statements? Should market forces dictate when a U.S.
issuer would make the choice to switch from U.S. GAAP to IFRS financial
statement reporting? If the former, what would be the best basis for
the Commission's determination about timing?
    33. Should the opportunity, if any, to switch to IFRS reporting be
available to U.S. issuers only for a particular period of time? If so,
why and for what period? At the end of that period of time, could
commenters foresee a scenario under which it would be appropriate for
the Commission to call for all remaining U.S. issuers to move their
financial reporting to IFRS?
    34. What difficulties, if any, do U.S. issuers anticipate in
applying IFRS 1's requirements on first-time adoption of IFRS,
including the requirements for restatement of and reconciliation from
previous years' U.S. GAAP financial statements?
    35. Would it be appropriate for U.S. issuers that move to IFRS to
be allowed to switch back to U.S. GAAP? If so, under what conditions?

V. General Request for Comments

    In addition to the areas for comment identified above, we are
interested in any other issues that commenters may wish to address and
the benefits and costs relating to investors, issuers and other market
participants of the possibility of accepting financial statements from
U.S. issuers prepared in accordance with IFRS. Please be as specific as
possible in your discussion and analysis of any additional issues.
Where possible, please provide empirical data or observations to
support or illustrate your comments.

     Dated: August 7, 2007.

    By the Commission.
Nancy M. Morris,
Secretary.
 [FR Doc. E7-15865 Filed 8-13-07; 8:45 am]

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