Friday, January 4, 2008

Part III

Securities and Exchange Commission 17 CFR Parts 210, 230, 239 and 249 Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With International Financial Reporting Standards Without Reconciliation to U.S. GAAP; Final Rule

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 986 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

SECURITIES AND EXCHANGE SUPPLEMENTARY INFORMATION: The c. Transition Period Interim Financial COMMISSION Commission is amending Form 20–F 1 Statements in Securities Act Registration under the Securities Exchange Act of Statements and Prospectuses and Initial 17 CFR Parts 210, 230, 239 and 249 1934 (the ‘‘Exchange Act’’),2 Rules 1–02, Exchange Act Registration Statements 3 C. Related Accounting and Disclosure [Release Nos. 33–8879; 34–57026; 3–10 and 4–01 of Regulation S–X, Issues International Series Release No. 1306; File Forms F–4 and S–4 under the Securities 1. Selected Financial Data No. S7–13–07] Act of 1933 (the ‘‘Securities Act’’),4 and 2. Other Form 20–F Disclosure Rule 701 under the Securities Act.5 a. Reference to U.S. GAAP RIN 3235–AJ90 Pronouncements in Form 20–F Table of Contents b. Disclosure from Oil and Gas Companies Acceptance From Foreign Private I. Executive Summary c. Market Risk Disclosure and the Safe Issuers of Financial Statements A. Proposed Amendments Harbor Provisions Prepared in Accordance With B. Overview of Comments Received 3. IFRS Treatment of Certain Areas International Financial Reporting C. Summary of Final Amendments 4. Other Considerations Relating to IFRS Standards Without Reconciliation to II. Acceptance of IFRS Financial Statements and U.S. GAAP Guidance U.S. GAAP from Foreign Private Issuers Without a 5. First-Time Adopters of IFRS U.S. GAAP Reconciliation 6. Check Boxes on the Cover Page of Form AGENCY: Securities and Exchange A. The IASB 20–F Commission. 1. Governance and Structure D. Regulation S–X 2. Funding 1. Application of the Amendments to Rules ACTION: Final rule. B. The Convergence Process 3–05, 3–09, and 3–16 SUMMARY: The Commission is adopting C. Investor Understanding and Education a. Significance Testing b. Separate Historical Financial Statements rules to accept from foreign private D. Consistent and Faithful Application of IFRS in Practice of Another Entity Provided under Rule issuers in their filings with the E. Regulatory Processes and Infrastructure 3–05 or 3–09 Commission financial statements to Promote Consistent and Faithful 2. Pro Forma Financial Statements prepared in accordance with Application of IFRS Provided under Article 11 International Financial Reporting III. Discussion of the Amendments 3. Financial Statements Provided under Standards (‘‘IFRS’’) as issued by the A. Eligibility and Implementation Rule 3–10 International Accounting Standards 1. Foreign Private Issuer Status 4. Conforming Amendment to Rule 4–01 Board (‘‘IASB’’) without reconciliation 2. IFRS as Issued by the IASB E. Application of the Amendments to other 3. Implementation Forms, Rules and Schedules to generally accepted accounting 1. Conforming Amendments to Securities principles (‘‘GAAP’’) as used in the B. Amendments to Effect Acceptance of IFRS Financial Statements without Act Forms F–4 and S–4 United States. To implement this, we Reconciliation to U.S. GAAP 2. Conforming Amendment to Rule 701 are adopting amendments to Form 20– 1. General 3. Schedule TO and Schedule 13E–3 F, conforming changes to Regulation S– 2. Interim Period Financial Statements 4. Small Business Issuers X, and conforming amendments to other a. Financial Information in Securities Act F. Application to Filings under the regulations, forms and rules under the Registration Statements and Multijurisdictional Disclosure System Securities Act and the Securities Prospectuses and Initial Exchange Act G. Periodic Reporting Deadlines for Exchange Act. Current requirements Registration Statements Used Less Than Foreign Private Issuers Nine Months After the Financial Year H. Quality Control Issues regarding the reconciliation to U.S. IV. Paperwork Reduction Act GAAP do not change for a foreign End b. Financial Statements in Securities Act A. Background private issuer that files its financial Registration Statements and B. Burden and Cost Estimates Related to statements with the Commission using a Prospectuses and Initial Exchange Act the Accommodation basis of accounting other than IFRS as Registration Statements Used More Than 1. Form 20–F issued by the IASB. Nine Months after the Financial Year 2. Form F–1 End 3. Form F–4 EFFECTIVE DATE: March 4, 2008. 4. Form S–4 Compliance Date: Amendments 5. Rule 701 regarding acceptance of financial 1 17 CFR 249.220f. V. Cost-Benefit Analysis statements prepared in accordance with 2 15 U.S.C. 78a et seq. Form 20–F is the combined A. Expected Benefits registration statement and annual report form for B. Expected Costs IFRS as issued by the IASB are foreign private issuers under the Exchange Act. It applicable to financial statements for also sets forth disclosure requirements for VI. Regulatory Flexibility Act Certification financial years ending after November registration statements filed by foreign private VII. Consideration of Impact on the Economy, 15, 2007 and interim periods within issuers under the Securities Act of 1933. 15 U.S.C. Burden on Competition and Promotion of Efficiency, Competition and Capital those years contained in filings made 77a et seq. The term ‘‘foreign private issuer’’ is defined in Formation Analysis after the effective date. Amendments to Exchange Act Rule 3b–4(c) [17 CFR 240.3b–4(c)]. A VIII. Statutory Basis and Text of Final General Instruction G of Form 20–F foreign private issuer means any foreign issuer Amendments relating to first-time adopters of IFRS other than a foreign government except an issuer are applicable to filings made after the that meets the following conditions: (1) More than I. Executive Summary 50 percent of the issuer’s outstanding voting effective date. securities are directly or indirectly held of record A. Proposed Amendments FOR FURTHER INFORMATION CONTACT: by residents of the United States; and (2) any of the The Commission has long viewed Michael D. Coco, Special Counsel, following: (i) The majority of the executive officers or directors are United States citizens or residents; reducing the disparity between the Office of International Corporate (ii) more than 50 percent of the assets of the issuer accounting and disclosure practices of Finance, Division of Corporation are located in the United States; or (iii) the business the United States and other countries as Finance, at (202) 551–3450, or Katrina of the issuer is administered principally in the an important objective both for the A. Kimpel, Professional Accounting United States. 3 17 CFR 210.1–02, 17 CFR 210.3–10 and 17 CFR protection of investors and the Fellow, Office of the Chief Accountant, 210.4–01. Regulation S–X sets forth the form and efficiency of capital markets.6 The use at (202) 551–5300, U.S. Securities and content of requirements for financial statements. Exchange Commission, 100 F Street, 4 17 CFR 239.34 and 17 CFR 239.13. 6 See ‘‘Acceptance from Foreign Private Issuers of NE., Washington, DC 20549–3628. 5 17 CFR 230.701. Financial Statements Prepared in Accordance with

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 987

of a single set of high-quality globally Most recently, on July 11, 2007, the issuers, accounting firms, legal firms accepted accounting standards by Commission issued for public comment and foreign standard setters, as well as issuers will help investors understand a proposal to amend Form 20–F and some investors, agreed that IFRS were investment opportunities outside the Regulation S–X to accept financial suitable to be used as an internationally United States more clearly and with statements of foreign private issuers that accepted set of standards. Further, they greater comparability than if those are prepared on the basis of the English expressed that allowing IFRS without a issuers disclosed their financial results language version of IFRS as published U.S. GAAP reconciliation would be under a multiplicity of national by the IASB without a reconciliation to perceived as recognition of the accounting standards, and it will enable U.S. GAAP.11 We did not propose to adequacy of the convergence process to issuers to access capital markets change existing reconciliation date and would promote and encourage worldwide at a lower cost. requirements for foreign private issuers the ongoing convergence process. Towards this end, the Commission that file their financial statements under However, the views of several other has undertaken several measures to other sets of accounting standards, or commenters, including those that are not in full compliance with foster the use of International Financial 12 representing some institutional Reporting Standards (‘‘IFRS’’) as issued IFRS as issued by the IASB. As part investors and analysts, were mixed. by the International Accounting of our efforts to foster a single set of While these commenters also expressed globally accepted accounting standards, Standards Board (‘‘IASB’’) and fully the view that IFRS have the potential to we are now adopting amendments to supports the efforts of the IASB and the fulfill the role of a set of high-quality, accept from foreign private issuers Financial Accounting Standards Board international standards at some time in financial statements prepared in (‘‘FASB’’) to converge their accounting accordance with IFRS as issued by the the future, some thought the time was standards.7 Specifically, the IASB in filings with the Commission not yet ripe for accepting those financial Commission has adopted rules to without reconciliation to U.S. GAAP. statements without a U.S. GAAP encourage the use of IFRS, which has reconciliation. Among the varying become increasingly widespread B. Overview of Comments Received reasons cited by those who believed the throughout the world. Approximately In the Proposing Release we sought time had not yet come were that the 100 countries now require or allow the comment on a number of issues, convergence process is insufficient to use of IFRS, and many other countries including the goal of achieving a single date and adopting the proposal would are replacing their national standards set of global accounting standards, the likely slow, and possibly halt, the with IFRS. Following the adoption of a role of the IASB as standard setter, the convergence process. Other commenters regulation in the European Union potential effect of the proposed rule did think that the time was ripe to (‘‘EU’’) to require companies changes on convergence, the ability of accept financial statements prepared in incorporated in one of its Member States investors and others to understand and accordance with IFRS as issued by the and whose securities are listed on an EU use IFRS financial statements without a IASB without a U.S. GAAP regulated market to use IFRS beginning U.S. GAAP reconciliation, and the reconciliation. with their 2005 financial year,8 we application of IFRS by preparers of Regarding the effect on information adopted an accommodation to allow any financial statements. We received foreign private issuer preparing its quality if the U.S. GAAP reconciliation approximately 125 comment letters in was removed, many commenters in financial statements using IFRS for the response to the Proposing Release from support of the proposal stated that the first time to provide two years rather a wide variety of respondents, including reconciliation information is highly than three years of financial statements investors, analysts, foreign and U.S. technical and not widely understood. in their filings with the Commission.9 issuers, business associations, These commenters also generally Acknowledging the significant efforts accounting firms, law firms, credit expressed confidence in the quality of expended by many foreign private rating agencies and regulators.13 The issuers in their transition to IFRS, we majority of commenters agreed that, application of IFRS in practice. On the also extended compliance dates for overall, the use of high-quality, other hand, commenters that expressed management’s report on internal control internationally accepted accounting concerns with the proposal supported over financial reporting.10 standards was an important and the usefulness of both the quantitative worthwhile goal. In general, and qualitative aspects of the U.S. International Financial Reporting Standards commenters supporting the proposal, GAAP reconciliation. These without Reconciliation to U.S. GAAP,’’ Release No. which included many foreign private commenters cited the presence of 33–8818 (July 2, 2007) [72 FR 37962 (July 11, 2007)] significant differences in important line (the ‘‘Proposing Release’’) for a summary of the 11 items, such as net income, in the U.S. Commission’s past consideration of a single set of As used in this release the phrase ‘‘IFRS as globally accepted accounting standards. issued by the IASB’’ refers to the authoritative text GAAP reconciliations of many foreign of IFRS, which, according to the IASC Foundation 7 private issuers as evidence that the See the Proposing Release for a summary of the Constitution, is published in English. See IASB, the FASB and the process of convergence. ‘‘International Financial Reporting Standards convergence process is not sufficiently 8 Consistent with Form 20–F, IFRS and general (IFRSs), including International Accounting complete. In their view, such usage outside the United States, we use the term Standards (IASs) and Interpretations as at 1 January differences would be more difficult to ‘‘financial year’’ to refer to a fiscal year. See 2007,’’ Preface to International Financial Reporting discern without the U.S. GAAP Instruction 2 to Item 3 of Form 20–F. Standards, at 23. As described below in Section 9 Release No. 33–8567 (April 12, 2005) [70 FR III.A.2., the Proposing Release used the phrase reconciliation. They also asserted that 20674 (April 20, 2005)] (the ‘‘2005 Adopting ‘‘IFRS as published by the IASB’’ to refer to the the U.S. GAAP reconciliation is helpful Release’’). Other than first-time adopters of IFRS authoritative text of IFRS. to financial statement quality, and they eligible to rely on that accommodation, foreign 12 See Items 17 and 18 of Form 20–F; see also advocated further cross-jurisdictional private issuers that register securities with the SEC, Article 4 of Regulation S–X. See the Proposing and that report on a periodic basis thereafter under Release for a history of the reconciliation structural and enforcement efforts Section 13(a) or 15(d) of the Exchange Act, are requirement. regarding IFRS, including efforts to required to present audited statements of income, 13 These comment letters are available on the strengthen governance of the IASB and changes in shareholders’ equity and cash flows for Commission’s Internet Web site, located at http:// funding of the International Accounting each of the past three financial years. www.sec.gov/comments/s7–13–07/s71307.shtml, 10 Release No. 33–8545 (March 2, 2005) [70 FR and in the Commission’s Public Reference Room in Standards Committee (‘‘IASC’’) 11528 (March 8, 2005)]. its Washington, DC headquarters. Foundation, the stand-alone

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 988 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

organization responsible for overseeing II. Acceptance of IFRS Financial consider its role with regard to the the activities of the IASB. Statements From Foreign Private IASB. Issuers Without a U.S. GAAP Many commenters that supported the 1. Governance and Structure proposal also urged the Commission to Reconciliation Commenters generally agreed that the make amendments that go further than In the Proposing Release, the IASB is a stand-alone standard setter those we proposed. These commenters Commission requested comment on a with a robust due process in its suggested that the Commission also number of broad areas with regard to standard-setting procedures.14 Although accept from foreign private issuers whether we should proceed with our most commenters did not express financial statements prepared using proposal to accept from foreign private concerns over governance, a few jurisdictional adaptations of IFRS issuers IFRS financial statements commenters identified several concerns without a U.S. GAAP reconciliation, without a reconciliation to U.S. GAAP. relating to the organization, governance jurisdictional adaptations of IFRS with Commenters had a range of views on and operation of the IASB as standard a reconciliation to IFRS as issued by the these areas and offered useful input, and setter. Specifically, these commenters IASB, or any home country GAAP with we considered many factors in our felt that improvements were needed to a reconciliation to IFRS as issued by the determination to adopt these enhance the geographic diversity of the IASB. amendments. We received mixed views board,15 and to better align its C. Summary of Final Amendments on the utility of the information membership with investor interests.16 provided by the U.S. GAAP In reflection on these comments and The Commission has considered the reconciliation of IFRS financial its own considerations, the Commission comments received and believes it is statements. Some commenters has joined other authorities responsible appropriate at this time to adopt expressed concern about the overall for capital market regulation—the revisions, substantially as proposed, to quality of IFRS, either due to European Commission, the Financial Items 17 and 18 of Form 20–F to allow institutional considerations such as the Services Agency of Japan and the foreign private issuers to include in governance or funding of the IASB or International Organization of Securities their filings with the Commission due to operational considerations such Commissions (‘‘IOSCO’’)—to work financial statements prepared in as the future of the convergence process. together to achieve a means of greater accordance with IFRS as issued by the As described below, there are initiatives accountability for the IASB and the IASB without reconciliation to U.S. that directly address these concerns. We IASC Foundation to those governmental GAAP. However, the amendments believe these initiatives will be more authorities charged with protecting adopted differ in some areas in effective in addressing concerns than investors and regulating capital consideration of the responses we any indirect effects of retaining the markets.17 This interest in increasing received to questions we asked in the reconciliation requirement to U.S. the accountability of the IASB and the Proposing Release. GAAP for financial statements that IASC Foundation is a reflection of the In summary, the Commission is comply with IFRS as issued by the widespread acceptance of IFRS. The adopting amendments that: IASB. increased use of IFRS has raised interest We believe that it is appropriate to • in establishing formal ties between Permit foreign private issuers to file adopt these amendments at this time securities regulatory stakeholders and financial statements prepared in because we expect our acceptance of the IASC Foundation. accordance with IFRS as issued by the IFRS financial statements without a U.S. The authorities described in the IASB without reconciliation to U.S. GAAP reconciliation will encourage paragraph above propose to utilize the GAAP; more foreign issuers to prepare financial occasion of the IASC Foundation’s 2008 • Require that foreign private issuers statements in accordance with IFRS. We Constitution review to put forward, in taking advantage of this option state also expect it will facilitate capital collaboration with the IASC explicitly and unreservedly in the notes formation for foreign private issuers that Foundation, certain changes to to their financial statements that such are registered with the Commission. strengthen the IASC Foundation’s financial statements are in compliance Adopting these amendments now may governance framework, while with IFRS as issued by the IASB and serve as an incentive to encourage the emphasizing the continued importance provide an unqualified auditor’s report use of IFRS as issued by the IASB, as of an independent standard-setting that opines on that compliance; well as to support their development as process. Central to this effort is the • Allow these foreign private issuers a truly globally accepted set of high- establishment of a new monitoring body within the governance structure of the also to file financial statements for quality accounting standards. IASC Foundation to reinforce the required interim periods without A. The IASB existing public interest oversight reconciliation to U.S. GAAP (and function of the IASC Foundation without providing disclosure under In the Proposing Release we noted Trustees. Likewise we note the IASC Article 10 of Regulation S–X) if the that the IASB’s sustainability, Foundation Trustees’ announcement of interim financial statements fully governance and continued operation in their proposals, following a strategy comply with IAS 34; a stand-alone manner as a standard setter are significant considerations in • Extend indefinitely the two-year our acceptance of IFRS financial 14 See, for example, letters from American accommodation contained in General statements without a U.S. GAAP Bankers Association, Georg Merkl (‘‘Merkl’’), and UBS AG (‘‘UBS’’). Instruction G of Form 20–F to all first- reconciliation, as those factors relate to time adopters of IFRS as issued by the 15 See, for example, letter from Korean the ability of the IASB to continue to Accounting Institute and Korean Accounting IASB; and develop high-quality globally accepted Standards Board (‘‘KAI–KASB’’). • Make conforming amendments to standards. We solicited comment on 16 See, for example, letter from CFA Institute Rules 1–02, 3–10 and 4–01 of ways in which the Commission could Centre for Financial Market Integrity (‘‘CFA Institute’’). Regulation S–X, Securities Act Forms further support the IFRS standard- 17 See, SEC Press Release No. 2007–226, F–4 and S–4, and Securities Act Rule setting and interpretive processes, and November 7, 2007, available at: http://www.sec.gov/ 701. also how the Commission should news/press/2007/2007-226.htm.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 989

review over recent months, to enhance IFRS platform of standards for issuers timely fashion.27 The Trustees continue the organization’s governance that had already adopted IFRS. The to make progress in obtaining stable arrangements and reinforce the commenter expressed concern that the funding that satisfies those elements. organization’s public accountability.18 2009 effective date would delay Commenters have indicated that such a As described in the Proposing improvement in the quality of financial change would be beneficial to the Release, the Commission participates in statements and disclosures, and argued stability of the organization, as it would the development of IFRS primarily that our acceptance of IFRS financial spread the costs more equitably.28 through its participation in IOSCO, in statements without reconciliation In light of the comments received and which it takes an active role in should not occur until after the IASB its own considerations, the Commission reviewing and contributing to comments lifted its ‘‘moratorium’’ on new has taken note of the IASC Foundation’s on exposure drafts of standards issued standards.23 We note, however, that the funding progress as most recently by the IASB and in contributing to its IASB continues to issue new standards announced following an October 31, working groups. The Commission staff, even if it does not require their 2007 IASC Foundation Trustee as an IOSCO representative, serves as a application before January 1, 2009, and meeting.29 The Commission is non-voting observer at International that voluntary early adoption of new encouraged by the progress in Financial Reporting Interpretations standards prior to their mandatory diversifying the sources of the IASC Committee (‘‘IFRIC’’) meetings.19 The effective date generally is allowed. Foundation’s funding among and within Commission also is an observer of the jurisdictions, as well as by the number IASB Standards Advisory Council, 2. Funding of jurisdictions (such as Australia, the whose responsibilities include Several comment letters, including Netherlands, New Zealand and the consulting with the IASB as to technical United Kingdom) that have moved away issues on the IASB’s agenda and project those from financial statement users and investors, raised the independence of from a voluntary funding scheme either priorities. Most commenters that 24 to a levy or national payment. addressed the role of the Commission IASB funding as an issue. Most of with respect to the IASB felt that the these commenters were concerned that B. The Convergence Process the current voluntary nature of Commission should continue to As discussed in the Proposing contributions might impact at least the participate in the IASB and IFRIC’s due Release, continued progress towards appearance of the IASB’s independence process.20 Many felt that continued convergence between U.S. GAAP and as well as the quality and timeliness of interaction with the IASB through IFRS as issued by the IASB is another its standards.25 A few commenters IOSCO was appropriate.21 consideration in our acceptance of IFRS pointed out that the concentration of One commenter noted that in July financial statements without a U.S. private contributions was a concern that 2006, following the reaffirmation of the GAAP reconciliation. We believe that led to the FASB’s current funding IASB and the FASB of their investors can understand and work with mechanism.26 commitment to convergence, the IASB both IFRS and U.S. GAAP and that these announced that it would not require the We support a strong, independent two systems can co-exist in the U.S. application of new standards before IASB, and as we noted in the Proposing public capital markets in the manner January 1, 2009.22 The establishment of Release, there are initiatives underway described in this rulemaking, even that lead time for the application of to address its funding structure. We though convergence between IFRS and major new standards was intended to believe promotion of these efforts is a U.S. GAAP is not complete and there allow increased opportunity for more efficient and productive course of are differences between reported results consultation, to set a clear target date for action than continuing to require a U.S. under IFRS and U.S. GAAP. As we adoption, and to provide stability in the GAAP reconciliation for financial statements prepared in accordance with 27 The Trustees determined that ‘‘characteristics 18 See, IASC Foundation Press Release, ‘‘Trustees IFRS as issued by the IASB. Currently of the new scheme for 2008 would be: Announce Strategy to Enhance Governance—Report the operations of the IASC Foundation • Broad-based: Fewer than 200 companies and on Conclusions at Trustees Meeting,’’ November 6, organizations participate in the current financing 2007, available at http://www.iasb.org/News/Press+ are financed by a combination of system. A sustainable long-term financing system Releases/Trustees+Announce+Strategy+to+ voluntary, private contributions and must expand the base of support to include major Enhance+Governance+-+Report+on+Conclusions+ levied funds. Trustees of the IASC participants in the world’s capital markets, at+Trustees++Meeting.htm (the ‘‘IASC Foundation Foundation have indicated that a long- including official institutions, in order to ensure November 6 Press Release’’). diversification of sources. 19 IFRIC interprets IFRS and reviews accounting term objective of its funding plan is to • Compelling: Any system must carry with it issues that are likely to receive divergent or move away from relying on voluntary, enough pressure to make free riding very difficult. unacceptable treatment in the absence of private contributions. In June 2006, the This could be accomplished through a variety of authoritative guidance, with a view to reaching means, including official support from the relevant consensus on the appropriate accounting treatment. IASC Foundation Trustees agreed on regulatory authorities and formal approval by the The IFRIC is currently comprised of twelve voting four elements that should govern the collecting organizations. members, and the IASC Foundation has recently establishment of a funding approach • Open-ended: The financial commitments approved an increase to fourteen voting members. that would enable the IASC Foundation All IFRIC members are appointed by the IASC should be open-ended and not contingent on any Foundation Trustees for renewable terms of three to remain a stand-alone, private sector particular action that would infringe on the years. IFRIC Interpretations are ratified by the IASB organization with the necessary independence of the IASC Foundation and the prior to becoming effective. International Accounting Standards Board. resources to conduct its work in a • 20 See, for example, letters from Deloitte Touche Country-specific: The funding burden should Tohmatsu (‘‘Deloitte’’), Institute of International be shared by the major economies of the world on Finance, London Investment Banking Association 23 See letter from CFA Institute. a proportionate basis, using Gross Domestic Product (‘‘LIBA’’), PricewaterhouseCoopers LLP (‘‘PwC’’) 24 See, for example, letters from California Public as the determining factor of measurement. Each and the Swedish Export Credit Corporation Employees’ Retirement System, CFA Institute, and country should meet its designated target in a (‘‘SEK’’). Goldman Sachs. manner consistent with the principles above.’’ 21 See, for example, letters from UBS and PwC. 25 See, for example, letters from Colgate- See http://www.iasb.org/About+Us/ 22 The press release in which the IASB made this Palmolive Company and Investors Technical About+the+Foundation/Future+Funding.htm. announcement is available at: http://www.iasb.org/ Advisory Committee (‘‘ITAC’’). 28 See the letter from KPMG IFRG Limited News/Press+Releases/IASB+takes+steps+to+assist+ 26 See, for example, letters from Council of (‘‘KPMG’’). adoption+of+IFRSs+and+reinforce+consultation+ Institutional Investors (‘‘CII’’), Lawrence A. 29 See the IASC Foundation November 6 Press No+new+IFRSs+effective+until.htm. Cunningham, and Gaylen R. Hansen. Release.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 990 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

stated in the Proposing Release, we do reconciliation as evidence that the best served with high-quality not believe that eliminating the convergence process is not sufficiently accounting standards. Our focus is on reconciliation should be contingent complete, and gave examples of several whether IFRS is a set of high-quality upon achieving a particular degree of items that are disclosed in the accounting standards established convergence. Rather, the robustness of reconciliation of which they would be through a robust process, the the convergence process over time, unaware if they had to rely on IFRS application of which yields information among other factors, is of greater financial statements alone.36 Several investors can understand and work with importance. commenters suggested that if we accept despite any differences with U.S. GAAP. The majority of commenters agreed IFRS financial statements without We anticipate that the process that attaining a single set of high-quality reconciliation, users of financial towards convergence will continue, global accounting standards was a statements would benefit if issuers because capital markets will provide an worthwhile goal, with several agreeing continued to provide qualitative ongoing incentive for a common set of that a specific level of convergence was disclosure of the nature of the high-quality globally accepted not required to eliminate the differences between IFRS and the accounting standards, regardless of the reconciliation requirement.30 In unreported U.S. GAAP results.37 Other existence of an IFRS to U.S. GAAP highlighting that acceptance of IFRS commenters representing users of reconciliation requirement. The IASB financial statements without a U.S. financial statements, though, noted that and the FASB are now developing GAAP reconciliation should not be the reconciling information is not very standards in areas where improvement contingent on achieving a particular useful to them in evaluating IFRS is warranted. These circumstances exist level of convergence, one commenter financial statements,38 and many regardless of whether the U.S. GAAP noted, ‘‘[e]ven today users cannot foreign issuers commented that they reconciliation requirement is in place. assume that the U.S. GAAP rarely receive questions from securities The IASB and the FASB have, in 2002 reconciliation always ensures direct analysts and others relating to their U.S. and 2006, issued Memoranda of comparability with U.S. GAAP financial GAAP reconciliations.39 Many Understanding that acknowledge their statements of other entities.’’ 31 commenters believed that market forces joint commitment to developing high- We received a variety of viewpoints and demand for comparable information quality global standards, the about the level of convergence between in global capital markets will continue establishment of which remains a long- U.S. GAAP and IFRS as issued by the to provide sufficient incentive for term strategic priority for both Boards. IASB and about the potential effect of further convergence of U.S. GAAP and In November 2007, the Trustees of the eliminating the reconciliation IFRS as issued by the IASB.40 IASC Foundation reiterated their requirement on the convergence IFRS as issued by the IASB and U.S. support for continuing the convergence process. Respondents in favor of the GAAP are both sets of high-quality work program described in these amendments generally felt that accounting standards that are similar to Memoranda, noting that future work is acceptance of IFRS financial one another in many respects, and the largely focused on areas in which the statements 32 without a reconciliation to convergence efforts to date have objective is to develop new world-class U.S. GAAP would be perceived as an progressed in eliminating many international standards.41 indication of the adequacy of differences. We recognize, however, that It also is important to note that some convergence and the convergence there are still a number of differences reconciling differences between IFRS between U.S. GAAP and IFRS as issued process to date.33 Many of those not in and U.S. GAAP will continue to exist by the IASB, and that there remain favor of the amendments believed that independent of the U.S. GAAP specific accounting subjects that IFRS convergence to date was insufficient to reconciliation and the convergence has yet to address fully. One goal of the merit the removal of the reconciliation process. Due to their sources, these convergence effort underway with the requirement at this time,34 or that differences between U.S. GAAP and FASB and IASB is to remove the acceptance of IFRS financial statements IFRS will remain regardless of the level remaining differences and to avoid without reconciliation would impede of future convergence that can be creating significant new differences as progress on further convergence.35 attained. These differences include the standard setters continue to address Some commenters who took the latter effects of legacy transactions, such as existing and emerging accounting view cited the presence of substantial business combinations, that occurred issues. differences in important items in the before U.S. GAAP and IFRS became These rule amendments are based on more converged, and of self-selected many factors, including the progress of 30 See, for example, letters from the American differences that arise as a function of Insurance Group, Inc. (‘‘AIG’’), Ernst & Young LLP the IASB and the FASB towards differing accounting elections (e.g. (‘‘Ernst & Young’’), PwC, American Accounting convergence, the joint commitment that hedge accounting) that foreign private Association—Financial Accounting Standards both boards have expressed to achieving issuers make under IFRS and U.S. Committee. further convergence of accounting GAAP. 31 See letter from KPMG. standards in the future, and our belief 32 The phrase ‘‘IFRS financial statements’’ as used C. Investor Understanding and in this release refers to financial statements that investors and capital markets are prepared in accordance with IFRS as issued by the Education IASB, unless otherwise specified. 36 See, for example, letters from the CFA Institute, In the Proposing Release we posed 33 See, for example, letters from Institute of Maverick, and R.G. Associates. several questions about the ability of Chartered Accountants in England and Wales 37 See, for example, letters from AIG, BP plc (‘‘ICAEW’’), Siemens Aktiengesellschaft (‘‘BP’’), and Fitch Ratings. investors to understand and use (‘‘Siemens’’), KPMG, Goldman Sachs, and 38 See, for example, letters from Corporate financial statements prepared in Federation of European Accountants (‘‘FEE’’). Reporting Users’ Forum (‘‘CRUF’’), Goldman Sachs, accordance with IFRS as issued by the 34 See, for example, letters from New York State and Merrill Lynch & Company. IASB without a U.S. GAAP Society of Certified Public Accountants 39 See, for example, letters from Novartis and reconciliation, and whether that ability (‘‘NYSSCPA’’), Maverick Capital (‘‘Maverick’’), and Nokia. ITAC. 40 See, for example, letters from British Bankers’ would depend on the size or nature of 35 See, for example, letters from CFA Institute, Association, Microsoft Corporation (‘‘Microsoft’’), ITAC, NYSSCPA, R.G. Associates, and Terry Ernst & Young, PwC, Prudential plc (‘‘Prudential’’), 41 See the IASC Foundation November 6 Press Warfield (‘‘Warfield’’). and Fitch Ratings. Release.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 991

the investor, the value of the comfort and familiarity with IFRS Commenters had a range of views investment, or other considerations. financial statements.47 with regard to our request for comments Commenters noted that investors vary The present use of IFRS financial on the application of IFRS as issued by considerably in their ability to statements described above does not the IASB. Some commenters who understand and use IFRS financial diminish the importance of recognizing favored the amendments highlighted the statements and that the same is true of that some investors are not as familiar fact that IFRS has been applied for more their ability to understand and use with using IFRS financial statements as than two years by thousands of financial statements prepared using U.S. they are with using U.S. GAAP financial companies throughout the world, GAAP.42 However, many commenters statements or the information provided including approximately seven were encouraged by the apparent lack of in the U.S. GAAP reconciliation. These thousand in the EU, and that investors difficulty with transition to IFRS in the investors may need to obtain training or are already employing information from EU from many different country-specific education in IFRS before they are IFRS financial statements to make 50 GAAPs.43 One respondent took an comfortable working without the U.S. investment decisions. In contrast, opposing view and asserted that the GAAP reconciliation. In this regard, we some commenters who were not note the amendments we are adopting present lack of investor understanding supportive of the proposal noted that will affect a small number of issuers of IFRS should be a factor in deciding the U.S. GAAP reconciliation offers relative to the overall size of the U.S. whether to eliminate the reconciliation auditors a quality control mechanism public capital markets. In addition, we requirement.44 That commenter that identifies IFRS application issues, are allowing only financial statements believed that eliminating the and referred to the staff’s ‘‘Observations prepared in accordance with IFRS as reconciliation will require more work in the Review of IFRS Financial issued by the IASB to be filed without (and possibly self-education) by Statements’’ as evidence that supports a U.S. GAAP reconciliation, so concern their concerns about the consistent investors to understand IFRS financial over having to learn multiple application of IFRS by reporting statements, which may result in jurisdictional variations of IFRS is not a issuers.51 One such commenter also felt investment decisions becoming more factor. More broadly, as companies that it would be difficult to audit for costly.45 Another commenter indicated increasingly move to IFRS, investors compliance with IFRS as issued by the its belief that currently there is a lack of that have gained familiarity with IFRS IASB because of the current state of IFRS-based educational programs.46 should see an increasing return on their IFRS-based training for auditors.52 As is also the case with U.S. GAAP, investment in education. A number of Auditors, however, generally we understand investors and other users accounting firms and other commented that they do have sufficient of financial statements do not all organizations currently provide experience and familiarity with IFRS to possess the same level of understanding information about IFRS as issued by the be able to opine on IFRS financial of IFRS or the resources that would IASB on their web sites free of charge. statements, and that the elimination of facilitate gaining such an As more countries adopt IFRS as the the U.S. GAAP reconciliation would understanding. We anticipate, however, basis of accounting for their listed provide an incentive to develop IFRS that by encouraging the use of IFRS as companies, we anticipate that investors capabilities faster than if the U.S. GAAP issued by the IASB, these amendments who are not yet familiar with IFRS will reconciliation were retained.53 Some will help investors to understand have the opportunity to gain such respondents believed that latitude in the international investment opportunities familiarity. application of IFRS results in more clearly and with greater 54 D. Consistent and Faithful Application inconsistent reporting, while several comparability in the long-term than if of IFRS in Practice supporters of the proposal believed they had to continue to rely on a application of IFRS did not vary multiplicity of national accounting The degree of consistency and between companies that are registered standards. The disclosures provided faithfulness with which IFRS is applied under the Exchange Act and those that pursuant to the U.S. GAAP is another consideration in our are not.55 One firm, while reconciliation are not an exact substitute acceptance of IFRS financial statements acknowledging diversity in the for an issuer preparing its financial without reconciliation to U.S. GAAP. application of IFRS, felt that such statements in U.S. GAAP. While some The Commission staff has gained an diversity should diminish with time as commenters have indicated that the U.S. increasing understanding of the application and interpretive issues are GAAP reconciliation is useful, it is not application of IFRS standards through identified and addressed.56 the equivalent of U.S. GAAP financial its regular review of the periodic reports As described in the Proposing statements. Investors currently must of publicly registered companies, a Release, the Commission has a long make use of IFRS financial statements number of which prepare their financial and financial statements under various statements in accordance with IFRS.48 or traded on an automated quotation facility of a national GAAPs, even when The Commission staff will continue to national securities association on a regular and systematic basis for the protection of investors. accompanied by a U.S. GAAP review and comment on IFRS financial Such review shall include a review of the issuer’s reconciliation. We are encouraged by statements and disclosure as part of its financial statements. comments from other institutional normal review function.49 50 See, for example, letters from Deutsche Bank, investors indicating their degree of Ernst & Young, HSBC Holdings plc (‘‘HSBC’’), SEK, 47 See, for example, letter from CRUF. and Siemens. 51 48 The Staff of the Commission’s Division of See, for example, letters from ITAC, R.G. 42 See, for example, letters from BDO Global Corporation Finance has published its observations Associates, CFA Institute. Coordination B.V. (‘‘BDO’’), ICAEW, Merkl, and on the review of IFRS financial statements included 52 See letter from CFA Institute. Shell International B.V. (‘‘Shell’’). in the annual reports of more than 100 foreign 53 See, for example, letter from Grant Thornton 43 See, for example, letters from British Bankers’ private issuers. Those observations are available at LLP (‘‘Grant Thornton’’). Association, LIBA, International Swaps and http://www.sec.gov/divisions/corpfin/ 54 See, for example, letters from Robert Mladek, Derivatives Association (‘‘ISDA’’), and Financial ifrs_staffobservations.htm. and Fund for Stockowners Rights. Reporting Council. 49 Pursuant to Section 408 of the Sarbanes-Oxley 55 See, for example, letters from HSBC, Cleary 44 See letter from ITAC. Act of 2002, the Commission is required to review Gottlieb Steen & Hamilton (‘‘Cleary’’), Syngenta AG 45 Id. disclosures made by reporting issuers with (‘‘Syngenta’’). 46 See letter from CFA Institute. securities listed on a national securities exchange 56 See letter from Deloitte.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 992 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

history of supporting the work of the and avoid inconsistent and inaccurate their consolidated financial IASB and its predecessor the applications of IFRS globally.59 Some of statements 64 or reporting foreign issuers International Accounting Standards these commenters noted the that did not fall within the definition of Committee in developing high-quality Commission’s involvement and foreign private issuer under Rule 3b–4 global accounting standards. In addition leadership role in IOSCO and under the Exchange Act.65 We note that to understanding the standards, the encouraged the Commission to continue the scope of our proposal was limited to Commission staff has developed a to work through IOSCO to coordinate foreign private issuers, for which the growing familiarity with their with other regulators in bringing matters Commission has an established application. The Commission staff has to the IASB and to IFRIC.60 Several of disclosure regime distinct from that reviewed and commented upon the these commenters also supported the applicable to companies that are not filings of foreign private issuers that Commission’s continued involvement in foreign private issuers. The question of prepare their financial statements using information sharing arrangements with which disclosure regime an entity IFRS. The staff has indicated that issues other regulators and the interaction with should report under was beyond the that it has observed in its ordinary CESR.61 Some commenters who did not scope of the proposal, and thus we are review of IFRS financial statements do support the proposal believed that the not extending the application of the not appear to be more pervasive or lack of a global enforcement mechanism adopted amendments to entities that do significant than those it has identified in means that the necessary controls to not satisfy the definition of foreign U.S. GAAP financial statements. We successfully implement global standards private issuer under Rule 3b–4, or anticipate that the increasing use of are currently lacking.62 The foreign private issuers that do not file IFRS as issued by the IASB will lead to Commission believes the current system their annual report on Form 20–F. We even greater consistency of application, can be effective, and will continue its are examining the possibility of the as well as to increased training work in this area to support multilateral broader use of IFRS by entities that are opportunities for preparers, auditors, and bilateral efforts, including its not foreign private issuers in the and investors. participation in IOSCO and its Concept Release on Allowing U.S. Issuers to Prepare Financial Statements E. Regulatory Processes and collaboration with CESR and other in Accordance with International Infrastructure to Promote Consistent regulators as appropriate. Financial Reporting Standards.66 and Faithful Application of IFRS III. Discussion of the Amendments We requested comment as to whether In the Proposing Release, we We are adopting the amendments we should place limitations on the discussed the cooperative infrastructure substantially as proposed. We have, eligibility of a foreign private issuer to that regulators have put in place to however, in response to comments, file financial statements prepared in identify and avoid inconsistent or made some modification in certain accordance with IFRS as issued by the inaccurate applications of IFRS globally areas, as discussed below. IASB without a U.S. GAAP so as to foster the consistent and faithful reconciliation. We also asked whether application of IFRS around the world. A. Eligibility and Implementation our acceptance of IFRS financial This infrastructure includes IOSCO, in 1. Foreign Private Issuer Status statements without a U.S. GAAP which the Commission participates, reconciliation should be phased in which has established a database among The amendments the Commission is based on, for example, issuer size or member regulators for sharing adopting will apply only to foreign other criteria. Most commenters regulators’ decisions on the application private issuers that file on Form 20–F, opposed any limitations on the of IFRS.57 The Commission and the regardless of whether the issuer application of any final rules, and did Committee of European Securities complies with IFRS as issued by the not see any benefit to a transition Regulators (‘‘CESR’’), which the IASB voluntarily or in accordance with approach that phases in registrants.67 European Commission has charged with the requirements of the issuer’s home One commenter pointed out that evaluating the implementation of IFRS country regulator or exchange on which appropriate application of IFRS would in the EU, have established a work plan its securities are listed. not be dependent on an issuer’s size,68 in which they agree to consult with one A large number of comment letters while others stated that smaller another with the goal of avoiding addressed eligibility requirements and companies face a greater relative burden conflicting conclusions regarding the commenters almost unanimously in preparing a U.S. GAAP application and enforcement of IFRS.58 supported the applicability of the reconciliation.69 One commenter also In the Proposing Release, we asked for proposed amendments to all foreign opposed a phase-in based on issuers’ 63 feedback regarding our work with other private issuers. Some commenters experience with IFRS, as it would be regulators to provide for the indicated that other types of issuers also difficult to establish meaningful criteria enforcement of IFRS as issued by the should be permitted to file IFRS to evaluate that experience.70 We are not IASB. Many commenters did not financial statements without a U.S. adopting any issuer limitations or express concern with the current GAAP reconciliation, for example phase-in for the application of the processes and infrastructure that have reporting U.S. subsidiaries of foreign been established between regulators to private issuers that use IFRS to prepare 64 See, for example, letter from Financial Security promote consistent and faithful Assurance Holdings Ltd. application of IFRS. Most commenters 59 See, for example, letters from HSBC, LIBA, and 65 See memorandum from the Executive Staff on SIFMA. a meeting with representatives of INVESCO plc. responding on this topic believed that 60 See, for example, letters from Business Europe, 66 Release No. 33-8831 (August 7, 2007) [72 FR the infrastructure is in place to identify BP, HSBC, and UBS. 45600 (August 14, 2007)], available on the 61 See, for example, letters from International Commission Web site at http://www.sec.gov/rules/ 57 See IOSCO’s press release regarding its IFRS Finance, LIBA, PwC, and Securities Industry and concept/2007/33-8831.pdf. database at http://www.iosco.org/news/pdf/ Financial Markets Association (‘‘SIFMA’’). 67 See, for example, letters from Cleary, Deloitte, IOSCONEWS92.pdf. 62 See, for example, letters from CFA Institute, Fitch Ratings, PwC, and Sullivan & Cromwell. 58 The press release announcing the SEC–CESR and Brent Kobayashi. 68 See letter from Fitch Ratings. work plan, and the text of the work plan, are 63 See, for example, letters from Grant Thornton, 69 See, for example, letters from Cleary, Deloitte, available at http://www.sec.gov/news/press/2006/ Microsoft, and Sullivan & Cromwell LLP (‘‘Sullivan Grant Thornton, and Sullivan & Cromwell. 2006-130.htm. & Cromwell’’). 70 See letter from Grant Thornton.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 993

adopted amendments, as we believe that able to provide the dual statements Some of these and other commenters to do so would not effectively encourage without undue difficulty. thought it would be appropriate also to the use by foreign private issuers of A foreign private issuer will continue permit a reconciliation from a IFRS as issued by the IASB and may to be required to provide a jurisdictional variation of IFRS to IFRS create inappropriate disparity in our reconciliation to U.S. GAAP under these as issued by the IASB. Further, some treatment of foreign private issuers. amendments if its financial statements commenters suggested the Commission include deviations from IFRS as issued also permit a reconciliation from any 2. IFRS as Issued by the IASB by the IASB, if it does not state home country GAAP to IFRS as issued We are adopting as proposed the unreservedly and explicitly that its by the IASB. Commenters did not amendments to Items 17 and 18 of Form financial statements are in compliance suggest that accepting financial 20–F. Under the amendments, a foreign with IFRS as issued by the IASB, if the statements that comply with IFRS as private issuer is eligible to omit the auditor does not opine on compliance issued by the IASB from foreign private reconciliation to U.S. GAAP if it states, with IFRS as issued by the IASB, or if issuers was dependent on implementing unreservedly and explicitly in an the auditor’s report contains any any of these additional suggested appropriate note to the financial qualification relating to compliance approaches. We are not extending the statements, that its financial statements with IFRS as issued by the IASB. A proposal to these variations because we are in compliance with IFRS as issued foreign private issuer using a believe that allowing any of these by the IASB.71 Also, the independent jurisdictional or other variation of IFRS approaches would not as effectively auditor must opine in its report on will be able to rely on the amendments foster the development and use of a whether those financial statements if that issuer also is able to state single set of high-quality global comply with IFRS as issued by the compliance with both IFRS as issued by accounting standards. IASB. As described in the Proposing the IASB and a jurisdictional variation In the Proposing Release, the phrase Release, the auditor’s report can include of IFRS (and does so state), and its we used to describe the authoritative this language in addition to any opinion auditor opines that the financial text of IFRS was ‘‘the approved English relating to compliance with standards statements comply with both IFRS as language version of IFRS as published required by the home country. issued by the IASB and the by the IASB.’’ The final amendments The majority of commenters believed jurisdictional variation, as long as the refer to the same authoritative text of that auditors should be able to provide statement relating to the former is IFRS as it is provided for by the IASC audit opinions that financial statements unreserved and explicit. Foundation Constitution, although we were fully compliant with IFRS as Many commenters supported the are using the phrase ‘‘IFRS as issued by issued by the IASB.72 Several objective of encouraging the the IASB’’ to describe it. As one commenters indicated that they were development of a single set of high- commenter pointed out, according to not aware of any reason why the auditor quality international accounting the IASC Foundation Constitution, ‘‘the and the issuer would not be able to standards, but suggested that we also authoritative text of any Exposure Draft provide the dual statement of accept without a U.S. GAAP or International Accounting Standard or compliance with both IFRS as issued by reconciliation financial statements International Financial Reporting the IASB and a jurisdictional variation prepared in accordance with a Standards or Draft or final Interpretation of IFRS in cases where accounting jurisdictional variation of IFRS, and in shall be that published by the IASB in policy choices ensure compliance with particular IFRS as adopted by the EU.75 the English language’’ and, for this both IFRS as issued by the IASB and the reason, there is no need to make jurisdictional variation of IFRS.73 One 75 Many commenters noted that issuers listed in reference to language when describing commenter, however, believed that the the EU are required to prepare their statutory the authoritative text.76 Further, because additional opinion in the auditor’s financial statements using IFRS as adopted by the EU. Commenters noted that presently the only the standards are issued by the Board report relating to compliance with IFRS difference between IFRS as issued by the IASB and and published by the IASC Foundation, as issued by the IASB would be both IFRS as adopted by the EU relates to IAS 39, it is to standards ‘‘issued’’ that we refer. duplicative and unnecessary, as the ‘‘Financial Instruments: Recognition and auditor would already be expected to Measurement,’’ whereby IFRS as adopted by the EU 3. Implementation offers greater flexibility with respect to hedge issue a qualified opinion if it found accounting for certain financial instruments than In the Proposing Release we sought deviations from IFRS as issued by the does IFRS as issued by the IASB. We understand input on what commenters thought IASB given an issuer’s unreserved that few companies make use of this ability to might be an appropriate compliance statement of compliance.74 We believe ‘‘carve-out’’ these provisions of IAS 39 from IFRS date if the Commission were to adopt as issued by the IASB. As the European that in cases where there is no Commission noted in its comment letter, ‘‘[f]or the the proposed amendments, as well as on discrepancy between IFRS as issued by vast majority of EU issuers listed in the U.S., this issues relating to the timing of the IASB and a jurisdictional variation, carve-out has no practical significance and as such implementation for any adopted the issuer and the auditor should be their financial statements prepared under IFRS as amendments. adopted by the EU would be identical to those Of the commenters who provided prepared under IFRS as published by the IASB.’’ As 71 The amendments would not encompass use of a practical matter, this difference applies only to feedback relating to implementation and the IASB’s proposed IFRS for Small and Medium- foreign financial institutions, several of which have timing, a majority of those who sized Entities (‘‘IFRS for SMEs’’), because those commented that they do not avail themselves of the supported acceptance of IFRS financial proposed standards relate only to smaller issuers approach afforded by the EU-endorsed standard statements without reconciliation that do not have debt or equity securities listed on (see letters from Deutsche Bank, HSBC, Lloyds), and a public market. More information on IFRS for that therefore they would be able to assert SMEs is available on the IASB Web site at http:// compliance with both IFRS as endorsed by the EU standard, were to create differences between EU www.iasb.org/Current+Projects/IASB+Projects/ and IFRS as issued by the IASB. Other commenters IFRS and IFRS as issued by the IASB such that Small+and+Medium-sized+Entities/ either did not address the issue or did not express compliance with EU IFRS necessarily precluded Small+and+Medium-sized+Entities.htm. concern about their ability to assert dual compliance with IFRS as issued by the IASB. 72 See, for example, letters from Galileo Global compliance at the present time. See Section III.A.3. below for a discussion of Advisors LLC, Grant Thornton, Microsoft, PwC, and Issuers expressed concern, however, that they transition provisions applicable to European UBS. may not be able to express dual compliance in the companies that make use of the EU’s carve-out from 73 See, for example, letters from PwC and UBS. future if the timing of the EU’s endorsement of new IAS 39. 74 See letter from CESR. standards, or an EU decision not to endorse a 76 See letter from KPMG.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 994 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

indicated that the amendments should The Commission has concluded that same manner that foreign private issuers be effective for filings covering the 2008 the amendments to accept financial presently provide reconciliations of financial year, with some of those statements from foreign private issuers their financial statements to U.S. GAAP commenters indicating that such timing prepared in accordance with IFRS as under Item 17 and Item 18 of Form 20– would allow investors and other issued by the IASB will be applicable to F. All financial statements of foreign affected parties more time to familiarize annual financial statements for financial private issuers that used the IAS 39 themselves with IFRS.77 A significant years ending after November 15, 2007, carve out for periods prior to the portion of commenters that supported and to interim periods within those financial year that ends after November the proposed rules felt that the years, that are contained in filings made 15, 2007 must continue to be reconciled amendments should be effective at the after the effective date of these rule to U.S. GAAP. At the end of this earliest date possible.78 amendments. transition period, these registrants will In deciding to make the rule have the same financial statement Commenters did not indicate that the amendments available for financial reporting choices as that of any foreign number of issuers that prepare their statements that cover the 2007 financial private issuer (e.g., if they continue to financial statements in accordance with year for many foreign private issuers, use the IAS 39 carve out as described in IFRS should be a factor in determining the Commission considered the fact that Section III.A.2., above, they will remain the implementation of any adopted it was not awaiting any particular event subject to the U.S. GAAP reconciliation rules, and some stated that acceptance to support its policy decision and, requirements of Items 17 and 18). The of IFRS financial statements without a further, by making the rule amendments Commission has adopted an amendment U.S. GAAP reconciliation would available for the 2007 financial year for to Items 17 and 18 of Form 20–F to encourage other issuers to adopt IFRS, many foreign private issuers, the accommodate this transition provision. which may assist in promoting the Commission’s objectives in The Commission observes that the achievement of a single set of high- implementing this policy decision IAS 39 carve out relates to hedge quality internationally accepted would begin to be realized that much accounting for certain financial accounting standards.79 Most sooner. instruments. The Commission and its commenters responding to our question The Commission notes that there may staff have had several opportunities to as to whether the timing of any rule be foreign private issuers that are consult and discuss with different should be based on further experience existing Commission registrants who— constituencies regarding the accounting and knowledge of IFRS stated that these pursuant to policy decisions the for derivative and hedging transactions. should not be factors in determining the European Union made in its role as an The Commission will make its staff implementation timing,80 with some ‘‘early adopter’’ of IFRS—have already available to the staffs of the IASB, FASB noting that there was already sufficient been preparing their financial and European Commission to identify experience in the application of IFRS to statements by applying the EU’s ‘‘carve any ways to address this area. warrant immediate effectiveness of the out’’ from IAS 39 with respect to hedge amendments.81 Some commenters, accounting for certain financial B. Amendments To Effect Acceptance of including some from the investor instruments (the ‘‘IAS 39 carve out’’), as IFRS Financial Statements Without community, however, felt that described above in Section III.A.2.83 Reconciliation to U.S. GAAP elimination of the reconciliation may be Given the timing of this decision, 1. General premature, or thought deferral of registrants who may have taken The basic financial statement adopting the amendments would be advantage of the IAS 39 carve out would requirements for foreign private issuers appropriate until more experience was have done so without the knowledge are described in Items 17 and 18 of gained with IFRS even if they supported that its use would be at odds with the Form 20–F. Under Item 17(c), a foreign the idea of accepting IFRS without IFRS reporting alternative that the private issuer must either prepare its reconciliation as a move towards the use Commission is adopting today. financial statements and schedules in of a single set of high-quality Accordingly, the Commission is making accordance with U.S. GAAP or, if the international accounting standards.82 available temporary transition relief to financial statements and schedules are Those that thought taking action at this these existing registrants. Specifically, prepared using another basis of time was premature cited the for only their first two financial years accounting, include a reconciliation to ‘‘readiness’’ concerns described in Part that end after November 15, 2007, the U.S. GAAP as described under Item II above; namely concerns regarding Commission will accept from existing 17(c)(2). This reconciliation includes a IASC Foundation’s governance and SEC registrants from the EU that have narrative discussion of reconciling funding, the state of and prospects for already utilized the IAS 39 carve out in differences,84 a reconciliation of net convergence of IFRS and U.S. GAAP, financial statements previously filed income for each year and any interim investor education, regulators’ with the Commission financial periods presented,85 a reconciliation of mechanisms for interaction, and so statements that do not include a major balance sheet captions for each forth. The Commission’s consideration reconciliation to U.S. GAAP, if those year and any interim periods,86 and a of those comments is noted in Part II financial statements otherwise comply reconciliation of cash flows for each with respect to its decision to adopt rule with IFRS as issued by the IASB and year and any interim periods.87 The amendments at this time. contain a reconciliation to IFRS as Commission is adopting as proposed issued by the IASB. This reconciliation amendments to Item 17(c) so that a 77 See, for example, letter from Syngenta. to IFRS as issued by the IASB is to reconciliation will no longer be required 78 See, for example, letters from Citigroup, contain information relating to financial from foreign private issuers that prepare Financial Reporting Counsel, and PwC. statement line items and footnote 79 See, for example, letters from BP, British disclosure based on full compliance Bankers’ Association, and UBS. 84 See Item 17(c)(1) of Form 20–F. 80 See, for example, letters from Deutsche Bank, with IFRS as issued by the IASB. It is 85 See Item 17(c)(2)(i) of Form 20–F. Fitch Ratings, and ICAEW. to be prepared and disclosed in the 86 See Item 17(c)(2)(ii) of Form 20–F. 81 See, for example, letter from Deloitte. 87 See Item 17(c)(2)(iii) of Form 20–F, containing 82 See, for example, letters from CFA Institute, 83 See http://eur-lex.europa.eu/LexUriServ/site/ the exception relating to IAS 7 ‘‘Cash Flow William Craven, Gaylen R. Hansen, and ITAC. en/oj/2004/l_363/l_36320041209en00010065.pdf. Statements.’’

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 995

financial statements that comply with IASB,90 we believe that the preparation b. Financial Statements in Securities IFRS as issued by the IASB. of interim period financial statements in Act Registration Statements and Several subparagraphs of Item 17(c)(2) accordance with the provisions of IFRS Prospectuses and Initial Exchange Act relate to reconciling disclosures that as issued by the IASB that pertain to Registration Statements Used More rely on certain International Accounting interim financial reporting will not Than Nine Months After the Financial Standards (‘‘IAS’’) and were available to create difficulties for issuers, and that Year End foreign private issuers that use home issuers that have changed to IFRS as In registration statements and country GAAP or IFRS. We proposed to issued by the IASB for their annual delete Items 17(c)(2)(iv)(B) and (C), prospectuses under the Securities Act financial statements and prepare interim and initial registration statements under which relate to reconciling disclosures financial statements will do so in from issuers that rely on IAS 21, ‘‘The the Exchange Act, if the document is accordance with IFRS as issued by the Effects of Changes in Foreign Exchange dated more than nine months after the IASB. Rates.’’ Because some commenters end of the last audited financial year, foreign private issuers must provide recommended that the IAS 21 a. Financial Information in Securities consolidated interim period financial accommodation could continue to be Act Registration Statements and useful to foreign private issuers that statements covering at least the first six Prospectuses and Initial Exchange Act months of the financial year and the may operate in a hyperinflationary Registration Statements Used Less Than economy, we are retaining that comparative period for the prior Nine Months After the Financial Year financial year.92 These unaudited provision.88 We are eliminating Item End 17(c)(2)(viii), which relates to financial statements must be prepared reconciling disclosures to be provided In registration statements and using the same basis of accounting as the audited financial statements by issuers that use IAS 22, ‘‘Business prospectuses under the Securities Act contained or incorporated by reference Combinations,’’ as IAS 22 has been and initial registration statements under in the document and include or superseded by IFRS 3, ‘‘Business the Exchange Act, if the document is Combinations.’’ Because IAS 22 may no incorporate by reference a reconciliation dated less than nine months after the to U.S. GAAP.93 longer be used by an issuer preparing end of the last audited financial year, We proposed a new instruction to IFRS financial statements, we also are foreign private issuers are not required deleting Instruction 6 to Item 17 as Item 8.A.5 to clarify that an issuer to include interim period financial would not need to provide that proposed. information. If a foreign private issuer A reconciliation to U.S. GAAP under reconciliation if it prepares its interim has published interim period financial financial statements using IFRS as Item 18 of Form 20–F requires that an information, however, Item 8.A.5 of issuer provide all information required issued by the IASB. Under the proposed Form 20–F requires these registration by U.S. GAAP and Regulation S–X, in amendment, an issuer relying on the statements and prospectuses to include new instruction to provide IFRS addition to the reconciling information 91 for line items specified in Item 17(c). that information. The intent of this financial statements for an interim Because our acceptance of financial requirement is to make information period without reconciliation would statements prepared using IFRS as available in U.S. offering documents as continue to be required to comply with issued by the IASB without a U.S. current as information that is available Article 10 of Regulation S–X with regard GAAP reconciliation is intended to elsewhere. to the minimum content of the financial apply equally to an Item 18 The instructions to Item 8.A.5 require statements for interim periods, when reconciliation, we are revising Item that an issuer which provides published that information is required under Item 18(b) as proposed to indicate that U.S. interim financial information describe 8.A.5 of Form 20–F. GAAP and Regulation S–X disclosures any material variations between the In the Proposing Release we will not be required if the issuer files accounting principles used and U.S. enumerated several differences between financial statements using IFRS as GAAP and quantify any material the requirements of Article 10 of issued by the IASB. variations that have not been quantified Regulation S–X and IAS 34, ‘‘Interim in the annual financial statements. We Financial Reporting,’’ which prescribes 2. Interim Period Financial Statements the minimum content of an interim are adopting as proposed an instruction We are adopting as proposed that a financial report and the principles for to Item 8.A.5 of Form 20–F to clarify foreign private issuer that is eligible to recognition and measurement in interim omit a U.S. GAAP reconciliation from that interim period financial period financial statements. These its audited annual financial statements information that is made public by a differences relate primarily to the detail also will be able to omit a reconciliation foreign private issuer need not be required for major headings and from its unaudited interim period reconciled to U.S. GAAP if the basis of subtotals used in the financial financial statements which, to the extent accounting used in the audited annual statements, statements regarding the such financial statements are required,89 financial statements and the published sufficiency of the interim disclosures, also will have to be prepared in interim information is IFRS as issued by minimum contingent liability accordance with IFRS as issued by the the IASB. disclosures, and footnote disclosure of IASB. Based on the responses that we summarized data for equity investees. received to questions posed in the Many commenters did not view Proposing Release relating to the ability 90 See, for example, letters from BP, Deutsche differences between IAS 34 and Article of issuers to prepare interim period Bank, Shell, and UBS. 10 as significant 94 and felt that IAS 34 financial statements that are in 91 Under Item 512(a)(4) of Regulation S–K [17 accordance with IFRS as issued by the CFR 22.512(a)(4)], a foreign private issuer that 92 See Item 8.A.5 of Form 20–F and Item 512(a)(4) registers securities on a shelf registration statement of Regulation S–K. 88 See, for example, letters from Deloitte and also is required to undertake to include any 93 See Items 17(c) and 18 of Form 20–F. Shell. financial statements required by Item 8.A of Form 94 See, for example, letters from BP, British 89 See Item 8.A.5 of Form 20–F for requirements 20–F at the start of any delayed offering or Bankers Association, Ernst & Young, and Royal relating to interim period financial statements. throughout a continuous offering. Bank of Scotland Group plc.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 996 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

information was sufficient without IASB.97 One commenter noted that basis on which the financial statements needing to require compliance with efforts to keep the previously filed are prepared. We believe issuers should Article 10 when preparing IFRS selected U.S. GAAP financial not have undue difficulty in financial statements for interim information current, for example due to determining the objective of those periods.95 Accordingly, under the rules retrospective effects of changes of disclosure requirements. We therefore we are adopting a foreign private issuer accounting methods or discontinued are adopting instructions to Item 5 and that relies on the new instruction to operations, would not be cost- Item 11 to indicate that issuers provide IFRS financial statements for an effective.98 preparing their financial statements in interim period without reconciliation to We are amending Item 3.A. of Form accordance with IFRS as issued by the U.S. GAAP will not be required to 20–F as proposed to clarify that selected IASB should provide, in responding to comply with Article 10 of Regulation financial data based on the U.S. GAAP paragraphs of those items that refer to S–X for interim period financial reconciliation is required only if the specific pronouncements of U.S. GAAP, statements provided pursuant to Item issuer prepares its primary financial disclosure that satisfies the objective of 8.A.5 of Form 20–F, if it complies with statements using a basis of accounting the item’s disclosure requirements. If and explicitly states compliance with other than IFRS as issued by the IASB. information called for by the non- IAS 34. 2. Other Form 20–F Disclosure financial statement requirements of Form 20–F duplicates information that c. Transition Period Interim Financial a. Reference to U.S. GAAP is contained in the IFRS financial Statements in Securities Act Pronouncements in Form 20–F statements, an issuer need not repeat Registration Statements and such information but may cross- Prospectuses and Initial Exchange Act Several non-financial statement reference to the appropriate footnote in Registration Statements disclosure items in Form 20–F refer to specific U.S. GAAP pronouncements.99 the audited financial statements. We Eligible foreign private issuers will be We proposed to add an Instruction to will continue to evaluate whether able to omit the U.S. GAAP Item 5 and Item 11 stating that an IFRS specific changes to the non-financial reconciliation from their unaudited filer that will not be required to provide statement disclosure items of Form financial statements relating to interim a U.S. GAAP reconciliation will 20–F would be beneficial. periods only if the audited annual continue to respond to those items of financial statements included or b. Disclosure From Oil and Gas Form 20–F that make reference to U.S. Companies incorporated by reference for all GAAP pronouncements. Under the required periods are prepared in proposed instruction, in providing that We proposed to amend Item 18 of accordance with IFRS as issued by the disclosure the issuer would apply the Form 20–F to expressly require that any IASB, as described in Section III.A.2. appropriate corresponding IFRS issuer that provides disclosure under above. If the audited annual financial pronouncements that embody the FAS 69, ‘‘Disclosures about Oil and Gas statements are not so prepared, then in principles contained in the referenced Producing Activities,’’ continue to order to be able to omit the U.S. GAAP U.S. GAAP pronouncement. provide that disclosure even if the reconciliation from required interim A number of commenters suggested issuer is preparing financial statements period financial statements, an issuer that individual issuers may reach in accordance with IFRS as issued by would amend prior filings in order to different determinations as to which the IASB without a reconciliation to 101 appropriately revise the audited IFRS pronouncement to look to in U.S. GAAP. We are adopting this financial statements.96 response to Form 20–F item amendment as proposed to continue to requirements that refer to U.S. GAAP require FAS 69 disclosure. Most C. Related Accounting and Disclosure commenters responding to our question Issues provisions. To facilitate the use of Form 20–F by IFRS users, those commenters on this matter supported our proposal to 1. Selected Financial Data recommended that we revise the non- continue to require FAS 69 disclosure, Under Item 3.A. of Form 20–F, issuers financial statement disclosure which they felt was useful to investors and analysts.102 Some issuers indicated, must provide five years of selected requirements to itemize the specific however, that FAS 69 disclosure should financial data. We proposed to revise IFRS pronouncements that correspond cease to be required once the IASB the instruction to Item 3.A. to clarify to the referenced U.S. GAAP issues disclosure requirements for oil that selected financial data based on the pronouncements.100 and gas related activities.103 We will U.S. GAAP reconciliation is required In evaluating these comments, we continue to consider appropriate only if the issuer prepares its primary concluded that in responding to the revisions to our requirements in this financial statements using a basis of non-financial statement disclosure area in light of future developments. accounting other than IFRS as issued by requirements of Form 20–F, issuers the IASB. should continue to meet the objective of c. Market Risk Disclosure and the Safe Almost all commenters that addressed the stated disclosure regardless of the Harbor Provisions the issue believed that U.S. GAAP We recognize that IFRS filers have 97 selected financial data should not be See, for example, letters from BP, expressed particular concerns related to required if an issuer prepares its DaimlerChrysler, Deloitte, and KAI-KASB. 98 the applicability of the safe harbor for primary financial statements in See letter from PwC. 99 See, for example, Item 5 (‘‘Operating and forward-looking statements provided accordance with IFRS as issued by the Financial Review and Prospects’’), which contains under Section 27A of the Securities references to FASB Interpretations No. 45 Act 104 and Section 21E of the Exchange 95 See, for example, letters from AXA, Deloitte, ‘‘Guarantor’s Accounting and Disclosure KAI–KASB, and Group of 100. Requirements for Guarantees, Including Indirect 101 96 For example, an issuer that previously had filed Guarantees of Indebtedness of Others’’ and No. 46 Disclosure provided pursuant to FAS 69 is an annual report on Form 20–F containing financial ‘‘Consolidation of Variable Interest Entities,’’ and supplementary information that is provided with statements which were not prepared in accordance Item 11, which contains reference to multiple FASs. the financial statements. with IFRS as issued by the IASB, as described in 100 See, for example, letters from Accounting 102 See, for example, letters from Ernst &Young Section III.A.2. above, could file an amendment to Standards Committee of Germany and Germany and Deloitte. that annual report which included financial Accounting Standards Board, and Center for Audit 103 See, for example, letters from BP and Shell. statements that were so prepared. Quality (‘‘CAQ’’). 104 15 U.S.C. 77z–2.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 997

Act.105 Those safe harbor provisions control and similar transactions.109 revenue recognition, consolidation and expressly exclude any information While IFRS does include a standard on joint venture accounting under U.S. ‘‘included in a financial statement financial statement presentation, it lacks GAAP.112 prepared in accordance with generally specific conventions as to the form and Several commenters indicated that, accepted accounting principles.’’ 106 content of the income statement.110 We where gaps might exist in IFRS, Because forward-looking market risk did not receive extensive comments in preparers may look to accounting disclosure required by IFRS 7, these areas. Other examples given in the guidance issued by other standards, ‘‘Financial Instruments: Disclosure,’’ Proposing Release include accounting such as U.S. GAAP, pursuant to IAS 8, will appear in the footnotes to audited for insurance contracts and extractive ‘‘Accounting Policies, Changes in IFRS financial statements, it is not activities. Accounting Estimates and Errors.’’ 113 In covered by the safe harbor provisions. In IFRS 4, ‘‘Insurance Contracts,’’ areas for which an IFRS does not exist, contrast, market risk disclosure provides some requirements in IAS 8 requires preparers to use provided pursuant to Item 11 of Form accounting for issued insurance judgment in developing accounting 20–F is not included as part of the contracts and held reinsurance policies such that financial information financial statements in a filing and is contracts. As IFRS 4 was the first part is provided that, among other things, is expressly subject to the safe harbor of a two-phase project, the standard relevant to the needs of users and the provisions. generally permits a company to financial statements reliably reflect the continue to apply its home country economic substance of transactions. In In the Proposing Release, while we accounting principles for insurance applying such judgment, preparers must did not propose any changes, we did contracts, though it imposes certain consider other guidance found in IFRS solicit feedback on the non-availability accounting requirements in order to and, if no analogous guidance is found, of the safe harbor provisions to financial eliminate certain inconsistencies in the definitions, criteria and concepts in statement information, including application, and establishes many the IFRS conceptual framework. Finally, disclosure required by IFRS 7. In disclosure requirements. The IASB has IAS 8 allows preparers to consider response, a number of commenters a project to further address the pronouncements of other standard- indicated that the Commission should accounting for insurance contracts and setting bodies to the extent that such address the implications of the safe has issued a discussion paper on its guidance does not conflict with the harbor provisions and financial preliminary views on such a concepts underlying IFRS. In areas that statement disclosure, including forward- standard.111 are not addressed by IFRS, we expect looking information called for by IFRS IFRS 6, ‘‘Exploration for and companies, consistent with IAS 1 and 7.107 This is an issue that exists Evaluation of Mineral Resources,’’ IAS 8, to provide full and transparent currently even with a U.S. GAAP provides some requirements in disclosure in the financial statements reconciliation, and therefore is distinct accounting for exploration and and operating and financial review and from our acceptance of IFRS financial evaluation activities of oil and gas and prospects disclosure 114 about the statements without a U.S. GAAP mining companies. For limited areas of accounting policies selected and the reconciliation and affects foreign private accounting for extractive activities, IFRS effects of those policies on the IFRS issuers generally.108 We therefore 6 establishes guidelines under which financial statements.115 believe the question warrants further preparers can continue to apply home Accounting for insurance contracts consideration and, if appropriate, we country accounting principles. was the area most frequently cited by may address it through a separate In the Proposing Release we solicited commenters as lacking complete rulemaking initiative. comment as to whether there are any standards, and some letters addressed accounting subject areas that the IASB extractive activities as well.116 However, 3. IFRS Treatment of Certain Areas should address before we accept IFRS most of the commenters believed that, financial statements without while IFRS 4 has not addressed many In the Proposing Release we noted reconciliation, and whether investors recognition and measurement items for that although IFRS as issued by the can understand and use IFRS financial insurance contracts, the rule IASB constitutes a comprehensive basis statements which include activities in amendments to allow the filing of IFRS of accounting that may be used by areas for which IFRS does not have a financial statements without foreign private issuers in the specific standard. Some commenters reconciliation to U.S. GAAP should not preparation of their financial statements noted that IFRS is not alone in having be delayed and noted that European contained in Commission filings, there gaps in accounting for certain areas, and investors are currently using financial are certain areas in which the IASB has gave as examples the lack of standards statements prepared under IFRS by yet to develop standards or in which for property, plant and equipment, IFRS permits disparate options. As 112 See, for example, letter from Kurt S. Schulzke. discussed in the Proposing Release, 109 The IASB and the FASB are expected to issue 113 See, for example, letters from Diageo plc IFRS does not have a specific standard a final standard for the accounting for business (‘‘Diageo’’) and Ernst & Young. or interpretation on accounting combinations and non-controlling interests. This 114 See Item 5 of Form 20–F. treatment for common control mergers, joint project is expected to converge numerous 115 For example, the embedded deposit areas of application and reduce certain alternative component of certain types of insurance contracts recapitalization transactions, treatments currently available under IFRS, but will written by an insurance company might be reorganizations, acquisitions of minority not address all areas listed herein. unbundled as a liability, or might not be unbundled shares not resulting in a change of 110 Early in 2008, the IASB and the FASB are and thus included in premium revenues and policy expected to publish a discussion document relating benefit expenses. Similarly, exploration and to financial statement presentation, including the evaluation costs of a company in the extractive 105 5 U.S.C. 78u–5. presentation of information on the face of the industries might be expensed as incurred, or 106 See Securities Act Section 27A(b)(2)(A) and financial statements. capitalized as assets and subsequently depreciated. Exchange Act Section 21E(b)(2)(A). 111 The IASB currently has projects underway Similarly, common control mergers, reorganizations 107 See, for example, letters from American Bar addressing accounting for insurance contracts and or recapitalizations might be reported at the Association, CAQ, and PwC. extractive activities. See the IASB work plan for historical cost basis of the entit(ies) involved or at 108 Some foreign private issuers have early further detail at http://www.iasb.org/ a new basis in whole or in part. adopted IFRS 7 in their financial statements relating Current+Projects/IASB+Projects/ 116 See, for example, letters from CFA Institute to their 2006 financial years. IASB+Work+Plan.htm. and Fitch Ratings.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 998 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

insurance companies to make financial that will not be required to reconcile its G. As a conforming amendment, we are decisions.117 One commenter noted that IFRS financial statements to U.S. GAAP changing all references to ‘‘IFRS as even though the implementation of an may, nevertheless, pursuant to the published by the IASB’’ contained in insurance standard may occur after the application of IAS 8 look for guidance General Instruction G to ‘‘IFRS as issued Commission’s acceptance of IFRS from Commission sources, such as rules by the IASB,’’ which has the same financial statements without and regulations, and including definition. reconciliation to U.S. GAAP, global Accounting Series Releases (‘‘ASRs’’) We proposed to amend General practices in this area are sufficiently and Financial Reporting Releases Instruction G to provide consistency developed to not require (‘‘FRRs’’).123 In addition, such an issuer with the proposed acceptance of reconciliation.118 Another commenter may look to the guidance that the financial statements prepared in indicated that IFRS 4 does provide Commission staff provides in Staff accordance with IFRS as issued by the minimum requirements for insurance Accounting Bulletins (‘‘SABs’’), and, if IASB without a U.S. GAAP contracts accounting and requires the company is engaged in certain lines reconciliation. Commenters were extensive disclosure of the accounting of business, various Industry Guides.124 supportive of the conforming policies used and other matters so that As described in the Proposing amendments as proposed, which we are investors can inform themselves. The Release, we believe that a company that adopting. Specifically, we are revising commenter noted that in some areas is no longer required to reconcile its paragraph (a) of General Instruction G, these disclosures are more extensive IFRS financial statements to U.S. GAAP ‘‘Omission of Certain Required than those called for under U.S. under the adopted amendments, and its Financial Statements,’’ to provide for GAAP.119 Another commenter indicated auditor, must continue to follow any this. We also are revising paragraph (d) that although IFRS provides more Commission guidance that relates to of General Instruction G, ‘‘Information options in the selection of accounting auditing issues.125 on the Company,’’ to refer to ‘‘a U.S. GAAP reconciliation’’ rather than ‘‘the policies in some areas compared to U.S. 5. First-Time Adopters of IFRS GAAP, it also provides sufficient U.S. GAAP reconciliation’’ to avoid any transparency of the options chosen such General Instruction G to Form 20–F inference that a reconciliation would be that the U.S. GAAP reconciliation does provides for an accommodation that required. In addition, we are revising not provide added benefit.120 permits a foreign private issuer in its paragraph (e) to eliminate the reference In a few cases, commenters first year of reporting under ‘‘IFRS as to the U.S. GAAP reconciliation, which recommended that some or all published by the IASB’’ to file two years will no longer be required. insurance companies be excluded from rather than three years of statements of Contained in paragraph (f) of General the scope of the proposed amendments income, changes in shareholders’ equity Instruction G are three options by which or that additional disclosure and cash flows prepared in accordance an issuer relying on the two-year requirements be imposed because IFRS with IFRS, with appropriate related accommodation could satisfy the 4 may not provide the same level of disclosure in its registration statements interim financial statement transparency to investors as other IFRS or annual report filed with the requirements of Item 8.A.5 of Form applicable to other sectors of the Commission.126 The amendments to 20–F in a transitional registration financial services industry.121 Another accept financial statements prepared in statement. One of these options allows commenter said that once there is a accordance with IFRS as issued by the for two years of audited financial robust IFRS on insurance, the lack of IASB that we are adopting today will statements and interim financial convergence should not further delay apply to, among others, foreign private statements prepared in accordance with the elimination of the reconciliation.122 issuers that are able to rely on the IFRS as issued by the IASB and The IASB continues to make progress accommodation to first-time adopters of reconciled to U.S. GAAP as required by towards developing standards under IFRS contained in General Instruction Item 17(c) or 18 of Form 20–F. We IFRS for both insurance and extractive proposed to eliminate the reconciliation activities. As we accept and support the 123 FRRs contain the Commission’s views and requirement from this option in a use of IFRS as issued by the IASB as a interpretations relating to financial reporting. Prior to 1982, the Commission published its views and manner consistent with the proposed comprehensive basis of accounting for interpretations relating to financial reporting in amendments to Items 17 and 18. We did the preparation of financial statements Accounting Series Releases (ASRs). In FRR 1, not receive extensive comment on this included in filings with the Commission Adoption of the Financial Reporting Release Series aspect of the proposal, and are and Codification of Currently Relevant ASRs, the by foreign private issuers, we do not Commission codified certain previously issued eliminating the reconciliation believe that the IFRS standards in these ASRs on financial reporting matters. requirement from this option as or other discrete areas should delay our 124 Staff Accounting Bulletins reflect the proposed. We are retaining the other full acceptance of IFRS as issued by the Commission staff’s views regarding accounting- options as they currently stand, and IASB without a U.S. GAAP related disclosure practices. They represent interpretations and policies followed by the note that few if any issuers appeared to reconciliation. Division of Corporation Finance and the Office of use the option requiring condensed U.S. the Chief Accountant in administering the GAAP financial information as a bridge 4. Other Considerations Relating to IFRS disclosure requirements of the federal securities and U.S. GAAP Guidance laws. Industry Guides serve as expressions of the between three years of previous GAAP policies and practices of the Division of Corporation financial statements and two years of As discussed in the Proposing Release Finance. They are of assistance to issuers, their IFRS interim information. We also note and in Section III.C.3. of this release, the counsel and others preparing registration that issuers may continue to contact the Commission recognizes that an issuer statements and reports, as well as to the Commission’s staff. SABs and Industry Guides are staff if they are unable to comply with not rules, regulations, or statements of the one of the options but have comparable 117 See, for example, letters from Allianz, Commission. The Commission has neither 127 Prudential, and PwC. information available. approved nor disapproved these interpretations. 118 See letter from AIG. We are adopting as proposed the 125 In addition, foreign private issuers are 119 revisions to paragraph (h) of General See letter from ING. required to have audits conducted in accordance 120 See letter from PwC. with the Standards of the PCAOB (U.S.) regardless Instruction G to eliminate the U.S. 121 See, for example, letters from ACLIG, of the comprehensive basis of accounting they use American Academy of Actuaries, and GNAIE. to prepare their financial statements. 127 See the Instruction to General Instruction G(f) 122 See letter from Fitch Ratings. 126 See the 2005 Adopting Release. of Form 20–F.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 999

GAAP reconciliation requirement for International Financial Reporting information would include the name of the two most recent financial years for Standards.’’ 130 The firm indicated that an individual at the company or its legal which financial statements prepared in similar difficulties may arise if an entity counsel and the telephone, e-mail, and/ accordance with IFRS as issued by the that prepares its financial statements in or facsimile number, or other means by IASB are filed. We also are adopting the accordance with a local GAAP that has which that person can be contacted. conforming amendment to Instruction converged with IFRS over time has not Information provided on the Form 20– 2.b of General Instruction G(h) to gone through the adoption process of F in response to the proposed check specify that disclosure on operating and IFRS 1 with appropriate transition boxes and the company contact financial review and prospects provided adjustments. We recognize that a information will constitute required in response to Item 5 of Form 20–F need specific issuer may need to make a disclosure that is subject to all not refer to a reconciliation to U.S. determination as to when it may rely on applicable federal securities laws. GAAP. That revision is intended to IFRS 1 as a first-time adopter of IFRS. We did not receive extensive clarify that disclosure should not refer We believe that an issuer may rely on comment on these proposed revisions to to any U.S. GAAP reconciling the provisions of General Instruction G Form 20–F. One commenter thought information prepared for previous years. if and only if that issuer has not that the naming of individuals on the As we noted in the Proposing Release, previously stated its reliance on IFRS 1. cover page would be viewed as sensitive the accommodation to first-time Further, an issuer may only rely on the because of potential exposure to adopters of IFRS contained in General provisions of General Instruction G litigation, and suggested that we obtain Instruction G was scheduled to expire once. contact information by non-public 133 after the first financial year starting on Paragraph (i) of General Instruction G means. Because identification on the or after January 1, 2007. That timing was contains a special instruction that cover page does not expose that intended to comport with the requires European issuers that prepare individual to additional liability or requirements of the EU Regulation their financial statements using IFRS as responsibility for the contents of the relating to the transition to IFRS of filing, we are adopting the amendments adopted by the EU to reconcile their 134 European companies, although the financial statements to IFRS as issued as proposed. We also note that forms for domestic issuers already require accommodation is available to an by the IASB to qualify for the contact information. Consistent with the eligible first-time adopter of IFRS from accommodation. A U.S. GAAP usage throughout the amendments we any jurisdiction. As many other reconciliation also is required. This are adopting today, however, the countries are expected to adopt IFRS in paragraph presently applies only to reference in the check boxes on the the coming years, we proposed to issuers incorporated in an EU Member Form 20–F cover page has been changed extend the accommodation contained in State, and would cease to be applicable to ‘‘IFRS as issued by the IASB’’ rather General Instruction G to Form 20–F for after the 2007 financial year, at which than the proposed ‘‘IFRS as published five years to cover financial statements time the mandatory switch to IFRS by the IASB.’’ 135 for the 2012 financial year or earlier that under the EU Regulation will be are included in annual reports or complete. Because the provisions will D. Regulation S–X registration statements. We also no longer be applicable after that time, Regulation S–X contains, among other solicited comment as to whether we are deleting General Instruction G(i) things, the form and content extending the accommodation for a of Form 20–F.131 requirements for financial statements longer or indefinite period would be included in filings made with the appropriate. 6. Check Boxes on the Cover Page of Form 20–F Commission. It also includes many All commenters addressing this provisions that do not relate to U.S. matter supported extension of the We proposed adding check boxes to GAAP, for example, requirements for accommodation contained in General the cover page of Form 20–F in which auditor qualifications and reports. 128 Instruction G. Rather than the five- a filer would indicate whether the Regulation S–X will continue to apply year extension as proposed, most financial statements included in the to the filings of all foreign private commenters believed that the filing have been prepared using U.S. issuers, including those who file accommodation should be extended GAAP, IFRS as issued by the IASB, or financial statements prepared using indefinitely to provide an ongoing another basis of accounting. If, in IFRS as issued by the IASB without incentive for the adoption of IFRS as response to this check box, an issuer has reconciliation to U.S. GAAP.136 issued by the IASB in filings with the indicated that it uses a basis of Commission.129 We agree with this accounting other than U.S. GAAP or 1. Application of the Amendments to view, and therefore are extending the IFRS as issued by the IASB, the issuer Rules 3–05, 3–09, and 3–16 accommodation to first-time adopters of would then indicate in response to a Under Rules 3–05, 3–09 and 3–16 of IFRS as issued by the IASB contained in subsequent check box whether it Regulation S–X, an issuer, in certain General Instruction G for an indefinite follows Item 17 or 18 to prepare its U.S. period. GAAP reconciliation. page would not make that person an agent for service of process. One accounting firm commented that We also proposed to revise the cover temporary or permanent recognition or 133 See letter from Fried, Frank, Harris, Shriver & page of Form 20–F to require that Jacobson (London), LLP. measurement differences between IFRS issuers provide contact information for 134 We will consider the possibility of including as issued by the IASB and local a person to whom Commission or staff this information as an EDGAR header. variations of IFRS may create enquiries may be directed.132 This 135 EU companies using the transition provisions difficulties in the ability of an issuer to discussed in Section III.A.3. should check the ‘‘IFRS as issued by the IASB’’ box. rely on IFRS 1, ‘‘First-time Adoption of 130 See letter from Ernst & Young. 136 Foreign private issuers that file financial 131 The transition provisions discussed in Section statements prepared in accordance with IFRS as 128 See, for example, letters from CAQ and III.A.3. relating to IFRS as adopted by the EU are issued by the IASB will comply with IASB Deloitte. available only for existing registrants, all of whom requirements for form and content within the 129 See, for example, letters from BDO, CAQ, have already been first-time adopters of IFRS. financial statements, rather than with the specific Deloitte, Ernst & Young, Grant Thornton, ICAEW, 132 An example of this enquiry would be a staff presentation and disclosure provisions in Articles PwC, and Shell. comment letter. Identifying the person on the cover 4, 5, 6, 7, 9, and 10 of Regulation S–X.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1000 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

circumstances, must include the of financial statements prepared in 2. Pro Forma Financial Statements financial statements of another entity in accordance with IFRS as issued by the Provided Under Article 11 137 its filings. We did not propose any IASB, we are revising Rule 1–02(w) to Article 11 of Regulation S–X requires changes to Rules 3–05, 3–09, and 3–16 specify significance testing using issuers to prepare unaudited pro forma of Regulation S–X, although the amounts determined under IFRS as financial information that is intended to amendments that we are adopting to issued by the IASB when the issuer’s give effect as if a particular transaction, accept IFRS financial statements financial statements are prepared in such as a significant recent or probable without a U.S. GAAP reconciliation will accordance with IFRS as issued by the business combination, had occurred at apply equally in their application. In IASB. the beginning of the financial period. response to our questions, respondents Following the adoption of the found the description in the Proposing b. Separate Historical Financial amendments described in this release, Release of how the new amendments Statements of Another Entity Provided requirements for pro forma financial would apply to the preparation of Under Rule 3–05 or 3–09 information under Article 11 continue financial statements provided under to be governed by the financial Rules 3–05, 3–09, and 3–16 to be Generally, the historical financial statement requirements for a foreign statements of the issuer rather than of sufficiently clear. We have summarized the acquiree or other entity, as the pro acquired business or investee under below the guidance provided in the forma results must be presented using Rule 3–05 or 3–09 are governed by the Proposing Release. the same basis of accounting as the status of that entity, and do not impose a. Significance Testing issuer. Similarly, the rules that we are a higher presentation burden on a non- adopting do not impose a higher Requirements for significance testing issuer entity than on an issuer. In presentation burden on pro forma are governed by the financial statements applying the amendments, if the entity’s financial information than would be of the issuer.138 Generally, a foreign audited financial statements are in imposed on the historical financial private issuer that prepares its own accordance with IFRS as issued by the statements of the issuer. financial statements using IFRS as IASB, those financial statements will As proposed, we are not amending issued by the IASB also would perform not be required to be reconciled to U.S. Article 11, although the amendments the significance tests under Rules 3–05, GAAP. For example, under Rule 3–05 that we are adopting will affect the 3–09, and 3–16 using IFRS as issued by both foreign private issuers and U.S. application of Article 11. Accordingly, a the IASB, regardless of the basis of companies that acquire a ‘‘significant’’ foreign private issuer using IFRS as accounting used by the other entity. If foreign business will be permitted, issued by the IASB as its basis of the significance thresholds under Rule under the adopted rules, to include the accounting will not be required to 3–05, 3–09, or 3–16 are met, then the acquiree’s financial statements prepared reconcile to U.S. GAAP its pro forma issuer must provide on a separate basis in accordance with IFRS as issued by financial information. Therefore, an audited annual financial statements of the IASB without reconciliation to U.S. issuer using IFRS as issued by the IASB the subject entity. GAAP, in accordance with U.S. GAAP, will prepare the pro forma financial Some commenters pointed out that information by presenting its IFRS significance testing under Rule 1–02(w) or in accordance with another comprehensive basis of accounting results and converting the financial has historically been performed using statements of the business acquired (or U.S. GAAP amounts and, reconciled to U.S. GAAP. The same is true for the financial statements of a to be acquired) into IFRS as issued by notwithstanding the amendments we the IASB. are adopting today, an issuer would still ‘‘significant’’ foreign investee under need to prepare a U.S. GAAP Rule 3–09. 3. Financial Statements Provided Under reconciliation for the purpose of An issuer that includes financial Rule 3–10 significance testing even if such a statements for a foreign entity under Rule 3–10 of Regulation S–X specifies reconciliation was no longer required to Rule 3–05 or Rule 3–09 currently is financial statement requirements for be disclosed.139 In order to clarify our permitted to omit the reconciliation to issuers of guaranteed securities and intent and to implement fully our U.S. GAAP for that entity, regardless of guarantors.141 Generally, under this rule acceptance from foreign private issuers the comprehensive basis of accounting both the issuer of the guaranteed in which that entity’s financial security and the guarantor must follow 137 Rule 3–05 specifies the requirements for statements are presented, if the the financial statement requirements of financial statements of businesses acquired or to be a registrant. If both entities are reporting acquired. Rule 3–09 specifies the requirements for significance of that entity, as defined in financial statements of unconsolidated majority- Rule 1–02(w) of Regulation S–X, does foreign private issuers filing on Form owned subsidiaries and 50 percent or less owned not exceed 30 percent of the 20–F, we will accept financial investments accounted for by the equity method. registrant.140 Although we are not statements prepared in accordance with Both Rule 3–05 and 3–09 require financial IFRS as issued by the IASB without statements when the applicable entity is significant amending Rules 3–05 or 3–09, we are to the issuer. revising Items 17(c)(2)(v) and (vi) of reconciliation from each one under the 142 Rule 3–16 specifies the requirement for financial Form 20–F as proposed to clarify, rules we are adopting. Rule 3–10 permits modified reporting statements of affiliates whose securities respectively, that if the financial collateralize an issue registered or being registered. by subsidiary issuers of guaranteed The requirement to provide separate financial statements of a foreign entity filed under statements under Rule 3–16 is based upon whether Rule 3–05 or 3–09 are presented in 141 A guarantee of a registered security is itself a or not the securities are a substantial portion (as accordance with IFRS as issued by the security, so a guarantor of a registered security is defined) of the collateral for the class of securities IASB, those financial statements may itself considered an issuer of a security. See registered or being registered. Securities Act Section 2(a)(1). 138 omit the reconciling information An entity is significant to the issuer if the 142 In this situation, when an issuer of a issuer’s investment in the entity exceeds 20% of the specified under Item 17(c)(2)(i)–(iii) guaranteed security and a guarantor each file issuer’s total assets, the entity’s income (as defined) regardless of the significance of the complete audited financial statements, the separate exceeds 20% of the issuer’s corresponding income, entity. financial statements of each entity also may be on or (for Rule 3–05 only) the entity’s total assets a different basis of accounting and, if not prepared exceed 20% of the issuer’s total assets. under U.S. GAAP or IFRS as published by the IASB, 139 See, for example, letter from CAQ. 140 See Item 17(c)(2)(v) and (vi) of Form 20–F. must be reconciled to U.S. GAAP.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1001

securities and subsidiary guarantors. adopting the revision to Rule 4–01 as the U.S. GAAP reconciliation contained Separate financial statements need not proposed. in the instruction to Item 17 of Form be filed for subsidiaries meeting the S–4. E. Application of the Amendments to applicable conditions contained in Other Forms, Rules and Schedules 2. Conforming Amendment to Rule 701 Rules 3–10(b) through 3–10(f). Instead, condensed consolidating financial 1. Conforming Amendments to Rule 701 under the Securities Act information is presented in the parent Securities Act Forms F–4 and S–4 provides an exemption from registration for offers and sales made under certain company’s reports in an additional In order to implement fully our compensatory benefit plans. The audited footnote to the financial acceptance of financial statements exemption generally is not available to statements. In applying modified prepared in accordance with IFRS as issuers that have a reporting obligation reporting under Rule 3–10, however, the issued by the IASB without under the Exchange Act and does not reconciliation requirement would be reconciliation to U.S. GAAP,145 we involve the filing of any information based on the consolidated financial proposed to make certain conforming with the Commission. However, an statements of the parent company, as amendments to references to the U.S. issuer conducting an offering under under current rules. A parent issuer or GAAP reconciliation that are contained Rule 701 must deliver to investors guarantor that presents consolidated in Securities Act Forms F–4 and S–4.146 financial statements in accordance with Based on the comments received, our certain information, including financial IFRS as issued by the IASB would acceptance of IFRS financial statements statements, if more than $5 million in present the condensed consolidating from foreign private issuers in both securities are sold over a 12-month financial information on the basis of Exchange Act and Securities Act filings period. For foreign private issuers, IFRS as issued by the IASB, without appears to be well understood. Many of financial statements provided under reconciliation to U.S. GAAP. As noted the commenters that responded to the Rule 701 must include a reconciliation in the Proposing Release, we do not questions we posed indicated that the under Item 17 of Form 20–F if they are believe that any substantive revision to proposed changes were sufficiently not prepared in accordance with U.S. Rule 3–10 is necessary to implement the clear, and did not believe that any other GAAP. To implement fully our acceptance of financial statements rules or forms would need to be acceptance of IFRS financial statements prepared using IFRS as issued by the specifically amended to permit the without reconciliation to U.S. GAAP, IASB without reconciliation. filing of IFRS financial statements we proposed to amend Rule 701 to clarify that a foreign private issuer that As a conforming amendment, we did without a reconciliation to U.S. 147 conducts an offering under Rule 701 propose to revise the reference to the GAAP. A few commenters thought that various other forms, rules and and prepares its financial statements reconciliation to U.S. GAAP of the using IFRS as issued by the IASB should condensed consolidating financial regulations would require modification, and set forth the changes they thought not be required to present a U.S. GAAP information contained in Rule 3–10 to reconciliation. Commenters were clarify that we would accept the would be necessary in their comment letters.148 After considering the supportive of the revision to Rule 701 as condensed consolidating financial a means of facilitating stock ownership information without a U.S. GAAP suggestions, we continue to believe that the proposed revisions to other rules and compensatory plans for employees reconciliation if it is prepared using 149 and forms were sufficiently clear, and of foreign private issuers, which we IFRS as issued by the IASB. are adopting as proposed. Commenters generally agreed that this therefore we do not believe additional revisions are necessary and are adopting change was sufficient, and we are 3. Schedule TO and Schedule 13E–3 the revisions proposed. adopting it as proposed.143 Schedule TO, the tender offer We therefore are adopting as proposed statement under the Exchange Act, and the revisions to the references to the 4. Conforming Amendment to Rule 4–01 Schedule 13E–3, the transaction U.S. GAAP reconciliation contained in statement under Section 13(e) of the Rule 4–01 of Regulation S–X sets out Items 10, 12 and 17 of Form F–4 to Exchange Act, both contain a reference the general requirements for financial make that form consistent with the to U.S. GAAP reconciliation in statements included in Commission amendments we are adopting to Items filings and requires that foreign private accordance with Item 17 of Form 20–F. 17(c) and 18(b) of Form 20–F to indicate Respondents who commented on the issuers include an Item 18 that the referenced U.S. GAAP issue, including accounting firms and reconciliation if they use a basis of reconciliation would be required only foreign private issuers, generally felt accounting other than U.S. GAAP, for financial statements prepared using that changes to Schedule TO and except as otherwise stated in the a basis of accounting other than U.S. Schedule 13E–3 were not necessary applicable form.144 In order to GAAP or IFRS as issued by the IASB. where changes to Item 17 of Form 20– implement fully the proposed We also are adopting as proposed the F were made.150 Other accounting firms acceptance of financial statements analogous revision to the reference to and law firms suggested additional prepared using IFRS as issued by the specific revisions to those schedules to IASB and to avoid ambiguity for issuers, 145 Form 20–F serves as the combined registration clarify that no reconciliation or statement and annual report for foreign private we proposed to revise Rule 4–01 to discussion of differences from U.S. clarify that financial statements of issuers under the Exchange Act, and also sets forth the disclosure requirements for registration GAAP would be necessary if financial foreign private issuers may be prepared statements filed by foreign private issuers under the statements that complied with IFRS as using IFRS as issued by the IASB Securities Act. issued by the IASB were included.151 without reconciliation to U.S. GAAP. 146 Form F–4 is the registration statement for The amendments we are adopting to Commenters generally agreed that this securities of foreign private issuers in certain business combinations, and Form S–4 is the Form 20–F to implement our acceptance approach was sufficient, and we are registration statement for securities of domestic issuers issued in business combinations. 149 See, for example, letter from Cleary. 143 See, for example, letters from Ernst & Young 147 See, for example, letters from UBS and 150 See, for example, letters from PwC, Deloitte, and UBS. Deutsche Bank. Deutsche Bank, and UBS. 144 As noted above, Item 17 reconciliation is 148 See, for example, letters from Ernst & Young 151 See, for example, letters from Cleary and Ernst permitted in various circumstances. and Cleary. & Young.

VerDate Aug<31>2005 17:56 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1002 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

of IFRS financial statements without IFRS financial statements from foreign 40–F 160 and registration statements on reconciliation to U.S. GAAP are private issuers. Form F–10,161 each when used for intended to apply to all Securities Act In the Proposing Release we solicited common equity securities, securities and Exchange Act filings that reference comment asking whether we should convertible into common equity the U.S. GAAP reconciliation permit the use in Form 1–A of financial securities and other securities not rated requirement contained in Item 17 or statements prepared in accordance with investment grade. Canadian issuers that Item 18 of Form 20–F. We therefore are IFRS as issued by the IASB without a participate in the MJDS generally use not adopting any revision to Schedule reconciliation.155 Presently, a Canadian either Canadian GAAP, with a U.S. TO or Schedule 13E–3. issuer that files a GAAP reconciliation when required, or 4. Small Business Issuers Form 1–A may use unaudited financial U.S. GAAP in their filings with the statements reconciled to U.S. GAAP. We Commission. Under rules currently in effect, a received several comment letters noting Canadian foreign private issuer that Canadian accounting standards setters that it would be appropriate to make qualifies as a small business issuer have indicated that they expect to such an amendment to Form 1–A once under Regulation S–B may elect to permit the use of IFRS as issued by the Canada officially adopts IFRS,156 with provide disclosure in its registration IASB as the basis of accounting for all one commenter indicating that requiring statements and annual reports, in Canadian public companies. The date a reconciliation could make a compliance with forms based on for application of IFRS in Canada has Regulation A offering cost prohibitive Regulation S–B rather than on Form not yet been confirmed, but is expected for a Canadian issuer that did not use 162 20–F.152 Regulation S–B describes the to be 2011. A number of commenters U.S. GAAP.157 Some issuers supported financial statement requirements for a therefore have felt that it would be too immediate revision to Form 1–A in this small business issuer, which must be early to describe acceptance of IFRS by way as a means of furthering our prepared in accordance with U.S. GAAP a Canadian company before Canadian acceptance of IFRS.158 While we fully 163 or, if filed by a foreign private issuer requirements allow the use of IFRS. support the use of financial statements that also is a small business issuer, Canadian issuers supported the prepared in accordance with IFRS as reconciled to U.S. GAAP in accordance acceptance of IFRS financial statements issued by the IASB in filings with the with the requirements of Items 17 or 18 without reconciliation, and urged that it Commission by foreign private issuers, 164 of Form 20–F, as appropriate.153 should apply equally to MJDS filers. we are not at this time revising Form We recently adopted amendments We are not adopting any revisions to 1–A as it appears that Canadian issuers under which disclosure requirements the MJDS forms. As described in the filing on that form would not be able to for smaller companies previously Proposing Release, we do not believe avail themselves of the adopted contained in Regulation S–B are any amendments to Forms 40–F and amendments until Canadian accounting integrated into Regulation S–K 154 and F–10 would be necessary to permit an standards setters permit the use of IFRS, smaller reporting companies that file MJDS issuer to file financial statements as discussed below in Section III.F. annual reports on Form 20–F or a prepared in accordance with IFRS as Securities Act registration statement F. Application to Filings Under the issued by the IASB without based on Form 20–F will be able to file Multijurisdictional Disclosure System reconciliation. Some commenters financial statements prepared using U.S. shared this view, as Forms 40–F and GAAP, IFRS as issued by the IASB Certain Canadian foreign private F–10 already contain a cross-reference without a U.S. GAAP reconciliation, or issuers file registration statements and to the U.S. GAAP reconciliation another comprehensive basis of annual reports under the requirement under Items 17 and 18 of accounting with a U.S. GAAP Multijurisdictional Disclosure System Form 20–F which are being amended.165 reconciliation. If that issuer chooses to (‘‘MJDS’’), which permits eligible file a registration statement or annual Canadian companies to use their G. Periodic Reporting Deadlines for report on a domestic form based on disclosure documents prepared in Foreign Private Issuers accordance with Canadian requirements Regulation S–K, financial statements In the Proposing Release we solicited prepared using U.S. GAAP would be in filings with the Commission. Certain filings under the MJDS are not required comment on periodic reporting due required. Because we adopted these dates for foreign private issuers, amendments for smaller company to contain a reconciliation to U.S. GAAP.159 A U.S. GAAP reconciliation is including whether it would be regulatory simplification, we are not appropriate to shorten the current six- making any revisions to Regulation required, however, in registration statements and annual reports on Form month deadline for annual reports on S–B as part of our final rules to accept Form 20–F if a reconciliation were not required. We received significant 152 17 CFR 228. A ‘‘small business issuer’’ is 155 Form 1–A is the Securities Act form for defined in Item 10 of Regulation S–B (17 CFR offerings made under Regulation A, a conditional feedback from commenters raising a 228.10) as a company that (i) has revenues of less exemption from Securities Act registration for number of considerations applicable to than $25,000,000; (ii) is a U.S. or Canadian issuer; securities offerings not exceeding $5 million. reporting deadlines for foreign private and (iii) is not an investment company and is not Regulation A may be used by eligible U.S. or issuers that are independent of the an asset-backed issuer; and (iv) if a majority owned Canadian issuers that do not have a reporting subsidiary, the parent corporation is also a small obligation under the Exchange Act. reconciliation requirement, including business issuer. An entity that meets all of these 156 See, for example, letter from CAQ. annual report deadlines in home criteria is not a small business issuer if it has a 157 See letter from CAQ. jurisdictions and time needed for public float (defined as the aggregate market value 158 See, for example, letters from BP and Deloitte. of the issuer’s outstanding voting and non-voting 159 A U.S. GAAP reconciliation is not required 160 17 CFR 249.240f. common equity held by non-affiliates) of under Form F–7 relating to rights offers, Forms 161 17 CFR 239.40. $25,000,000 or greater. F–8 and F–80 for exchange offers and business 162 153 See Notes 1 and 2 to Item 310 of Regulation combinations, Form F–9 relating to investment- See letter from Canadian Accounting S–B. grade securities, and Form 40–F when used as an Standards Board. 154 See ‘‘Smaller Reporting Company Regulatory annual report relating to an issuer’s Section 15(d) 163 See, for example, letters from PwC and Ernst Relief and Simplification,’’ Release No. 33-8819 reporting obligations for any of the these offerings & Young. (July 5, 2007), available at http://www.sec.gov/rules/ or a Section 13(a) reporting obligation relating to 164 See letter from Manulife Financial. proposed/2007/33–8819.pdf. investment-grade securities. 165 See, for example, letter from Deloitte.

VerDate Aug<31>2005 17:56 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1003

language translation, among others.166 procedures were adopted in 1999 the collection of information unless it Most commenters indicated that in no concerns that it sought to address have displays a currently valid OMB control event should the Form 20–F deadline be been mitigated by developments in the number. earlier than in an issuer’s home global financial reporting The amendments will allow a foreign jurisdiction, and ideally the Form 20–F environment.170 Because of these private issuer that prepares its financial should be due after the home country changes, they believed that it is no statements in accordance with IFRS as filing deadline.167 A number of longer necessary for the Appendix K issued by the IASB to file those commenters support consideration of procedures to require the involvement financial statements in its registration deadlines for Form 20–F in a separate of a filing reviewer. Commenters also statements and periodic reports filed rulemaking.168 Given the many pointed out that if U.S. GAAP with the Commission without considerations that may affect our information were no longer required, reconciliation to U.S. GAAP. These consideration of periodic reporting then a primary focus of Appendix K amendments are collections of deadlines, which may apply to foreign filing reviews would no longer apply.171 information for purposes of the private issuers generally, we believe it is However, some commenters believe that Paperwork Reduction Act. For purposes appropriate to consider the issue in a Appendix K procedures would still be of this Paperwork Reduction Analysis, separate rulemaking initiative so as to useful because U.S. auditing standards, these amendments will result in a obtain broader public input. independence rules, and SEC rules still decrease in the hour and cost burden 172 calculations. We believe these H. Quality Control Issues would apply. We understand that the PCAOB is aware of this matter.173 amendments will eliminate potential As part of the quality control burdens and costs for foreign issuers standards of the PCAOB, Appendix K IV. Paperwork Reduction Act that use IFRS. The disclosure will be applies to PCAOB-registered firms that A. Background mandatory. There will be no mandatory are associated with international firms retention period for the information The final amendments contain and establishes procedures to enhance disclosed, and responses to the ‘‘collection of information’’ the quality of SEC filings by registrants disclosure requirements will not be kept whose financial statements are audited requirements within the meaning of the confidential. by foreign associated firms.169 Paperwork Reduction Act of 1995 We are adopting the amendments 174 Appendix K procedures require that the (‘‘PRA’’). We are submitting the substantially as proposed, and do not international organization or individual amendments to the Office of believe any differences between the foreign associated firm of PCAOB- Management and Budget (‘‘OMB’’) for proposed and adopted amendments will 175 registered firms adopt policies and review in accordance with the PRA. impact our burden estimates for procedures that address the review of The titles for the affected collections of purposes of the Paperwork Reduction filings by persons knowledgeable about information are: Act. We solicited comments on the U.S. GAAP, U.S. generally accepted (1) ‘‘Form 20–F’’ (OMB Control No. Paperwork Reduction Analysis included auditing standards, and independence 3235–0288); in the Proposing Release. The few matters. We did not propose and are not (2) ‘‘Form F–1’’ (OMB Control No. commenters who addressed the issue adopting any amendments to our rules 3235–0258); thought, based on their experience in (3) ‘‘Form F–4’’ (OMB Control No. that relate to the continued need for preparing their U.S. GAAP 3235–0325); compliance with standards of the (4) ‘‘Form S–4’’ (OMB Control No. reconciliation, that we had PCAOB, including Appendix K. 3235–0324); and underestimated the number of hours by However, in the Proposing Release we (5) ‘‘Rule 701’’ (OMB Control No. which registrant burdens would be did provide commenters the 3235–0522). reduced if the amendments were 176 opportunity to address compliance with These forms were adopted pursuant to adopted. We note, however, that the PCAOB standards, including Appendix the Exchange Act and the Securities Act time required to prepare a U.S. GAAP K, in the context of the proposed and set forth the disclosure reconciliation may vary greatly between acceptance of IFRS financial statements requirements for annual reports and issuers. We are not changing our without a U.S. GAAP reconciliation. In registration statements filed by foreign estimates of the percentage of particular, we asked whether we should private issuers. The hours and costs incremental decrease in the burden be concerned about PCAOB-registered associated with preparing, filing and resulting from our amendments. Our firm requirements to have persons sending these forms constitute reporting Paperwork Reduction Analysis for Form knowledgeable in U.S. auditing and and cost burdens imposed by each F–1 and Rule 701 is unchanged from the independence standards review IFRS collection of information. An agency Proposing Release. However, we are financial statements filed with the may not conduct or sponsor, and a revising our estimates for Forms 20–F, Commission. person is not required to respond to, a F–4, and S–4. For Form 20–F, we have Several commenters, including those revised our estimate of the number of from registered public accounting firms, 170 See, for example, letters from CAQ, KPMG, filers affected by the amendments from pointed out that since the Appendix K PwC, and Deloitte. 110 to 140. For Form F–4, the total 171 See, for example, letter from KPMG. burden hour estimates were revised 166 See, for example, letters from HSBC, ING, and 172 See, for example, letters from ICAEW and from 24,503 hours to 24,599 hours Sullivan & Cromwell. Syngenta. subsequent to the issuance of the 167 See, for example, letters from European 173 The audit implications of IFRS financial Association of Listed Companies and Union of statements in SEC filings was a matter on the Proposing Release. We are revising our Issues Quoted in Europe, UNIQUE, New York City agenda of the PCAOB Standing Advisory Group analysis for Form F–4 accordingly, Bar, and ING. Meeting on October 18, 2007. See http:// although we are not changing our 168 See, for example, letters from Ernst & Young, www.pcaobus.org/News_and_Events/Events/2007/ estimate of the percentage of and LIBA. 10-18.aspx. A PCAOB briefing paper on the subject incremental decrease in burden that we 169 The text of Appendix K is available at: is available at: http://www.pcaobus.org/Standards/ _ _ http://www.pcaobus.org/Standards/Interim_ Standing Advisory Group/Meetings/2007/10-18/ expect to result from the adopted _ _ Standards/Quality_Control_Standards/SECPS_ IFRS Briefing Paper.pdf. 1000.08_Appendicies_ 174 44 U.S.C. 3501 et seq. 176 See, for example, letters from Diageo and bookmarks.pdf#nameddest=k. 175 44 U.S.C. 3507(d) and 5 CFR 1320.11. Syngenta.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1004 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

amendments. For Form S–4, we are amendment would cause those foreign the amendment would have a 5% revising the analysis to reflect an private issuers to have fewer burden decrease (90.45 hours) in the number of assumption that 25% of the burden to hours. We estimate that for each of the burden hours required to prepare their prepare financial statements for that companies affected by the proposal, registration statements on Form F–1, for form is borne by the registrant and 75% there would occur a decrease of 5% (132 a total decrease of 452 hours. We expect is borne by outside professionals hours) in the number of burden hours that 25% of these decreased burden retained by the registrant at an average required to prepare their Form 20–F, for hours (113 hours) will be saved by cost of $400 per hour. a total decrease of 18,480 hours. We foreign private issuers. We further For purposes of the Paperwork expect that 25% of these decreased expect that 75% of the decreased Reduction Act, we estimate that the burden hours (4,620 hours) will be burden hours (339 hours) will be saved incremental decrease in the paperwork saved by foreign private issuers. We by outside firms, at an average cost of burden for all foreign private issuers further expect that 75% of these $400 per hour, for a total of $135,600 in that use IFRS and issuers that acquire decreased burden hours (13,860 hours) decreased costs to the respondents of foreign private issuers that use IFRS will will be saved by outside firms, at an the information collection. be approximately 4,945 hours of average cost of $400 per hour, for a total Thus, we estimate that the company time and approximately of $5,544,000 in decreased costs to the amendment to Form 20–F will decrease $5,934,000 for the services of outside respondents of the information the annual burden incurred by foreign professionals. We estimated the average collection. private issuers in the preparation of number of hours each entity spends Thus, we estimate that the Form F–1 from 18,999 hours to 18,886 completing the forms and the average amendment to Form 20–F will decrease hours. We further estimate that the hourly rate for outside professionals. the annual burden borne by foreign amendment will decrease the total That estimate includes the time and the private issuers in the preparation of annual burden associated with Form F– cost of in-house preparers, reviews by Form 20–F from 619,601 hours to 1 preparation to 75,544 burden hours, executive officers, in-house counsel, 614,981 hours. We further estimate that which will decrease the average number outside counsel, independent auditors the amendment will decrease the total of burden hours per response to 1,799. and members of the audit committee.177 annual burden associated with Form We further estimate that the amendment Our estimates of the number of affected 20–F preparation to 2,459,924 burden will decrease the total annual costs foreign private issuers are based on the hours, which will decrease the average attributed to the preparation of Form F– number of recent filings received from number of burden hours per response to 1 by outside firms to $22,663,200. 2,611. We further estimate that the issuers that we believe may be 3. Form F–4 immediately eligible to rely on the amendment will decrease the total adopted amendments. annual costs attributed to the We estimate that currently foreign preparation of Form 20–F by outside private issuers file 68 registration B. Burden and Cost Estimates Related to firms to $737,977,200. statements on Form F–4 each year. We the Accommodation 2. Form F–1 assume that 25% of the burden required 1. Form 20–F to produce a Form F–4 is borne We estimate that currently foreign internally by foreign private issuers, We estimate that currently foreign private issuers file 42 registration resulting in 24,599 annual burden hours private issuers file 942 Form 20–Fs each statements on Form F–1 each year. We incurred by foreign private issuers out year. We assume that 25% of the burden assume that 25% of the burden required of a total of 98,396 annual burden hours. required to produce the Form 20–Fs is to produce a Form F–1 is borne by Thus, we estimate that 1,447 total borne internally by foreign private foreign private issuers, resulting in burden hours per response currently are issuers, resulting in 619,601 annual 18,999 annual burden hours incurred by required to prepare a registration burden hours borne by foreign private foreign private issuers out of a total of statement on Form F–4. We further issuers out of a total of 2,478,404 annual 75,996 annual burden hours. Thus, we assume that 75% of the burden to burden hours. Thus, we estimate that estimate that 1,809 total burden hours produce a Form F–4 is carried by 2,631 total burden hours per response per response currently are required to outside professionals retained by foreign currently are required to prepare the prepare a registration statement on Form private issuers at an average cost of $400 Form 20–F. We further assume that 75% F–1. We further assume that 75% of the per hour, for a total cost of $29,518,800. of the burden to produce the Form 20– burden to produce a Form F–1 is carried We estimate that currently Fs is carried by outside professionals by outside professionals retained by approximately 5 companies that file retained by foreign private issuers at an foreign private issuers at an average cost registration statements on Form F–4 will average cost of $400 per hour, for a total of $400 per hour, for a total cost of be impacted by the amendment.180 We cost of $743,520,600. $22,798,800. expect that the amendment will cause We estimate that approximately 140 We estimate that currently those foreign private issuers to have companies that file Form 20–F may be approximately five companies that file fewer burden hours. We estimate that currently impacted by the registration statements on Form F–1 will each of the affected companies will have 179 amendment.178 We expect that the be impacted by the amendment. We a decrease of 5% (72 hours) in the expect that the proposed amendment number of burden hours required to 177 In connection with other recent rulemakings, will cause those foreign private issuers prepare their registration statements on we have had discussions with several private law to have fewer burden hours. We firms to estimate an hourly rate of $400 as the cost Form F–4, for a total decrease of 360 to companies for the services of outside estimate that each company affected by hours. We expect that 25% of these professionals retained to assist in the preparation of decreased burden hours (90 hours) will these disclosures. For Securities Act registration financial statements during the last twelve months. be saved by foreign private issuers. We statements, we also consider additional reviews of As additional jurisdictions adopt IFRS as their basis the disclosure by underwriter’s counsel and of accounting in the future, the number of issuers further expect that 75% of the decreased underwriters. that use IFRS is expected to increase. 178 We are using this figure for purposes of the 179 This figure is based on our estimate of the 180 This figure is based on our estimate of the Paperwork Reduction Analysis based on the number of Form F–1s that were filed with IFRS number of Form F–4s that were filed with IFRS number of Form 20–Fs that were filed with IFRS financial statements during the 2006 calendar year. financial statements during the 2006 calendar year.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1005

burden hours (270 hours) will be saved the number of burden hours required to requirements for foreign private issuers by outside firms at an average cost of prepare their registration statements on that prepare their financial statements $400 per hour, for a total of $108,000 in Form S–4, for a total decrease of 486 using a basis of accounting other than decreased costs to the respondents of hours.182 We expect that 25% of these IFRS as issued by the IASB. the information collection. decreased burden hours (122 hours) will The amendments apply to a foreign Thus, we estimate that the be saved by issuers. We further expect private issuer’s financial statements amendment to Form 20–F will decrease that 75% of the decreased burden hours contained in annual reports and the annual burden incurred by foreign (364 hours) will be saved by outside registration statements on Form 20–F as private issuers in the preparation of professionals at an average cost of $400 well as to financial statements included Form F–4 from 24,599 hours to 24,509 per hour for a total of $145,600 in in Securities Act registration statements hours. We further estimate that the decreased costs to the respondents of filed by foreign private issuers or, when amendment will decrease the total the information collection. applicable, included in a registration annual burden associated with Form F– Thus, we estimate that the statement or reported pursuant to Rules 4 preparation to 98,036 burden hours, amendment will decrease the annual 3–05, 3–09 or 3–16 of Regulation S–X. which will decrease the average number burden incurred by issuers in the We also are adopting a conforming of burden hours per response to 1,441. preparation of Form S–4 from 629,059 amendment to Rule 701, which provides We further estimate that the amendment hours to 628,937 hours. We further an exemption from Securities Act will decrease the total annual costs estimate that the amendment will registration for securities offered in attributed to the preparation of Form F– decrease the total annual burden certain employee benefit plans, to 4 by outside firms to $29,410,800. associated with Form S–4 preparation to clarify that a foreign private issuer 2,515,748 burden hours, which will conducting an offering in excess of $5 4. Form S–4 decrease the average number of burden million in reliance on that rule may When a domestic issuer files a hours per response to 4,064. We further furnish investors with financial registration statement on Form S–4 for estimate that the amendment will statements prepared using IFRS as the acquisition of a foreign business, the decrease the total annual costs issued by the IASB without domestic issuer may be required to attributed to the preparation of Form S– reconciliation. include the financial statements of the 4 by outside firms to $754,725,400. The amendments are available to any acquired business in the Form S–4. If 5. Rule 701 foreign private issuer that files financial those financial statements are prepared statements that comply with IFRS as Rule 701 provides an exemption from using a basis of accounting other than issued by the IASB, whether voluntarily registration for offers and sales of U.S. GAAP, the domestic issuer must or in accordance with the requirements provide a reconciliation to U.S. GAAP, securities pursuant to certain compensatory benefit plans and of the issuer’s home country regulator or unless a U.S. GAAP reconciliation is contracts relating to compensation. exchange on which its securities are unavailable or not obtainable without Issuers conducting employee benefit listed. unreasonable cost or expense. plan offerings in excess of $5 million in We recognize that the acceptance of We estimate that issuers file 619 reliance on Rule 701 are required to financial statements that comply with registration statements on Form S–4 provide employees covered by the plan IFRS as issued by the IASB without each year. We estimate that 4,065 total with certain disclosures, including reconciliation does not affect all foreign burden hours per response currently are financial statement disclosures. This private issuers equally, as there are required to prepare a registration disclosure is a collection of information. some issuers that will continue to find statement on Form S–4. We assume that We estimate that currently 300 issuers it more attractive to reconcile their 25% of the burden required to prepare provide information under Rule 701, financial statements to U.S. GAAP or to the financial statements for use in a and that the estimated number of continue to prepare financial statements Form S–4 is borne by the registrant, burden hours per respondent is two. in U.S. GAAP. Approximately 140 of resulting in 629,059 annual burden Therefore, we estimate an aggregate of approximately 1,100 foreign private hours incurred by registrants out of a 600 burden hours per year. We believe issuers currently file financial total of 2,516,236 annual burden hours. that the reduction in burden hours statements in which they represent in We further assume that 75% of the caused by the rules will be insignificant. the footnotes to the financial statements burden to produce financial statements Therefore, we do not believe the rules that the financial statements either for a Form S–4 is carried by outside will alter current burden estimates comply with IFRS as issued by the IASB professionals retained by the issuer at associated with Rule 701. or a jurisdictional variation of IFRS an average cost of $400 per hour for a where such jurisdictional variation may total cost of $754,871,000. V. Cost-Benefit Analysis not prevent compliance with IFRS as We estimate that currently The adopted amendments provide issued by the IASB. If these issuers are approximately 6 registration statements foreign private issuers the option of not able to state, and their auditors are able filed on Form S–4 will contain the including a U.S. GAAP reconciliation in to opine, that the financial statements financial statements of a foreign target their Commission filings if their comply with IFRS as issued by the that will be impacted by the financial statements comply with IFRS IASB, then these issuers will be able to amendment.181 We expect that the as issued by the IASB. We are not file their IFRS financial statements amendment will cause registrants that amending the current reconciliation without reconciliation to U.S. GAAP. In file Form S–4 registration statements to coming years, as more countries adopt have fewer burden hours. We estimate 182 We estimate the burden decrease for purposes IFRS as their basis of accounting or that for each of these registrants, there of this Paperwork Reduction Analysis would be less permit companies to use IFRS as issued for Form S–4 than for other forms described in this will be a decrease of 2% (81 hours) in section because, in the case of Form S–4, the by the IASB as their basis of accounting, registrant is obtaining the U.S. GAAP reconciliation we believe that the number of foreign 181 This figure is based on our estimate of the from the foreign private issuer. Further, the private issuers that will be eligible to number of Form S–4s that were filed during the registrant is not required to provide the 2006 calendar year that contained IFRS financial reconciliation if it is unavailable or unobtainable rely on the adopted amendments will statements. without unreasonable cost or expense. increase. For instance, approximately 80

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1006 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

foreign private issuers from Israel 183 different bases of accounting so that capital. At the same time, the issuers and approximately 500 from Canada 184 they can compare opportunities. While reporting in home country GAAP may file financial statements with the financial statements filed with the experience higher perception costs if a Commission and both of these countries Commission and prepared under a set of critical mass of comparable issuers have announced moves to IFRS home country accounting standards adopts IFRS as issued by the IASB. reporting. Additionally, foreign private have included a reconciliation to U.S. We believe that issuers will be issuers incorporated in other GAAP, this reconciliation is not a affected by the amendments in a jurisdictions would be able to take complete substitute for comparing number of ways, including needing advantage of the adopted amendments financial statements prepared using U.S. fewer resources to prepare Commission by preparing financial statements in GAAP. filings.188 Issuers that commented on accordance with IFRS as issued by the The benefits of a single set of globally our estimates of the cost of IASB for purposes of Commission accepted, high-quality accounting reconciliation believe we filings. Finally, approximately 40 standards that improve financial underestimated these costs suggesting additional foreign private issuers that statement comparability may be that accepting IFRS financial statements are incorporated in jurisdictions that diminished if there is a wide latitude in without a U.S. GAAP reconciliation will have moved to IFRS historically have application of IFRS that results in result in greater than expected savings included in their filings with the inconsistent reporting. This latitude to issuers.189 Investors will benefit to Commission financial statements potentially harms investors’ ability to the extent that an issuer relying on the prepared using U.S. GAAP. Some of compare financial statements across amendments can reallocate its cost these issuers also may be in a position companies and potentially allows more savings from not preparing a to file financial statements that comply opportunity for obfuscatory reporting as reconciliation to U.S. GAAP or possibly with IFRS as issued by the IASB noted by one commenter.187 As noted in a second set of financial statements in without a U.S. GAAP reconciliation Section II., the Commission and its staff U.S. GAAP to higher earning under the amendments.185 continue to be involved in efforts to opportunities and not suffer an even Although few commenters provided promote consistent and faithful greater increase in its cost of capital quantitative data to support their application of IFRS. We believe, based relative to the cost of reconciling to U.S. views,186 the Commission has revised on the staff’s review of IFRS financial GAAP. the proposed amendments in response statements, that financial statements The amendments are expected to to the concerns that the commenters prepared in accordance with IFRS as facilitate capital formation by foreign expressed. The Commission expects that issued by the IASB are of sufficient companies in the United States capital the adopted amendments will result in quality. Investors therefore should be markets. Our amendments to accept the following benefits and costs to able to understand and work with them, IFRS financial statements without investors. a situation which will contribute to the reconciliation to U.S. GAAP are use of globally accepted accounting expected to reduce regulatory burdens A. Expected Benefits standards, likely resulting in a more for foreign private issuers that rely on Our acceptance of financial efficient allocation of capital. them, thereby lowering the information statements prepared using IFRS as The amendments are expected to disclosure preparation cost of raising issued by the IASB is expected to help increase the likelihood of realizing the capital in the United States for those foster the use of IFRS as issued by the net benefits to investors of the use of issuers. We believe that foreign private IASB as a way of moving to a single set globally accepted accounting standards. issuers therefore may be more likely to of globally accepted accounting This benefit is due to potential network enter or remain in the U.S. capital standards, which we believe will have effects of the proposed amendments: the markets. To the extent our acceptance of positive effects on investors. Financial more issuers that use IFRS as issued by IFRS financial statements without statements prepared using a common, the IASB, the greater the incentive for reconciliation encourages foreign high-quality set of accounting standards other issuers to do so. The utility for private issuers to enter or remain in the are expected to help investors better investors of a set of accounting U.S. capital markets, investors also will understand and compare investment standards increases as the number of benefit from the protections of the U.S. opportunities as compared to financial issuers using it increases. For example, regulatory and disclosure system statements prepared under differing sets a foreign private issuer may be relative to the protections they may of national accounting standards. concerned about public perception receive if purchasing those securities Without a common standard, global costs, as it may be perceived as being overseas and the ease of investing in investors are likely to incur the extra the outlier if companies with which it these opportunities in the United States. costs of time and effort to understand competes for capital report using a financial statements reported using different basis of accounting. The 188 For purposes of the Paperwork Reduction perception costs of being an outlier in Analysis, as described above, we have estimated 183 Israel Accounting Standard No. 29 ‘‘Adoption such a case are likely to be smaller if a that the incremental decrease in the paperwork of International Financial Reporting Standards,’’ burden for all foreign private issuers that currently critical mass of issuers with whom the use IFRS and issuers that acquire foreign private stipulating that Israeli public companies that issuers that currently use IFRS would be prepare their primary financial statements in issuer competes for capital (such as approximately 3,943 hours of company time and accordance with Israeli GAAP are obliged to adopt those in its industry sector) report approximately $4,731,120 for the services of outside IFRS unreservedly for years starting on January 1, pursuant to the same set of standards, professionals. For purposes of these calculations, 2008. such as IFRS as issued by the IASB. In we estimated the average number of hours each 184 See ‘‘Implementation Plan for Incorporating such situations, the use of IFRS as entity spends completing the forms and the average International Financial Reporting Standards into hourly rate for outside professionals, including the Canadian GAAP,’’ available at http:// issued by the IASB is expected to make time and the cost of in-house preparers, reviews by _ www.acsbcanada.org/client asset/document/3/2/7/ it more efficient for investors to analyze executive officers, in-house counsel, outside _ 3/5/document 8B452E12-FAF5-7113- an issuer’s financial results in counsel, independent auditors and members of the C4CB8F89B38BC6F8.pdf?sfgdata=4. comparison with the results of others audit committee. The impact on an individual 185 The figures contained in this paragraph are per issuer may vary, based on its specific staff estimates based on the jurisdiction of the filers. with whom that issuer competes for circumstances. 186 See, for example, letters from Diageo and 189 See, for example, letters from Diageo and Syngenta. 187 See letter from Maverick. Syngenta.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1007

The expected benefits of a single set reconciliation by quantifying or differences. With respect to IFRS of high quality accounting standards estimating differences in certain financial statements, there are generally may be mitigated if the standards were financial results under IFRS and U.S. three sources for differences identified not to continue to be of a high quality. GAAP and comparing results in certain in the reconciliation to U.S. GAAP: Investors may face uncertainty about the line items such as net income of foreign • Legacy differences arising from future quality of IFRS. Factors that private issuers with those of domestic transactions that occurred before U.S. could affect the quality of IFRS are both issuers.190 Alternatively, other investors GAAP and IFRS became more institutional with respect to the IASC are familiar with IFRS as a basis of converged; Foundation including its governance accounting and therefore may make • Self-selected differences that arise and funding, as discussed in Section II. limited use of the reconciliation from as a function of differing accounting above, as well as operational with IFRS to U.S. GAAP.191 Because elections that foreign private issuers respect to the actual standard setting investors may be differently situated in make in accounting for the same area process. We recognize that our the market and have varying levels of under IFRS and U.S. GAAP; and relationship with the IASB is less direct familiarity with IFRS and with the • Regenerating differences that than our relationship with the FASB information provided in the U.S. GAAP continue to recur each year in areas in and that there are more and varied reconciliation, investors may not all which the standards are not converged. constituents of the IASB than of the bear the cost from the amendments With the differing reasons for FASB. The result may be that our view equally and some commenters reconciling items, we do not believe that will be one of many views that the IASB recognized this.192 The use that a the reconciliation solely or primarily receives from around the world and particular investor may make of the provides investors or the IASB and considers when developing future reconciliation will depend on many FASB with an understanding of areas standards. We continue to support the factors including the size and nature of that are not yet converged. IASC Foundation’s objectives for its the investor and the industry to which There may be differing incentives for work to achieve a stable and the issuer in question belongs. the convergence of IFRS and U.S. GAAP independent funding structure. Additionally, under the amendments, to continue. We believe, however, that B. Expected Costs the comparability of IFRS and U.S. the needs of the marketplace will GAAP results may change. To the extent support the IASB and the FASB working Under the amendments, the minimum that an issuer elected IFRS accounting required financial information that together to develop the best policies that were consistent with U.S. international standards to be used in the investors in the U.S. capital markets GAAP solely to avoid having to disclose receive from any foreign private issuer U.S. and internationally regardless of a U.S. GAAP reconciling item, future our regulatory requirement to reconcile will differ from what it was previously. accounting policy elections may not be The extent to which an investor receives financial statements. The current influenced by this incentive. This may convergence work program includes less information for a particular foreign result in future IFRS financial private issuer who reports under the topics such as revenue recognition, information from that issuer differing amendments will depend upon how the financial statement presentation, and from U.S. GAAP. Eligible foreign private issuer previously reported its financial leases. These are topics on which both issuers who register their securities after statements. For instance, if the foreign the IASB and the FASB seek to develop this rulemaking is effective will not be private issuer currently files financial better standards (rather than using the influenced by this incentive. statements prepared in U.S. GAAP and existing U.S. GAAP or IFRS standards). The amendments may lead to some transitions to reporting in IFRS, then We believe that investors and issuers costs to both investors and to issuers. If this may or may not represent a loss of seek comparable information in global the investor community prefers the required information in absolute terms. capital markets thereby providing an information communicated by a U.S. Whether there is an absolute loss of incentive for continued convergence of GAAP reconciliation, a foreign private information will depend upon whether U.S. GAAP and IFRS. issuer that uses IFRS as issued by the IFRS financial statements yielded more This rulemaking also may create costs IASB to prepare financial statements or less information about a particular to investors in domestic issuers required may face a reduced following in the issuer than the U.S. GAAP financial by the Commission’s rules to prepare marketplace. Investors that are not statements yielded. On the other hand, their financial statements under U.S. if the foreign private issuer currently sufficiently familiar with IFRS GAAP. The desire of potential investors prepares its financial statements in IFRS accounting standards may prefer a U.S. for comparability of financial and includes reconciling information to GAAP reconciliation. In addition, information among companies that U.S. GAAP, then a loss of information unfamiliarity with IFRS as issued by the report in IFRS and domestic issuers that will result as the reconciling IASB may have an adverse effect on report in U.S. GAAP may create an information is omitted. A potential cost investors’ confidence in the reported incentive for domestic issuers to could be incurred if an investor loses results which may lead them to insist on provide financial information prepared information contained in the a risk premium. under IFRS as issued by the IASB in reconciliation that the investor would The reconciliation may highlight the addition to U.S. GAAP financial use to understand differences in certain areas in which IFRS and U.S. GAAP are statements. If domestic issuers make financial results under IFRS and U.S. not converged, thus providing a possible this choice, their investors bear GAAP for a particular issuer. The benchmark to gauge convergence, additional preparation cost, while usefulness of this omitted information although the efficacy of this benchmark benefiting from additional information depends on the extent to which the could be affected by many other factors, provided. Domestic issuers currently investor uses the information provided and convergence may not eliminate all compete internationally for capital with by the reconciliation to U.S. GAAP. companies who provide financial 190 See, for example, letters from ITAC, Maverick, Some investors, including investors R.G. Associates, and Standard & Poor’s. information prepared under IFRS. In who appear to be familiar with IFRS, 191 See, for example, letter from CRUF. spite of this international competition currently make use of the information 192 See, for example, letters from CFA Institute for capital, we do not believe it is provided in the U.S. GAAP and ITAC. currently a widespread practice for

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1008 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

domestic issuers to provide financial substantially similar to the proposed formation to the extent that investors information under IFRS. rules, we continue to believe the new need to increase their familiarity with rules will contribute to efficiency, IFRS in order to compare investment VI. Regulatory Flexibility Act competition and capital formation. The opportunities without reference to a Certification purpose of the amendments to Form 20– U.S. GAAP reconciliation. If investors Under Section 605(b) of the F under the Exchange Act, Forms F–4 prefer the information provided in a Regulatory Flexibility Act,193 the and S–4 and Rule 701 under the U.S. GAAP reconciliation, a foreign Commission certified that the proposed Securities Act, and Regulation S–X is to private issuer that uses IFRS as issued amendments to Form 20–F under the allow foreign private issuers that by the IASB without reconciliation may Exchange Act, Forms F–4 and S–4 and prepare financial statements that face adverse competitive effects in the Rule 701 under the Securities Act and comply with IFRS as issued by the IASB capital markets. For example, investor Regulation S–X contained in this to include those financial statements in unfamiliarity with IFRS may adversely release, if adopted, would not have a their annual reports and registration affect investor confidence in issuers that significant economic impact on a statements filed with the Commission prepare IFRS financial statements substantial number of small entities. It without reconciliation to U.S. GAAP. without reconciliation to U.S. GAAP. included this certification in Part VII of These amendments are designed to This may lead investors to insist on a the Proposing Release. While the increase efficiency, competition and risk premium in those companies, Commission encouraged written capital formation by helping to move which would affect their comments regarding this certification, towards a set of globally accepted competitiveness in the capital markets. none of the commenters responded to accounting standards, as well as by Also, if investors must incur costs in this request. alleviating the burden and cost that order to understand IFRS financial eligible companies would face if statements without a U.S. GAAP VII. Consideration of Impact on the required to prepare a U.S. GAAP Economy, Burden on Competition and reconciliation, there may be an reconciliation for inclusion in annual incentive for intermediary parties to Promotion of Efficiency, Competition reports and registration statements filed and Capital Formation Analysis provide U.S. GAAP reconciliation with us. Due to the cost to issuers of services. Section 2(b) of the Securities Act 194 preparing the reconciliation to U.S. and Section 3(f) of the Exchange Act195 GAAP from IFRS, we believe that the VIII. Statutory Basis and Text of Final require us, when engaging in amendments are likely to promote Amendments rulemaking that requires us to consider efficiency by eliminating financial We are adopting the amendments to or determine whether an action is disclosure that is costly to produce. We Exchange Act Form 20–F, Regulation S– necessary or appropriate in the public believe that investors would have X Rules 1–02, 3–10 and 4–01, Securities interest, to consider whether the action adequate information on which to base Act Forms F–4 and S–4, and Securities will promote efficiency, competition, their investment decisions and that Act Rule 701 pursuant to Sections 6, 7, and capital formation. When adopting capital may be allocated on a more 10, and 19 of the Securities Act of 1933 rules under the Exchange Act, Section efficient basis. as amended, Sections 3, 12, 13, 15, 23 196 The amendments are expected to 23(a)(2) of the Exchange Act requires and 36 of the Securities Exchange Act facilitate capital formation by foreign us to consider the impact that any new of 1934, and Sections 3(c)(2) and 108(c) companies in the U.S. capital markets rule would have on competition. In of the Sarbanes Oxley Act of 2002. addition, Section 23(a)(2) prohibits us by reducing regulatory compliance from adopting any rule that would burdens for foreign private issuers that Text of Amendments rely on them. Reduced compliance impose a burden on competition not List of Subjects in 17 CFR Parts 210, burdens are expected to lower the cost necessary or appropriate in furtherance 230, 239 and 249 of the purposes of the Exchange Act. of preparing disclosure for purposes of In the Proposing Release we raising capital in the United States for Accounting, Reporting and considered the proposed amendments those issuers. recordkeeping requirements, Securities. The amendments also may have other in light of the standards set forth in the I In accordance with the foregoing, impacts on efficiency and capital above statutory sections. We solicited Title 17, Chapter II of the Code of formation, which may not be felt comment on whether, if adopted, the Federal Regulations is amended as equally by all market participants. For proposed rule amendments would result follows: in any anti-competitive effects or example, the amendments may have a promote efficiency, competition and more favorable competitive impact on PART 210—FORM AND CONTENT OF capital formation. We further foreign private issuers from jurisdictions AND REQUIREMENTS FOR FINANCIAL encouraged commenters to provide in which the use of IFRS is already STATEMENTS, SECURITIES ACT OF empirical data or other facts to support required or permitted. Issuers from such 1933, SECURITIES EXCHANGE ACT their views on any anti-competitive jurisdictions may be able to benefit from OF 1934, PUBLIC UTILITY HOLDING effects or any burdens on efficiency, the amendments more quickly than COMPANY ACT OF 1935, INVESTMENT competition or capital formation that issuers from jurisdictions that do not COMPANY ACT OF 1940, AND might result from adoption of the permit the use of IFRS. Also, some ENERGY POLICY AND proposed amendments. foreign private issuers may be CONSERVATION ACT OF 1975 We did not receive any comments or concerned about the public perception any empirical data in this regard costs of not including a U.S. GAAP I 1. The authority citation for part 210 concerning the proposed amendments. reconciliation, particularly if they continues to read as follows: Accordingly, since the adopted rules are compete for capital with other foreign Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, companies that provide a reconciliation 77z–2, 77z–3, 77aa(25), 77aa(26), 78c, 78j–1, 193 5 U.S.C. 605(b). or that prepare financial statements that 78l, 78m, 78n, 78o(d), 78q, 78u–5, 78w(a), 194 15 U.S.C. 77b(b). comply with U.S. GAAP. 78ll, 78mm, 80a–8, 80a–20, 80a–29, 80a–30, 195 15 U.S.C. 78c(f). The amendments also are expected to 80a–31, 80a–37(a), 80b–3, 80b–11, 7202, 196 15 U.S.C. 78w(a)(2). have effects on efficiency and capital 7218 and 7262, unless otherwise noted.

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1009

I 2. Section 210.1–02 is amended by principles, other than those generally Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, adding a note following paragraph accepted in the United States or 77z–2, 77z–3, 77sss, 78c, 78l, 78m, 78n, (w)(3) before the computational note to International Financial Reporting 78o(d), 78u–5, 78w(a), 78ll, 78mm, 80a–2(a), read as follows. Standards as issued by the International 80a–3, 80a–8, 80a–9, 80a–10, 80a–13, 80a– 24, 80a–26, 80a–29, 80a–30, 80a–37, 7202 Accounting Standards Board, if a and 7218, unless otherwise noted. § 210.1–02 Definitions of terms used in reconciliation to U.S. Generally Regulation S–X (17 CFR Part 210). * * * * * Accepted Accounting Principles and the I * * * * * provisions of Regulation S–X of the type 8. Amend Form S–4 (referenced in (w) * * * specified in Item 18 of Form 20–F § 239.25) by revising instruction 2 to (3) * * * (§ 249.220f of this chapter) is also filed Item 17 to read as follows: Note to paragraph (w): A registrant that as part of the financial statements. Note: The text of Form S–4 does not and files its financial statements in accordance Alternatively, the financial statements this amendment will not appear in the Code with or provides a reconciliation to U.S. may be prepared according to U.S. of Federal Regulations. Generally Accepted Accounting Principles Generally Accepted Accounting FORM S–4 shall make the prescribed tests using Principles or International Financial amounts determined under U.S. Generally * * * * * Accepted Accounting Principles. A foreign Reporting Standards as issued by the International Accounting Standards Item 17. Information with Respect to private issuer that files its financial Companies other than S–3 Companies. statements in accordance with IFRS as issued Board. * * * * * by the IASB shall make the prescribed tests * * * * * using amounts determined under IFRS as Instructions: issued by the IASB. PART 230—GENERAL RULES AND * * * * * REGULATIONS, SECURITIES ACT OF 2. If the financial statements required by * * * * * 1933 this paragraph are prepared on the basis of I 3. Section 210.3–10 is amended by: a comprehensive body of accounting I a. Revising the introductory text of I 5. The authority citation for Part 230 principles other than U.S. GAAP or International Financial Reporting Standards paragraph (i), and continues to read, in part, as follows: I b. Revising paragraph (i)(12). as issued by the International Accounting Standards Board, provide a reconciliation to The revisions read as follows. Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, U.S. GAAP in accordance with Item 17 of § 210.3–10 Financial statements of 78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), Form 20–F (§ 249.220f of this chapter) unless guarantors and issuers of guaranteed 78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a– a reconciliation is unavailable or not securities registered or being registered. 30, 80a–37, 7202 and 7218, unless otherwise obtainable without unreasonable cost or noted. expense. At a minimum, provide a narrative * * * * * * * * * * description of all material variations in (i) Instructions for preparation of accounting principles, practices and methods condensed consolidating financial I 6. Amend § 230.701 by revising used in preparing the non-U.S. GAAP information required by paragraphs (c), paragraph (e)(4) to read as follows: financial statements from those accepted in (d), (e) and (f) of this section. the U.S. when the financial statements are § 230.701 Exemption for offers and sales prepared on a basis other than U.S. GAAP. * * * * * of securities pursuant to certain (12) Where the parent company’s compensatory benefit plans and contracts * * * * * consolidated financial statements are relating to compensation. I 9. Amend Form F–4 (referenced in prepared on a comprehensive basis * * * * * § 239.34) by: other than U.S. Generally Accepted I a. Revising Item 10(c)(2); (e) * * * I Accounting Principles or International b. Revising Item 10(c)(3); (4) Financial statements required to be I c. Revising Item 12(b)(2)(iii) and (iv); Financial Reporting Standards as issued furnished by Part F/S of Form 1–A by the International Accounting and (Regulation A Offering Statement) I d. Revising the Instruction to Item Standards Board, reconcile the (§ 239.90 of this chapter) under 17(b)(5) and (b)(6). information in each column to U.S. Regulation A (§§ 230.251 through The revisions read as follows. Generally Accepted Accounting 230.263). Foreign private issuers as Principles to the extent necessary to defined in Rule 405 must provide a Note: The text of Form F–4 does not and allow investors to evaluate the this amendment will not appear in the Code reconciliation to generally accepted of Federal Regulations. sufficiency of the guarantees. The accounting principles in the United reconciliation may be limited to the States (U.S. GAAP) if their financial FORM F–4 information specified by Item 17 of statements are not prepared in * * * * * Form 20–F (§ 249.220f of this chapter). accordance with U.S. GAAP or Item 10. Information With Respect to F–3 The reconciling information need not International Financial Reporting Companies. duplicate information included Standards as issued by the International * * * * * elsewhere in the reconciliation of the Accounting Standards Board (Item 17 of (c) * * * consolidated financial statements. Form 20–F (§ 249.220f of this chapter)). (2) Restated financial statements prepared I 4. Amend § 210.4–01 by revising The financial statements required by in accordance with or, if prepared using a paragraph (a)(2) to read as follows: this section must be as of a date no more basis of accounting other than International than 180 days before the sale of Financial Reporting Standards (‘‘IFRS’’) as § 210.4–01 Form, order and terminology. securities in reliance on this exemption. issued by the International Accounting Standards Board (‘‘IASB’’), reconciled to U.S. (a) * * * * * * * * (2) In all filings of foreign private GAAP and Regulation S–X if there has been a change in accounting principles or a issuers (see § 230.405 of this chapter), PART 239—FORMS PRESCRIBED correction of an error where such change or except as stated otherwise in the UNDER THE SECURITIES ACT OF 1933 correction requires a material retroactive applicable form, the financial restatement of financial statements; statements may be prepared according I 7. The authority citation for part 239 (3) Restated financial statements prepared to a comprehensive set of accounting continues to read, in part, as follows: in accordance with or, if prepared using a

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1010 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

basis of accounting other than IFRS as issued I b. Add a check box to the cover page GENERAL INSTRUCTIONS by the IASB, reconciled to U.S. GAAP and indicating the basis of accounting used * * * * * Regulation S–X where one or more business to prepare the financial statements combinations accounted for by the pooling of G. First-Time Application of International below the accelerated filer line; Financial Reporting Standards interest method of accounting have been I consummated subsequent to the most recent c. Revise the check box on the cover (a) Omission of Certain Required Financial fiscal year and the acquired businesses, page indicating whether Item 17 or Item Statements. An issuer that changes the body considered in the aggregate, are significant 18 was used below the new check box of accounting principles used in preparing its pursuant to Rule 11–01(b) of Regulation S– indicating the basis of accounting; financial statements presented pursuant to X (§ 210.11–01(b) of this chapter); or I d. Revise General Instruction G.(a); Item 8.A.2 (‘‘Item 8.A.2’’) to International * * * * * I e. Remove General Instruction Financial Reporting Standards (‘‘IFRS’’) Item 12. Information With Respect to F–3 G.(b)(1)(A) and G.(b)(2)(A); issued by the International Accounting Registrants. I f. Redesignate General Instructions Standards Board (‘‘IASB’’) may omit the earliest of three years of audited financial * * * * * G.(b)(1)(B) and (G).(b)(1)(C) as General Instructions (G).(b)(1)(A) and G.(b)(1)(B) statements required by Item 8.A.2 if the (b) * * * issuer satisfies the conditions set forth in this (2) * * * and redesignate General Instructions Instruction G. For purposes of this (iii) Restated financial statements prepared (G).(b)(2)(B) and (G).(b)(2)(C) as General instruction, the term ‘‘financial year’’ refers in accordance with or, if prepared using a Instructions (G).(b)(2)(A) and G.(b)(2)(B); to the first financial year beginning on or basis of accounting other than IFRS as issued I g. Revise General Instructions G.(d) after January 1 of the same calendar year. by the IASB, reconciled to U.S. GAAP and and (e); * * * * * Regulation S–X if there has been a change in I h. Revise General Instructions accounting principles or a correction of an (d) Information on the Company. The error where such change or correction G.(f)(2)(B)(ii) and G.(f)(2)(B)(iii); reference in Item 4.B to the ‘‘body of I requires a material retroactive restatement of i. Revise General Instruction G.(h)(2); accounting principles used in preparing the I financial statements; j. Revise Instruction 2.b. to General financial statements,’’ means IFRS as issued (iv) Restated financial statements prepared Instruction G.(h); by the IASB and not the basis of accounting in accordance with or, if prepared using a I k. Remove General Instruction G.(i); that was previously used (‘‘Previous GAAP’’) basis of accounting other than IFRS as issued I l. Revise Item 3.A, Instruction 2; or accounting principles used only to prepare by the IASB, reconciled to U.S. GAAP and I m. Add Instruction 5 to Item 5; a U.S. GAAP reconciliation. Regulation S–X where one or more business I n. Add a sentence to the end of (e) Operating and Financial Review and combinations accounted for by the pooling of Instruction 3 in Item 8.A.5; Prospects. The issuer shall present the interest method of accounting have been I o. Add Instruction 4 to Item 8.A.5; information provided pursuant to Item 5. The consummated subsequent to the most recent I p. Add an Instruction to Item 11 discussion should focus on the financial fiscal year and the acquired businesses, before Instruction to Item 11(a); statements for the two most recent financial considered in the aggregate, are significant I q. Revise the introductory text of Item years prepared in accordance with IFRS as pursuant to Rule 11–01(b) of Regulation S– issued by the IASB. No part of the discussion 17(c); should relate to financial statements X; and I r. Add a sentence at the end of Items * * * * * prepared in accordance with Previous GAAP. 17(c)(2)(v) and (c)(2)(vi); (f) Financial Information. Item 17. Information With Respect to I s. Remove Item 17(c)(2)(viii); Foreign Companies Other Than F–3 I * * * * * t. Remove Item 17, Instruction 6; (2) * * * Companies. I u. Add a Special Instruction to the * * * * * (B) * * * end of Item 17; (ii) Two financial years of audited financial Instruction to paragraph (b)(5) and (b)(6): I v. Revise Item 18(b); statements and interim financial statements If the financial statements required by I w. Revise the Instruction to Item 18; (which may be unaudited) for the current and paragraphs (b)(5) and (b)(6) are prepared on and comparable prior year period, prepared in the basis of a comprehensive body of I x. Add a Special Instruction to the end accordance with IFRS as issued by the IASB; accounting principles other than U.S. GAAP (iii) Three financial years of audited or IFRS as issued by the IASB, provide a of Item 18. financial statements prepared in accordance reconciliation to U.S. GAAP in accordance The additions and revisions read as with Previous GAAP; interim statements with Item 17 of Form 20–F (§ 249.220f of this follows. (which may be unaudited) for the current and chapter) unless a reconciliation is Note: The text of Form 20–F does not, and comparable prior year period prepared in unavailable or not obtainable without this amendment will not, appear in the Code accordance with IFRS as issued by the IASB; unreasonable cost or expense. At a minimum, of Federal Regulations. and condensed financial information provide a narrative description of all material prepared in accordance with U.S. GAAP for variations in accounting principles, practices FORM 20–F the most recent financial year and the current and methods used in preparing the non-U.S. and comparable prior year interim period GAAP financial statements from those * * * * * (the form and content of this financial accepted in the U.S. when the financial (Name, Telephone, E-mail and/or information shall be in a level of detail statements are prepared on a basis other than Facsimile number and Address of Company substantially similar to that required by U.S. GAAP. Contact Person) * * * * * Article 10 of Regulation S–X). PART 249—FORMS, SECURITIES Indicate by check mark which basis of * * * * * EXCHANGE ACT OF 1934 accounting the registrant has used to prepare (h) Financial Statements. the financial statements included in this * * * * * I 10. The authority citation for part 249 filing: (2) U.S. GAAP Information. The U.S. continues to read, in part, as follows: U.S. GAAP lll. International Financial GAAP reconciliation referenced in Item 17(c) Reporting Standards as issued by the or 18 shall not be required for periods Authority: 15 U.S.C. 78a et seq., 7202, International Accounting Standards Board presented in accordance with IFRS as issued 7218, 7233, 7241, 7262, 7264, and 7265; and lll. Other lll. by the IASB. 18 U.S.C. 1350, unless otherwise noted. If ‘‘Other’’ has been checked in response to Instructions: * * * * * the previous question, indicate by check * * * * * I 11. Amend Form 20–F (referenced in mark which financial statement item the 2. * * * § 249.220f) as follows: registrant has elected to follow. b. Present or incorporate by reference I a. Add issuer contact information to Item 17 lll. Item 18 lll. operating and financial review and prospects the cover page below the address line; * * * * * information pursuant to Item 5 that focuses

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations 1011

on the financial statements for the two most interim period financial statements in U.S. GAAP if that issuer’s financial recent financial years prior to the most recent compliance with IAS 34 ‘‘Interim Financial statements otherwise comply with IFRS as financial year that were prepared in Reporting,’’ and explicitly states its issued by the IASB and the issuer provides accordance with Previous GAAP. The compliance with IAS 34 in the notes to the an audited reconciliation to IFRS as issued discussion should not refer to a interim financial statements. by the IASB. This reconciliation to IFRS as reconciliation to U.S. GAAP. No part of the * * * * * issued by the IASB is to contain information discussion should relate to financial Item 11. Quantitative and Qualitative relating to financial statement line items and statements prepared in accordance with Disclosures About Market Risk. footnote disclosure based on full compliance IFRS. with IFRS as issued by the IASB, and is to * * * * * * * * * * be prepared and disclosed in the same Instruction to Item 11: An issuer filing manner that an issuer would provide a Item 3. Key Information financial statements that comply with IFRS reconciliation to U.S. GAAP, following the * * * * * as issued by the IASB should, in providing requirements in Item 17(c)(2). All financial Instructions to Item 3.A: information in response to paragraphs of this statements of such an issuer for periods prior Item 11 that refer to pronouncements of the * * * * * to the financial year that ends after November FASB, provide disclosure that satisfies the 15, 2007 must continue to be reconciled to 2. You may present the selected financial objective of the Item 11 disclosure data on the basis of the accounting principles U.S. GAAP. For financial years following the requirements. In responding to this Item 11, two financial years ending after November used in your primary financial statements. If an issuer need not repeat information you use a basis of accounting other than IFRS 15, 2007, such an issuer will be required to contained in financial statements that include reconciliations to U.S. GAAP unless as issued by the IASB, however, you also comply with IFRS as issued by the IASB. must include in this summary any the issuer complies with the requirements in reconciliations of the data to U.S. generally * * * * * Item 17(c). accepted accounting principles and Item 17. Financial Statements. Item 18. Financial Statements. Regulation S–X, pursuant to Item 17 or 18 of * * * * * * * * * * this Form. For financial statements prepared (c) The financial statements and schedules (b) If the financial statements are prepared using a basis of accounting other than IFRS required by paragraph (a) above may be using a basis of accounting other than IFRS as issued by the IASB, you only have to prepared according to U.S. generally as issued by the IASB, all other information provide selected financial data on a basis accepted accounting principles or IFRS as required by U.S. generally accepted reconciled to U.S. generally accepted issued by the IASB. If the financial accounting principles and Regulation S–X accounting principles for (i) those periods for statements comply with IFRS as issued by unless such requirements specifically do not which you were required to reconcile the the IASB, such compliance must be apply to the registrant as a foreign issuer. primary annual financial statements in a unreservedly and explicitly stated in the However, information may be omitted (i) for filing under the Securities Act or the notes to the financial statements and the any period in which net income has not been Exchange Act, and (ii) any interim periods. auditor’s report must include an opinion on presented on a basis reconciled to United * * * * * whether the financial statements comply States generally accepted accounting with IFRS as issued by the IASB. If the notes principles, or (ii) if the financial statements Item 5. Operating and Financial Review and and auditor’s report of an issuer do not are furnished pursuant to § 210.3–05 or less- Prospects contain the information in the preceding than-majority owned investee pursuant to * * * * * sentence, then the U.S. GAAP reconciliation § 210.3–09 of this chapter. Instructions to Item 5: information described in paragraphs (c)(1) Instructions to Item 18: and (c)(2) must be provided. Alternatively, 1. All of the instructions to Item 17 also * * * * * apply to this Item, except Instruction 3 to 5. An issuer filing financial statements that such financial statements and schedules may be prepared according to a comprehensive Item 17, which does not apply. comply with IFRS as issued by the IASB 2. An issuer that is required to provide should, in providing information in response body of accounting principles other than those generally accepted in the United States disclosure under FASB Statement of to paragraphs of this Item 5 that refer to Accounting Standards No. 69, ‘‘Disclosures pronouncements of the FASB, provide or IFRS as issued by the IASB if the following are disclosed: about Oil and Gas Producing Activities,’’ disclosure that satisfies the objective of the shall do so regardless of the basis of Item 5 disclosure requirements. In * * * * * accounting on which it prepares its financial responding to this Item 5, an issuer need not (c)(2)(v) * * * Issuers that prepare statements. repeat information contained in financial financial statements using IFRS as issued by Special Instruction for Certain European statements that comply with IFRS as issued the IASB that are furnished pursuant to Issuers: by the IASB. § 210.3–05 may omit the disclosures An issuer incorporated in a Member State * * * * * specified by paragraphs (c)(2)(i), (c)(2)(ii), of the European Union that has complied and (c)(2)(iii) of this Item regardless of the Item 8. Financial Information with the carve out to IAS 39 ‘‘Financial size of the business acquired or to be Instruments: Recognition and Measurement,’’ * * * * * acquired. as adopted by the European Union, in Instructions to Item 8.A.5: (c)(2)(vi) * * * Issuers that prepare financial statements previously filed with the * * * * * financial statements using IFRS as issued by Commission, may file financial statements 3. *** the IASB that are furnished pursuant to for its first two financial years that end after (a) * * * § 210.3–09 may omit the disclosures November 15, 2007 without reconciling to (b) * * * specified by paragraphs (c)(2)(i), (c)(2)(ii), U.S. GAAP if that issuer’s financial A registrant filing financial information and (c)(2)(iii) of this Item regardless of the statements otherwise comply with IFRS as that complies with IFRS as issued by the size of the investee. issued by the IASB and the issuer provides IASB is not required to provide the * * * * * an audited reconciliation to IFRS as issued information described in paragraphs 3(a) and Special Instruction for Certain European by the IASB. This reconciliation to IFRS as (b) to this Instruction to Item 8.A.5. if that Issuers: issued by the IASB is to contain information registrant prepares its annual financial An issuer incorporated in a Member State relating to financial statement line items and statements in accordance with IFRS as issued of the European Union that has complied footnote disclosure based on full compliance by the IASB. with the carve out to IAS 39 ‘‘Financial with IFRS as issued by the IASB, and is to 4. A registrant that files interim period Instruments: Recognition and Measurement,’’ be prepared and disclosed in the same financial statements pursuant to Item 8.A.5 as adopted by the European Union, in manner that an issuer would provide a is not required to comply with Article 10 of financial statements previously filed with the reconciliation to U.S. GAAP, following the Regulation S–X if that registrant prepares its Commission, may file financial statements requirements in Item 18. All financial annual financial statements in accordance for its first two financial years that end after statements of such an issuer for periods prior with IFRS as issued by the IASB, prepares its November 15, 2007 without reconciling to to the financial year that ends after November

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3 1012 Federal Register / Vol. 73, No. 3 / Friday, January 4, 2008 / Rules and Regulations

15, 2007 must continue to be reconciled to the issuer complies with the requirements in By the Commission. U.S. GAAP. For financial years following the Item 18(a). Nancy M. Morris, two financial years ending after November Secretary. 15, 2007, such an issuer will be required to Dated: December 21, 2007. include reconciliations to U.S. GAAP unless [FR Doc. E7–25250 Filed 1–3–08; 8:45 am] BILLING CODE 8011–01–P

VerDate Aug<31>2005 17:32 Jan 03, 2008 Jkt 214001 PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 E:\FR\FM\04JAR3.SGM 04JAR3 rwilkins on PROD1PC63 with RULES3