[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Notices]
[Pages 51150-51153]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20358]
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SECURITIES AND EXCHANGE COMMISSION
[Release Nos. 33-9134; 34-62700; File No. 4-608]
Notice of Solicitation of Public Comment on Consideration of
Incorporating IFRS Into the Financial Reporting System for U.S. Issuers
AGENCY: Securities and Exchange Commission.
ACTION: Request for comment.
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SUMMARY: The Securities and Exchange Commission is requesting public
comment on behalf of the staff on three topics related to its ongoing
consideration of incorporating International Financial Reporting
Standards (``IFRS'') into the financial reporting system for U.S.
issuers. These three topics, derived from the staff's Work Plan on
considering the incorporation of IFRS into the financial reporting
system for U.S. issuers, involve the impact of such incorporation on:
Issuers' compliance with contractual arrangements that require the use
of U.S. Generally Accepted Accounting Principles (``U.S. GAAP'');
Issuers' compliance with corporate governance requirements; and the
application of certain legal standards tied to amounts determined for
financial reporting purposes.
DATES: Comments should be received on or before October 18, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml);
Send an e-mail to [email protected]. Please include
File Number 4-608 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. 4-608. This file number should
be included on the subject line if e-mail is used. To help us process
and review your comments more efficiently, please use only one method.
The Commission will post all comments on the Commission's Internet Web
site (http://www.sec.gov/rules/other.shtml). Comments are also
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street, NE., Washington, DC 20549, on official
business days between the hours of 10 a.m. and 3 p.m. All comments
received will be posted without change; we do not edit personal
identifying information from submissions. You should submit only
information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Tamara Brightwell, Senior Special
Counsel, Larry Hamermesh, Attorney-Fellow, or Jennifer Zepralka, Senior
Special Counsel, Division of Corporation Finance, at (202) 551-3500, or
Jeffrey S. Cohan, Senior Special Counsel, Office of the Chief
Accountant, at (202) 551-5300, 100 F Street, NE., Washington, DC 20549.
[[Page 51151]]
I. Introduction
On February 24, 2010, the Commission issued a Statement in Support
of Convergence and Global Accounting Standards (the ``Statement''),
reiterating its belief ``that a single set of high-quality globally
accepted accounting standards will benefit U.S. investors and that this
goal is consistent with our mission of protecting investors,
maintaining fair, orderly, and efficient markets, and facilitating
capital formation.'' \1\ In this Statement, the Commission directed the
Staff to develop and execute a work plan (``Work Plan''), the purpose
of which is to consider specific areas and factors before potentially
transitioning our current financial reporting system for U.S. issuers
to a system incorporating IFRS.\2\
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\1\ Release Nos. 33-9109; 34-61578 (Feb. 24, 2010) [75 FR 9494]
(Mar. 2, 2010).
\2\ Available at: http://www.sec.gov/spotlight/globalaccountingstandards/globalaccountingstandards.pdf.
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The Work Plan identifies a number of topics for further study,
including the three topics that are the subject of this solicitation
for comment.
II. Contractual Arrangements \3\
A. Background
Companies' contracts often, either explicitly or implicitly,
require reporting under U.S. GAAP or include metrics that are based off
of current U.S. GAAP reporting. For example, companies may have issued
debt instruments which include financial covenants based on U.S. GAAP
or require periodic reporting of financial statements prepared in
accordance with U.S. GAAP. Similarly, lease contracts and employee
compensation plans may be based on metrics computed using U.S. GAAP
financial information. Merger agreements may contain earn-out
provisions that are to be calculated using U.S. GAAP.
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\3\ See the Work Plan, 75 FR at 9511.
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Commentators on the Commission's 2008 proposal regarding IFRS \4\
indicated that a move to IFRS for U.S. issuers may require contract
renegotiation or the preparation of two sets of financial statements,
depending on how IFRS is incorporated in the U.S. capital markets. In
addition, performance under existing agreements could be affected if
the changes in accounting standards result in financial reporting
changes.
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\4\ See Roadmap for the Potential Use of Financial Statements
Prepared in Accordance with International Financial Reporting
Standards by U.S. Issuers, Release No. 33-8982; 34-58960 (Nov. 14,
2008) [73 FR 70816] (Nov. 21, 2008).
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B. Request for Comment
To what extent and in what ways would incorporating IFRS
into the financial reporting system for U.S. issuers be likely to
affect the application, interpretation, or enforcement of contractual
commercial arrangements such as financing agreements, trust indentures,
merger agreements, executive employment agreements, stock incentive
plans, leases, franchise agreements, royalty agreements, and preferred
stock designations?
What types of contractual commercial arrangements aside
from those specifically identified in the previous question would
likely be affected by the incorporation of IFRS into the financial
reporting system for U.S. issuers, and in what ways?
With respect to existing contractual commercial
arrangements, would the incorporation of IFRS into the financial
reporting system for U.S. issuers be treated differently as compared to
how a change in an existing financial reporting standard under U.S.
GAAP would be treated today? If so, how?
To the extent that incorporating IFRS into the financial
reporting system for U.S. issuers would affect the application,
interpretation, or enforcement of contractual commercial arrangements,
how would parties to such arrangements most likely address such effects
(e.g., by modifying the contract, or adopting multiple accounting
systems)?
To what extent would any potential effects of
incorporating IFRS into the financial reporting system for U.S. issuers
on the application of contractual commercial arrangements likely be
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the
financial reporting system for U.S. issuers? What length of a
transition or phase-in period would be necessary to reasonably mitigate
the effects? Are there any other means by which such effects can be
mitigated or avoided?
III. Corporate Governance; Stock Exchange Listing Requirements \5\
A. Background
Incorporation of IFRS into the financial reporting system for U.S.
issuers may affect an issuer's compliance with corporate governance
requirements. For example, in 2003, as required by the Sarbanes-Oxley
Act, the Commission adopted rules that require a registrant to disclose
whether it has at least one ``audit committee financial expert,'' as
defined, serving on its audit committee and, if so, the name of the
expert and whether the expert is independent of management. Those rules
also indicate the education and experience through which those
attributes must have been acquired.\6\ Listing rules for U.S.
securities exchanges also have requirements regarding the competence of
audit committee members in accounting and financial reporting.\7\ In
addition, U.S. securities exchanges have certain quantitative listing
standards that could be affected by changes in financial reporting.\8\
Accordingly, incorporation of IFRS into the financial reporting system
may result in challenges for U.S. issuers in identifying audit
committee financial experts and in satisfying corporate governance and
related quantitative stock exchange listing requirements, as well as,
more broadly, compliance with other aspects of corporate governance.
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\5\ See the Work Plan, 75 FR at 9511.
\6\ Item 407(d)(5) of Regulation S-K.
\7\ E.g., NYSE Listed Company Manual Sec. 303A.07; Nasdaq
Listing Rule 5605(c)(2).
\8\ E.g., NYSE Listed Company Manual Sec. 102.00; Nasdaq
Listing Rule 5450.
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B. Request for Comment
To what extent and in what ways would incorporating IFRS
into the financial reporting system for U.S. issuers likely affect
compliance with corporate governance and related disclosure
requirements applicable to U.S. issuers, such as stock exchange listing
requirements relating to the composition and function of audit
committees of the boards of directors and disclosure requirements
regarding audit committee financial experts?
We understand that experienced professionals, including
audit committee members, would likely need to enhance their knowledge
of IFRS and develop further expertise, and we believe it would be
important for audit committee members to do so in light of their
responsibility for oversight of the preparation and audit of financial
statements that are presented to U.S. investors. To what extent would
current members of boards of directors likely have the education or
experience needed to meet the requirements of the definition of ``audit
committee financial expert'' \9\ or the stock exchange listing
requirements related to accounting or financial management expertise
\10\ following the incorporation of IFRS into the financial reporting
system for U.S. issuers? Would there be adverse effects
[[Page 51152]]
if an issuer were required to disclose that it does not have any audit
committee financial experts while its audit committee members are in
the process of obtaining the necessary expertise?
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\9\ Item 407(d)(5) of Regulation S-K.
\10\ E.g., NYSE Listed Company Manual Sec. 303A.07; Nasdaq
Listing Rule 5605(c)(2).
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To the extent that incorporating IFRS into the financial
reporting system for U.S. issuers would adversely affect board members'
ability to meet the requirements or result in disclosure that the
issuer does not have an audit committee financial expert, how would
issuers and individual directors most likely address such effects
(e.g., by additional training)? To what extent and in what ways would
such effects be likely to differ from similar effects in jurisdictions
that have adopted, or are in the process of adopting, IFRS?
To what extent and in what ways would incorporating IFRS
into the financial reporting system for U.S. issuers likely affect an
issuer's ability to comply with quantitative securities exchange
listing standards?
To what extent would any potential adverse effects of
incorporating IFRS into the U.S. financial reporting system on issuers'
compliance with corporate governance and related disclosure
requirements likely be mitigated or otherwise affected by providing for
a transition or phase-in period for compliance with the incorporation
of IFRS into the financial reporting system for U.S. issuers? What
length of a transition or phase-in period would be necessary to
reasonably mitigate the adverse effects? Are there any other means by
which such effects can be mitigated or avoided?
To what extent would any potential adverse effects of
incorporating IFRS into the U.S. financial reporting system on issuers'
compliance with quantitative stock exchange listing standards likely be
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the
financial reporting system for U.S. issuers? What length of a
transition or phase-in period would be necessary to reasonably mitigate
the adverse effects? Are there any other means by which such effects
can be mitigated or avoided?
Are there any corporate governance and related disclosure
requirements other than those identified above that would be affected
by incorporating IFRS into the financial reporting system for U.S.
issuers?
IV. Statutory Distribution Restrictions and Other Legal Standards Tied
to Financial Reporting Standards \11\
A. Background
Certain legal standards in State laws may be tied to amounts
determined for financial reporting purposes. For example, while the
amount, timing, and manner of the payment of dividend distributions and
repurchases of stock are typically determined by companies' boards of
directors, the actual amounts available to distribute or to repurchase
may be restricted by State statute. Some jurisdictions provide in this
regard that dividends may be paid only from retained earnings or may be
paid from current earnings despite an accumulated deficit.
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\11\ Work Plan, 75 FR at 9508-9.
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To the extent that jurisdictions base legal standards on amounts
determined for financial reporting purposes, incorporation of IFRS into
the financial reporting system for U.S. issuers could affect a
company's ability to undertake certain actions, such as declaring
dividends or repurchasing stock, which would, in turn, affect
investors' expectations. In addition, to the extent that legal
standards do not change based on changes in financial reporting
requirements, companies could need to maintain two sets of records.
B. Request for Comment
To what extent and in what ways would incorporating IFRS
into the financial reporting system for U.S. issuers likely affect the
application of limits in State statutes on the ability of issuers to
make distributions to holders of equity securities, either through
dividends or similar distributions in respect of those securities, or
to repurchase such securities? \12\
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\12\ E.g., Del. Code Ann., tit. 8, Sec. 154 (defining surplus);
Model Bus. Corp. Act Sec. 6.40 (prohibiting distributions to
shareholders if total assets would be less than total liabilities).
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Are there any particular distribution statutes from any
particular jurisdictions the application of which are especially likely
to be affected by incorporating IFRS into the financial reporting
system for U.S. issuers? \13\ Which statutes, and why?
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\13\ E.g., Cal. Corp. Code Sec. 500(c) (``The amount of any
distribution payable in property shall, for the purposes of this
chapter, be determined on the basis of the value at which the
property is carried on the corporation's financial statements in
accordance with generally accepted accounting principles.''); Ohio
Rev. Code Sec. 1701.33(A) (including, in the formula for
determining the permissible amount of a distribution, ``[t]he
reduction in surplus that results from the immediate recognition of
the transition obligation under statement of financial accounting
standards no. 106 (SFAS no. 106), issued by the financial accounting
standards board'').
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To the extent that incorporating IFRS into the financial
reporting system for U.S. issuers would affect the application of
statutes governing distributions to equity security holders, how would
the jurisdictions affected (or issuers in such jurisdictions) most
likely address such effects?
To what extent would any potential effects of
incorporating IFRS into the financial reporting system for U.S. issuers
on the application of statutes governing distributions to equity
security holders be avoided or minimized by State law permitting the
board of directors to rely on reasonable valuation methods, rather than
on financial statements, in determining whether a distribution is
permissible (e.g., when transitioning to IFRS, if the value of an asset
is determined to be lower using IFRS than it would be using the current
standard in U.S. GAAP, would the board be able to make a determination
that the value of the asset is higher than as calculated under IFRS)?
\14\
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\14\ See Klang v. Smith's Food & Drug Ctrs., 702 A.2d 150, 152
(Del. 1997) (``Regardless of what a balance sheet that has not been
updated may show, an actual, though unrealized, appreciation
reflects economic value that the corporation may borrow against or
that creditors may claim or levy on. Allowing corporations to
revalue assets and liabilities to reflect current realities complies
with the statute [specifying permissible sources for distributions
to stockholders] and serves well the policies behind this
statute.''); Model Bus. Corp. Act Sec. 6.40(d) (permitting the
board of directors to determine whether a distribution is
permissible based ``either on financial statements prepared on the
basis of accounting practices and principles that are reasonable in
the circumstances or on a fair valuation or other method that is
reasonable in the circumstances.'').
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To what extent would any potential effects of
incorporating IFRS into the financial reporting system for U.S. issuers
on the application of statutory limits on distributions to equity
security holders likely be mitigated or otherwise affected by providing
for a transition or phase-in period for compliance with the
incorporation of IFRS into the financial reporting system for U.S.
issuers? What length of a transition or phase-in period would be
necessary to reasonably mitigate the effects? Are there any other means
by which such effects can be mitigated or avoided?
To what extent and in what ways would incorporating IFRS
into the financial reporting system for U.S. issuers likely affect the
application of State statutes requiring a shareholder vote for a sale
of ``all or substantially all'' of the issuer's property or assets?
\15\ For example, would the determination of whether such a vote is
required change
[[Page 51153]]
as a result of a change in accounting standards?
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\15\ E.g., Del. Code Ann., tit. 8, Sec. 271(a); Model Bus.
Corp. Act Sec. 12.02(a).
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Are there any particular asset sale statutes from any
particular jurisdictions the application of which is especially likely
to be affected by incorporating IFRS into the financial reporting
system for U.S. issuers? Which statutes, and why?
To the extent that incorporating IFRS into the financial
reporting system for U.S. issuers would affect the application of
statutes governing sales of assets, how would the jurisdictions
affected (or issuers in such jurisdictions) most likely address such
effects?
To what extent would any potential effects of
incorporating IFRS into the financial reporting system for U.S. issuers
on the application of statutes governing sales of assets be avoided or
minimized by State law permitting the board of directors to rely on
reasonable valuation methods, rather than financial statements, in
determining whether a shareholder vote is required to approve a sale of
assets? \16\
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\16\ See Official Comment to Model Bus. Corp. Act Sec. 12.02(a)
(stating that a board of directors may base a determination that a
retained business represents at least 25% of total assets or 25% of
total income ``either on accounting principles and practices that
are reasonable in the circumstances or (in applying the asset test)
on a fair valuation or other method that is reasonable in the
circumstances.'').
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To what extent are any potential effects of incorporating
IFRS into the financial reporting system for U.S. issuers on the
application of statutes governing sales of assets likely to be
mitigated or otherwise affected by providing for a transition or phase-
in period for compliance with the incorporation of IFRS into the
financial reporting system for U.S. issuers? What length of a
transition or phase-in period would be necessary to reasonably mitigate
the effects? Are there any other means by which such effects can be
mitigated or avoided?
Are there any other State statutes the application of
which is likely to be affected by incorporating IFRS into the financial
reporting system for U.S. issuers? \17\ To what extent and in what
ways, and why?
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\17\ E.g., Del. Code Ann., tit. 8, Sec. 503 (requiring, for
purposes of determining corporate franchise tax, that ``[i]nterests
in entities which are consolidated with the reporting company shall
be included within `total assets' and `total gross assets' at a
value determined in accordance with generally accepted accounting
principles.'').
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Persons submitting comments on any of these questions are invited
to consider and comment on whether the manner in which IFRS
incorporation is implemented would affect the responses to the
questions above.
All interested parties are invited to submit their views, in
writing, on these questions.
Dated: August 12, 2010.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-20358 Filed 8-17-10; 8:45 am]
BILLING CODE 8010-01-P