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Robert D' Strahota

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Supported 2000 IOSCO resolution re use of 30 core international accounting ... Resolution of this issue will affect the attractiveness of EU markets; e.g., Eurobonds ... – PowerPoint PPT presentation

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Title: Robert D' Strahota


1
CONVERTING TO IFRS A U.S. PERSPECTIVE
  • Robert D. Strahota
  • Assistant Director, Office of International
    Affairs
  • U.S. Securities and Exchange Commission
  • Russian Corporate Governance Roundtable
  • Moscow
  • November 11-12, 2004
  • As a matter of policy, the Commission disclaims
    responsibility for any private publications or
    statements by any of its employees. The views
    expressed are those of the speaker and do not
    necessarily reflect the views of the Commission,
    individual commissioners or the speakers
    colleagues on the staff of the Commission.

2
This Presentation Covers
  • Principal steps that have been taken in the U.S.
    to facilitate the development and use of
    international financial reporting standards
    (IFRS), including conversion issues that may be
    of relevance to other countries planning to adopt
    IFRS
  • U.S. efforts to foster high quality,
    internationally acceptable accounting and
    auditing standards
  • Some thoughts on where we are in the process

3
SEC and International Financial Reporting
Standards
  • SEC continues to work directly and through the
    International Organization of Securities
    Commissions (IOSCO) to encourage the adoption and
    use of high quality IFRS
  • Observed meetings of the former IASC
  • Supported 2000 IOSCO resolution re use of 30 core
    international accounting standards (IAS) in cross
    border offerings and listings
  • Participates in accounting standards improvement
    projects
  • Involved in restructuring and creation of IASB
  • Observes standards-setting and interpretation
    work of new IASB
  • SEC has already accepted use of IFRS by foreign
    companies with reconciliation to U.S. GAAP
  • SEC has already accepted three IAS without
    reconciliation IAS No. 7 (cash flow statements),
    No. 22 (business combinations) and No. 21
    (operations in hyperinflationary economies)

4
Foreign Companies Conversion to IFRS
  • Less than 50 of 1200 foreign companies now use
    IFRS in their SEC reports
  • All of the six Russian companies subject to SEC
    filing requirements have elected to prepare their
    financial statements using U.S. GAAP
  • Per a September 2003 EU regulation, IFRS will be
    required effective January 1, 2005 for
    approximately 7,000 EU companies, including
    approximately 450 EU companies that file reports
    with the SEC
  • Many other jurisdictions also are converting to
    IFRS as of this date
  • To accommodate IFRS conversion for foreign
    companies that file SEC reports, the SEC issued
    proposals in February 2004 that would permit
    filing of two instead of three years of IFRS
    financial statements in the first annual report
    filed by a foreign issuer in accordance with IFRS

5
SEC Proposals re Conversion to IFRS
  • Proposals would apply to companies adopting IFRS
    for the first time, and no later than calendar
    2007
  • Proposals would require a company must to state
    unreservedly and explicitly that its
    general-purpose financial statements comply with
    IFRS the audited financial statements may not be
    subject to any qualification relating to the
    application of IFRS.
  • If IFRS are used, reconciliation to US GAAP would
    still be required
  • All audited financial statements filed with SEC
    must be audited in accordance with U.S. generally
    accepted auditing standards (which now means
    auditing standards of the PCAOB) (U.S. GAAS), and
    U.S. independence rules apply
  • SEC staff will review the expanded universe of
    IFRS-based reports in considering future
    acceptance of IFRS reporting without US GAAP
    reconciliation

6
Key Issues Relating to Conversion
  • The SEC proposals, IFRS and CESR guidance
    identify several key issues raised by conversion,
    although there is not complete agreement
    regarding resolution
  • IFRS give rise to a new basis of accountability
    and would require disclosure regarding
    reconciliation of IFRS balance sheet and income
    statement information to previous GAAP
    information
  • To provide at least three years of comparable
    data, the SEC proposals would require companies
    presenting only two years of IFRS financial
    statements in the transition year report to
    include a note to the audited financial
    statements which presents three years US-GAAP
    condensed balance sheet and income statement data
    without any required footnote explanation.

7
Key Issues Relating to Conversion - continued
  • Interim financial statements during the first
    year of IFRS
  • Foreign companies are not required to file
    interim financial reports with the SEC, but if
    interim financial information were required,
    e.g., in an offering document because of the age
    of audited financial statements, SEC proposals
    would require comparative interim period
    information in accordance with or reconciled to
    U.S. GAAP
  • CESR guidance would not preclude use of previous
    GAAP for interim financial statements but
    indicates a preference for reporting on the basis
    of IAS 34 or IAS/IFRS recognition and measurement
    principles that will be used for year-end IFRS
    financial statements
  • SEC proposals would require MDA to focus on the
    IFRS financial statements, would prohibit side-by
    side comparisons of IFRS and previous GAAP
    information and would require cautionary language
    where previous GAAP information is used CESR
    guidance would permit side-by-side comparisons
    with explanatory reconciliation

8
Effect of EU Conversion to IFRS on Non EU
Companies
  • EU regulation requiring conversion to IFRS
    provides that EU member states to exempt non-EU
    companies from IFRS requirements up to 2007 in
    the case of
  • Companies that are listed both in EU and on a
    non-EU exchange and are using another set of
    internationally accepted standards
  • Companies that have only publicly-traded debt
    securities
  • In light of the 2007 deadline, on June 29, 2004
    EC issued a mandate to CESR to assess the
    equivalence with IFRS of U.S. GAAP, as well as
    Canadian and Japanese standards CESR-Fin, a
    standing committee of CESR, will direct the work
    and report to CESR
  • Resolution of this issue will affect the
    attractiveness of EU markets e.g., Eurobonds

9
SEC-CESR Cooperation Will Improve International
Coordination in Implementing and Enforcing Use of
IFRS
  • 2004 Memorandum of Understanding between CESR and
    the SEC provides for consultation and cooperation
    on a wide range of issues affecting the
    organizations constituencies
  • IFRIC will be responsible for issuing IFRS
    interpretations but individual country regulators
    do not relinquish their authority to interpret
    and enforce IFRS
  • It is expected that potential conflicts regarding
    interpretation and enforcement of IFRS will
    minimized by SEC-CESR consultation, and also by
    consultation within IOSCO

10
IOSCO Initiatives Regarding the Financial
Reporting Process and Its Oversight
  • May 2000 IOSCO resolution recommending that IOSCO
    members permit the use of 30 core IAS,
    supplemented by reconciliation, disclosure and
    interpretation, for cross border offerings and
    listings
  • In light of the many changes that have been made
    in the core IAS as well as adoption of new
    standards, an updated IOSCO resolution is being
    prepared to support IFRS as a whole, support
    IASBs independence, and explain IOSCOs role vis
    a vis IFRS and the IASB
  • In February 2004, the IOSCO Technical Committee
    approved a Regulatory Interpretations of IFRS
    Project with the goal of encouraging cooperation
    and consultation among IOSCO members in the
    application and interpretation of IFRS. IOSCO
    Standing Committee 1 is to develop a consultation
    to be circulated to all IOSCO members regarding
    this project

11
IOSCOs Position on Auditor Oversight
  • IOSCOs October 2003 Statement of the Technical
    Committee regarding Principles of Oversight
    reflects international consensus that within each
    jurisdiction auditors, auditing standards,
    independence, ethical standards and quality
    control procedures, should be
  • subject to oversight by a regulatory body that
    acts and is seen to act in the public interest
    and that
  • disciplinary processes carried out or overseen by
    a independent body that is not under the control
    of the auditing profession

12
SEC-PCAOB oversight of the auditing profession is
one (not the only) model for auditor oversight
  • PCAOB is a non-profit organization whose five
    board members are appointed by the SEC after
    consultation with the Chairman of the Federal
    Reserve Board and Secretary of the Treasury no
    more than two board members may come from the
    auditing profession
  • PCAOB has authority to establish audit standards,
    related attestation standards, and independence
    quality control and ethics standards to be used
    by registered public accounting firms in audits
    of public companies financial statements filed
    with SEC
  • PCAOB has comprehensive authority to inspect,
    investigate, require reports, testimony and
    documents from, and sanction registered public
    accounting firms and associated persons for
    violations of SOX, securities laws and
    professional standards, including failure to
    reasonably supervise associated persons and
    failure to cooperate with an investigation
  • SECs oversight authority includes authority to
    approve and amend Board Rules notice of Board
    investigations authority to inspect and sanction
    the Board, including censure and removal of
    members review of Board disciplinary actions
    and oversight of the Boards budget and funding
    process

13
Prospects for SEC Acceptance of IFRS Without U.S.
GAAP Reconciliation
  • The SEC Concept Release, issued in February 2000,
    requested comment on issues relating to quality
    of the standards, interpretation, application,
    auditing, and enforcement
  • Importance of a global financial reporting
    infrastructure was emphasized, including
  • A comprehensive body of standards
  • High quality of these standards, including
  • Consistency
  • Transparency
  • Full disclosure
  • Rigorous interpretation and application of the
    standards
  • Assessment of the financial reporting
    infrastructure includes auditing and enforcement
    issues
  • International regulatory cooperation is critical

14
SEC Concept Release Aftermath
  • Comment letters expressed a variety of views
  • Accounting convergence work underway holds out
    tremendous potential for investors and companies
    seeking to allocate and raise capital on a global
    basis
  • Adoption of IFRS to occur in European Union and
    some other countries should provide answers to
    some of the questions raised in the concept
    release
  • SEC staff currently considering steps that would
    need to be taken to eliminate reconciliation from
    IFRS to U.S. GAAP
  • No specific timetable has been adopted.

15
Convergence of Accounting Standards
  • IASB and FASB October 2002 MOU re convergence of
    IFRS and U.S. GAAP
  • Convergence is being implemented in several ways,
    including
  • Short term efforts focused on discrete areas
    where it is possible to readily identify the best
    standard
  • An IASB representative at the FASB
  • Joint projects on major, fundamental areas
  • Longer term research, studies and projects to
    come
  • Consideration of convergence potential in all
    FASB decisions
  • Convergence dialogue has identified the need for
    a single conceptual framework (a longer-term
    project now underway)
  • Unfortunately, convergence can be affected by
    politics e.g. EU acceptance of IAS 39 and 32,
    now compromised, and U.S. accounting for stock
    options, now deferred for six months
  • SEC fully supports convergence efforts and
    believes the focus should be on developing high
    quality standards. It does not view convergence
    as a one way street and is prepared to accept
    convergence from a U.S. GAAP standard to a better
    IFRS, but SEC also opposes lowest common
    denominator convergence

16
SEC Chief Accountant Donald T. Nicolaisen
recently statedIn order to realize the
benefits of truly international financial
reporting, we need convergence in all areas ---
accounting, auditing and disclosures.
17
Where Are We in the Process?
  • Progress in all three of these areas is
    encouraging
  • The global infrastructure for IFRS is
    substantially in place in light of IASBs
    reorganization and related efforts underway to
    coordinate interpretation and enforcement of IFRS
  • The EUs decision to use IOSCOs Nonfinancial
    Disclosure Standards as the base level for
    disclosure in the EUs Prospectus Directive and
    the SECs earlier adoption of these standards has
    contributed substantially to their international
    acceptance
  • While encouraging, progress regarding the global
    infrastructure for auditing standards is not
    complete. IFAC is not a body independent of the
    auditing profession and efforts to establish a
    Public Interest Oversight Board overlay are
    ongoing
  • There much less consensus over what constitutes
    high quality, international acceptable auditing
    standards and what changes need to made in
    current International Standards of Auditing

18
The Sarbanes-Oxley (SOX) Response to Auditing
Failures in the U.S. Has Significantly Changed
U.S. Auditing Standards
  • On May 27, 2003, the SEC implemented Section 404
    of SOX by requiring domestic and foreign issuers
    to include in their annual reports a management
    report on internal control over financial
    reporting, Among other things, the report must
    include
  • Managements assessment of the effectiveness of
    the internal control as of the end of the last
    fiscal year (any material weaknesses must be
    disclosed and if they exist, management cannot
    conclude that internal control is effective)
  • A statement that the issuers independent
    accountants have issued an attestation report on
    managements assessment
  • SOX also required the PCAOB to adopt rules that
    will require the independent auditor to describe
    in its audit report the scope of its testing of
    the internal control structure and procedures of
    the company, and to present (in such report or in
    a separate report)
  • The findings of the auditor from such testing
  • An evaluation whether the internal control
    structure and procedures achieve substantially
    the principal internal accounting control
    requirements of the Securities Exchange Act of
    1934

19
Changes in U.S. Auditing Standards
  • The new internal control audit requirement
    differs from the independent auditors existing
    obligation under U.S. GAAS to evaluate internal
    controls of the company for purposes of planning
    the scope of the audit e.g., the requirement
    envisions that the internal control evaluation
    would encompass an evaluation of the
    effectiveness of a companys audit committee
  • This requirement is in addition to the
    independent auditors obligation under SOX to
    attest to managements report and assessment of
    the internal control structure and procedures for
    financial reporting
  • This new requirement has been characterized as a
    sea change and as a breakthrough that requires
    an integrated approach to the audit process. See
    PCAOB Standard No. 2 on audits of internal
    controls over financial reporting
  • Because this change in U.S. practice is so new
    and has yet to gain international acceptance, it
    suggests a scenario whereby any U.S. acceptance
    of IFRS is likely to still require adherence to
    U.S. GAAS, as now prescribed by the PCAOB

20
Thank you
  • Questions?
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