Title: Robert D' Strahota
1CONVERTING 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.
2This 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
3SEC 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)
4Foreign 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
5SEC 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
6Key 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.
7Key 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
8Effect 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
9SEC-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
10IOSCO 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
11IOSCOs 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
12SEC-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
13Prospects 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
14SEC 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.
15Convergence 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
16SEC 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.
17Where 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
18The 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
19Changes 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
20Thank you