SEC to Accept IFRS Financial Statements from Foreign Private Issuers without US GAAP Reconciliation

January 11, 2008

The US Securities and Exchange Commission (the "SEC") recently announced its adoption of rules under which it will accept filings from foreign private issuers containing financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (the "IASB") without requiring reconciliation to US generally accepted accounting principles ("US GAAP"). This change eliminates what has historically been one of the largest obstacles for foreign private issuers to enter and to remain in the US public markets.


US GAAP Reconciliation Requirement. Foreign private issuers registering an offering of securities under the US Securities Act of 1933 (the "Securities Act"), a class of securities under the US Securities Exchange Act of 1934 (the "Exchange Act") or that are otherwise already subject to the ongoing reporting obligations of Section 13(a) or 15(d) of the Exchange Act are required to include in their registration statements and annual reports filed with the SEC their audited financial statements (including statements of income and changes in shareholders’ equity and balance sheets) for the past three years and, in the case of registration statements, interim financial statements for periods specified in the registration forms. Where those financial statements have been prepared in accordance with a basis of accounting other than US GAAP, the issuer historically has been required to include a reconciliation to US GAAP of material differences. This reconciliation requirement has often been a substantial impediment to foreign private issuers entering the US public market. With these rule changes, that reconciliation burden is removed for many issuers, including both new issuers and existing registrants.

Purpose of the New Rules. In its adopting release, the SEC indicated that the purpose of the new rules is to reduce the disparity in global accounting standards and to continue the SEC’s encouragement of the use of IFRS outside the US. The new rules are the most recent of such efforts. For example, in 2005, the European Union (the "EU") adopted a directive requiring the EU Member States to require companies organized within their respective jurisdictions and with securities admitted to trading on one of the regulated EU markets to prepare their financial statements in accordance with IFRS. In response to the EU directive, the SEC adopted a rule change permitting foreign private issuers preparing their financial statements in accordance with IFRS for the first time to provide only two (rather than three) years’ audited financials statements in their SEC filings. The new rules continue this exemption for such issuers.

Availability of the New Rules

The new rules permitting the omission of a US GAAP reconciliation are applicable regardless of whether the issuer complies with IFRS voluntarily or in accordance with the requirements of the issuer’s home country regulator or exchange on which its securities are listed. The issuer must, however, meet the following requirements:

"Foreign Private Issuers" Only. Only an issuer which is a "foreign private issuer" (as defined in Rule 3b-4 under the Exchange Act) that files on Form 20-F will be eligible to rely on the new rules. Thus issuers, including foreign issuers and US subsidiary registrants of foreign issuers, that do not meet each of the elements of the "foreign private issuer" definition, or that meet such elements but elect not to file on Form 20-F, will not be eligible. 

Must Apply IFRS as Issued by IASB. In order to qualify for the relief provided by the new rules, the issuer must apply IFRS as issued by the IASB. The issuer must include within the notes to its financial statements an "unreserved and explicit" statement that its financial statements are in compliance with IFRS as issued by the IASB, and the independent auditor’s opinion must also state without qualification that the financial statements comply with IFRS as issued by the IASB. As a result, financial statements prepared in compliance with a jurisdictional variation of IFRS will not be acceptable, unless the issuer is nonetheless able to provide the unreserved and explicit statement as to compliance, and the auditor opines as to compliance, with both IFRS as adopted by the IASB and the jurisdictional variation of IFRS. 

One exception to this requirement, in the form of temporary transition relief, has been provided by the SEC for existing SEC registrant foreign private issuers from the EU that have previously elected to use the "carve out" for certain hedge accounting provisions as permitted under IAS 39 in the jurisdictional version of IFRS adopted by the EU. The SEC noted that currently the only difference between IFRS as adopted by the EU and IFRS issued by the IASB is this option to elect to make such carve out, and that EU-based registrants who have previously taken advantage of that flexibility under the EU version of IFRS had done so without knowing that its use would be inconsistent with the standard the SEC is setting in the new rules. The transition relief will only be available for such registrants for their first two financial years ending after November 15, 2007.

The New Rules and Related Amendments 

In addition to eliminating the reconciliation requirement for financial statements prepared in accordance with IFRS as issued by the IASB, the SEC made a number of related changes intended to conform the use of IFRS in related areas of disclosure required by the Securities Act and Exchange Act forms. The additional changes principally included:

  • Clarifying References to US GAAP Pronouncements within Form 20-F. Where Form 20-F disclosure items make reference to US GAAP pronouncements, the SEC’s new amendments now specify that foreign private issuers relying on the new rules to omit a US GAAP reconciliation must apply the appropriate corresponding IFRS pronouncements in preparing the disclosure required by Form 20-F. Also, the SEC included an instruction as part of the rule amendments to clarify that the requirement in Form 20-F to include five years of selected financial data will permit the omission of a US GAAP reconciliation if the foreign private issuer prepares its financial statements in compliance with IFRS as issued by IASB.
  • Continuing the Accommodation for Foreign Private Issuers in Their First Year of Reporting under IFRS. As noted above, the SEC is continuing its accommodation to foreign private issuers who are in their first year of reporting under IFRS under which such issuers are only required to include two, rather than three, years’ audited financial statements (in addition to any required interim financial statements). Reconciliation to US GAAP will continue to be applicable to any such issuer who does not otherwise meet the requirements of the new rule discussed above.
  • Clarifying the Use of IFRS in Determining the Necessity of Inclusion of Separate Financial Statements for Acquired Entities or Businesses. In certain circumstances, issuers are required to include in their filings with the SEC the separate financial statements of an acquired entity or business, depending upon the "significance" of the transaction. Regulation S-X specifies the manner of testing the financial significance of the acquisition, and such tests have historically been performed using US GAAP amounts. The SEC amendments make it clear that the significance tests under Regulation S-X may be performed using amounts determined under IFRS as issued by the IASB when the issuer’s financial statements are prepared in accordance with such IFRS. In addition, the SEC made it clear that any issuer, whether foreign or US, that acquires a significant foreign business may include the separate financial statements of that business prepared in accordance with IFRS as issued by the IASB without reconciliation to US GAAP. 

Effective Date of the New Rules

The new rules will be applicable with respect to all annual financial statements for fiscal years ending after November 15, 2007, and any interim periods within those fiscal years, contained in filings with the SEC that are made 60 days after publication of this rule in the Federal Register (which is anticipated to occur in the next few days).  

Gibson, Dunn & Crutcher LLP

Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about the new rules permitting the omission of a US GAAP reconciliation for certain foreign private issuers. Please contact the Gibson Dunn attorney with whom you work or 
J. Alan Bannister (212-351-2310, [email protected]), 
William Candeleria (212-351-2626, [email protected]),
Steven Finley (212-351-3920, [email protected]), 
Dorothee Fischer-Appelt ( +44 20 7071 4224, [email protected]),
Steven Guynn (212-351-2377, [email protected]), 
Kevin Kelley (212-351-4022, [email protected]), 
Kenneth Lamb ( +44 20 7071 4201, [email protected]), 
Brian Lane (202-887-3646, [email protected]), or
Michael Scanlon (202-887-3668, [email protected]). 

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