On Dec. 12, 2008, the European Union (EU) issued a press release announcing: European Commission Grants Equivalence In Relation To Third Country GAAPs. (GAAP refers to Generally Accepted Accounting Principles.) The [European] Commission Decision and related [European] Commission Regulation (EC) No. 1289/2008 were published in the Journal of the European Union on December 19.
Had the European Commission (EC) not reached this equivalency decision, all foreign (non-EU based) companies listed in the EU, which file financial statements with authorities such as stock exchanges in the EU, would have had to begin filing those financial statements in the EU in International Financial Reporting Standards (IFRS), rather than in their home country GAAP (referred to as ‘third country GAAP’).
Like their EU-based counterparts, who were required to file their financial statements in IFRS in the EU beginning in 2005, foreign (non-EU based) companies listed in EU markets would have been required to file in the EU in IFRS as of Jan.1, 2009, to create a level playing field or harmonization.
However, in recognition of ongoing convergence efforts by the countries addressed in the December 12 equivalence decision, the EC, after consultation with the Commission of European Securities Regulators (CESR), made the finding of equivalence in accordance with the ‘equivalence mechanism’ established by the EC one year ago.
U.S., Japan GAAP Found Equivalent; China, Canada, South Korea, India on Transitional Basis
According to the EU’s December 12, 2008 press release, "The measures adopted today, which fall under the Prospectus Directive and Transparency Directive, determine that the GAAPs of US, Japan, China, Canada, South Korea and India are found to be equivalent to International Financial Reporting Standards (IFRS) as adopted by the EU. The Commission will review the situation of some of these countries (China, Canada, South Korea, India) by 2011 at the latest. The Commission will also regularly monitor the ongoing status of equivalence and report to Member States and Parliament where necessary." The press release continues:“Today's measures will mean that foreign companies listed on EU markets will continue to be able to file their financial statements prepared in accordance with those GAAPs (the transitional provisions allowing the use of these GAAPs in the EU would otherwise have expired at the end of 2008).”
Based on the status of convergence efforts (e.g. under the updated Memorandum of Understanding (MOU) between the Financial Accounting Standards Board and the International Accounting Standards Board, and based on the agreement between the Accounting Standards Board of Japan and the IASB), and the fact that the U.S. (under the SEC’s Nov. 2007 decision) and Japan do not require foreign filers to provide a reconciliation from IFRS to U.S. or Japanese GAAP, respectively, the EC found U.S. GAAP and Japan GAAP to be equivalent to IFRS.
Canada, South Korea and India have all formally announced plans to move to IFRS by 2011, and China’s Accounting Standards for Business Enterprises are ‘substantially converged’ with IFRS, and ‘cover nearly all topics under current IFRS,’ notes the EC Regulation adopted on December 12. Therefore, the Regulation states, the EC has approved the equivalency of Canada, China, South Korea and India’s IFRS on a transitional basis until 2011.
Equivalent Appears To Mean No “Remedy” Or Explanation of Significant Differences Required
Marie Leone of CFO.com reported the European Commission (EC) decision on December 12 in her article, “A Holiday Reconciliation Gift From the EU.”
We were wondering if there is still any possibility the EC/EU may require any type of ‘remedy’ or disclosure of significant differences between the equivalent third country GAAP and IFRS, as such ‘remedies’ had been contemplated in earlier draft advice documents issued by the Committee of European Securities Regulators (CESR).
As background, in an evolving series of recommendations (formally called ‘advice’ documents), beginning with CESR’s June, 2005 advice, CESR had initially proposed that countries filing in the EU in ‘equivalent’ GAAP – based on the status of IFRS-GAAP convergence and other factors at that time – would have to provide ‘remedies’ to investors in the form of disclosure of significant differences in reported results based on the third country GAAP vs. IFRS. Some, including FEI’s Committee on Corporate Reporting, in a comment letter filed with CESR on June 24, 2005, found CESR’s 2005 proposed ‘remedy’ tantamount to a reconciliation requirement.
Subsequently, in consideration of the furtherance of convergence efforts between FASB and the IASB and other developments including the U.S. Securities and Exchange Commission’s November, 2007 decision to drop the reconciliation requirement for foreign private issuers in the U.S., and in light of the European Commission’s publication in December, 2007 of a mechanism by which the equivalence of third country GAAPs would be determined, CESR’s March, 2008 advice stated, “It is CESR's view that the EU legislators' approach … reflected in the [European] Commission’s Regulation on the [equivalence] mechanism potentially requires a more holistic outcome-based approach to third country GAAP equivalence to be taken rather than an approach based on an analysis of differences in standards and remedying those differences.”
CESR concluded in March, 2008: “CESR now believes that it is best to base a decision on equivalence on an holistic assessment of the ability of investors to make similar decisions on investments irrespective of the existence of potential lingering differences in presentation and measurement, as long as such differences are taken into account in a sensible long-term work programme between the standard setters concerned and the IASB and there is evidence of such programmes being active pursued.”
We invited some experts to share with us their views on whether the EC Regulation issued on December 12 (published on December 19) requires any explanation of significant differences between IFRS and third country GAAPs (e.g., U.S. or Canadian GAAP) found equivalent to IFRS.
Paul Munter, a partner at audit firm KPMG (see also KPMG’s IFRS Institute) told us, “From my reading of the regulation, it appears that a company can use US GAAP without any reconciliation or other explanation, other than a clear and unreserved statement of compliance with US GAAP. He added, “Nothing in the regulation suggests to me that a company using US GAAP would be required to provide any explanation of the differences between their US GAAP financial statements and what the results would be under IFRS.”
Bruce Pounder, CMA, CFM, DipIFR (ACCA) and president of Leveraged Logic, a provider of IFRS convergence training, told us, “In the [European Commission’s] decision, I see no indication of a requirement to reconcile, provide supplementary financial statements, or provide additional disclosures regarding differences between U.S. GAAP and IFRS.” However, he added, “It will be interesting to see whether a requirement for explanatory disclosures makes it into a subsequent legislative act, which is always a possibility.”
As far as particular requirements are concerned, see the NOTE at the bottom of this post.
Canada, Mexico Already Moving to IFRS
Darla Sycamore, author of the blog “IFRS Canada: The Devil is in the Details,” [see her related website: The IFRS Exorcist] told us, “As you know we [Canada] have a requirement for conversion for public entities [to IFRS] for years beginning January 1, 2011.” She added, that as a practical matter, during the interim period (1.1.09, when the EU would have originally required IFRS by all foreign filers, and 1.1.11 when Canada will have adopted IFRS), “I am delighted that the EU has given recognition to Canada’s convergence efforts.”
Additionally, she believed the regulation would be responsive to a question some had about the applicability of the looming requirement for IFRS reporting in the EU that would have become effective as of 1.1.09 (barring the equivalency decision) with respect to certain non-calendar year-end companies as well. According to her reading of the EC Regulation, Sycamore added, “I think it would seem to allow non calendar year companies such as our banks (that have October 31 year ends) to file in Canadian GAAP for their October 31 year ends.”
By the way, Sycamore's blog was among the first to report on Mexico's Nov. 11 decision to adopt IFRS from 2012 onward, and to permit early adoption. She includes a link courtesy of Bruce Pounder to CINIF's Nov. 11 press release, with a translation by Pounder, in the comments section of the above-linked post.
SEC Roadmap Not Mentioned, But Euro. Comm. Says “Countries Should Be Encouraged To Adopt IFRS”
The EC’s December 12 decision does not mention the U.S. Securities and Exchange Commission’s proposed roadmap released in November, 2008 which proposes various milestones that would be considered by the SEC in determining whether to mandate IFRS filings by U.S. public companies, and proposes a timetable in which the SEC would potentially reach that decision in 2011, and require such filings beginning in 2014 (including some prior year comparative information in IFRS). Additionally, the SEC roadmap proposed permitting certain companies in industries in which IFRS is the most predominantly used standard to ‘early adopt’ IFRS.
By being silent on the SEC roadmap and detailing a rationale for the finding of equivalence based on the status of FASB-IASB convergence and the fact that the SEC dropped the reconciliation requirement for foreign issuers, some may say further progress on the roadmap appeared not to be a condition precedent for the EU’s equivalence decision.
However, the EC regulation does state, “The [European] Commission should continue to monitor, with the technical assistance of CESR, the development of those third country GAAPs in relation to adopted IFRS.” They add: “Countries should be encouraged to adopt IFRS,” and “The EU may determine that the national standards which have been determined to be equivalent may no longer be used in preparing information required … when those respective countries have adopted IFRS as their sole accounting standard.”
The EC’s equivalence decision is welcome news for companies that are listed in the EU that wish to continue filing there in one of the third country GAAPs deemed equivalent to IFRS.
NOTE: We recommend (as always), that reference be made to documents and legislation issued by the EU/EC, and that companies consult with their auditors and legal advisors in determining what the requirements are for filing financial statements and related disclosures in the EU, U.S. or elsewhere.
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