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33-9133
 

• To what extent and in what ways is the set of accounting standards (such as U.S. GAAP or IFRS) used by a company in its financial reporting significant to an investor’s decision to invest in that company?

Investor’s decision is influenced more by the strength of the management team, industry position, and stock price performance history than the actual statements or the standards applied in drafting them. Also, the consistency of applying the same standard which is comparable across industries and the whole global economy creates confidence necessary for any investment decision which should be taken under reduced risk of possible negative outcomes.

• To what extent are investors aware of the potential impact of incorporation of IFRS into the financial reporting system for U.S. issuers that they invest in or follow, compared with current U.S. GAAP? How significant of a change would the use of IFRS as compared to current U.S. GAAP be for investors?

Most investors do not have time to try to understand the differences between the standards and have to struggle with differences within US GAAP, FASB, ASC versus Internal Revenue Code Sections at the federal level and a multitude of local and state tax regimes. On the individual basis, the investor has to rely on other parties like advisors and investment administrators to help him or her understand the nuances in arriving at a different numerical outcome for the seemingly the same financial position.

• To what extent and in what ways would any of the current differences between U.S. GAAP and IFRS affect an investor’s use of information reported in the financial statements? How would completion of the convergence projects being jointly undertaken by the FASB and the IASB affect an investor’s use of those financial statements?

At the moment, the biggest difference is in reporting inventories. Compared to disallowance of LIFO valuation in IFRS, the rest of the differences are much smaller in impact. Investor would benefit from FASB and IASB issuing their standards jointly and in agreement. Access to timely financial information remains critical for the existing and new standards, but keeping differences to a minimum increases transparency and communication efficiency between the company and investing public.             

• How do investors develop and maintain an understanding of the impact of accounting standards, whether IFRS or U.S. GAAP, on the companies that they currently, or may in the future, invest in? How confident are investors in their understanding of IFRS?

The best approach for investors to understand the differences or their lack is by making investments in the companies that report in either set of standards and comparing the performance in their portfolios. Currently, the investors are as confident in understanding IFRS as they are in understanding US GAAP. Investors need to continue educating themselves as to the impacts of standards change whether within US GAAP or outside.

• To what extent and in what ways would that change if IFRS were incorporated into the financial reporting system for U.S. issuers?

Incorporation of IFRS would make even smaller differences become even less relevant to the investing decisions. Including IFRS would not reduce the need of continuing education and applying common sense in making investment decisions.

• How much time do investors currently devote to understanding or maintaining an understanding of accounting standards? To what extent would the time increase or decrease if IFRS were incorporated into the financial reporting system for U.S. issuers?

Only by virtue of my profession, I devote significant amount of time in trying to understand accounting standards. I would like to spend less time trying to understand the differences and reduce the amount of time spent in gathering requirements for the current and future automation projects of financial reporting systems and spend that time trying to innovate and increase my own productivity as well as  my clients’. After IFRS have been in place for a significant number of years, e.g. five to ten, I would see the time spent trying to understand the IFRS differences greatly reduced. This assumes the differences themselves would be smaller per se by then.

• If IFRS were to be incorporated into the financial reporting system for U.S. issuers, to what extent would an investor (or an investor’s organization) have adequate resources to develop an understanding of IFRS, such as knowledgeable professionals, training materials, and access to standards?

The resources are easily accessible today with tools offered through the internet, social media, and Wikipedia as well as through services provided by professional services firms. The highest expense would be incurred in training and retraining knowledgeable professionals who may initially not perceive the value of changing standards and the bigger adjustment required that would pay off in the long run which may, for some, be too long a horizon.

• To what extent and in what ways do investors think incorporation of IFRS would affect comparability among different issuers’ financial statements? Which standards or treatments in IFRS that are elective are most important? To what extent do reporting format and disclosures affect any lack of comparability?

Comparability is the single biggest advantage of incorporating IFRS. The critical areas of financial statements are revenue recognition, financial instruments, and provisioning for current and future expenses. The current inventory accounting methods (LIFO vs FIFO) may become less problematic once the companies start seeing larger benefit of complying with IFRS for all of their measurements and financial positions.

• To what extent and in what ways would an investor’s investment decision-making processes change if a U.S. issuer’s financial statements were prepared using IFRS?  Would investors need additional or different information to perform their analysis and, if so, what?

The only additional information required with IFRS would be reconciling two sets of standards for a period of few years to ensure consistency of historical data. After the initial adoption period the analytical tools are not really playing any role as technology is agnostic as to what kind of information is processed as longs as it is in an efficient and error free manner.

• To what extent and in what ways would an investor’s investment decision-making processes change if U.S. issuers were given a choice to elect to prepare their financial statements using either U.S. GAAP or IFRS? Would an investor have greater or lesser confidence in a company’s financial reporting if a U.S. issuer were to elect to prepare its financial statements in accordance with IFRS rather than U.S. GAAP?

Given a choice, the biggest international filers would elect to prepare their statements according to IFRS and smaller filers according to US GAAP as that seems to be a less expensive decision at this time. Competitive pressures and the increased pool of IFRS trained professionals will reduce the number of incidents of filing according to by then “minority” standards.

• To what extent would use of IFRS by a U.S. issuer influence an investor to invest in that issuer? Not to invest? To hold? To sell?

Holding seems the most popular decision as the companies are slowly transitioning and competing with each otherfor markets. One way to investigate the new standard is to invest tentatively in a filer that is already using IFRS and compare it to a US GAAP filing portfolio components to assess any statistical significance of filing standards variation.

• Do the answers to the questions above change depending on the nature of the investor (for example, if the investor is a retail investor, mutual-fund investor, institutional investor, or asset or portfolio manager) or the class of investments (debt, equity or convertible securities)?

Yes, retail investor is almost certainly not interested in accounting standards. As the investor becomes larger even a small difference may play a role in deciding whether to invest or not to invest. All classes of investments are similarly affected,  with common stocks being the least and convertible securities the most sophisticated instruments. I’m only a retail investor, but I also use the infrastructure of one of the largest retirement fund administrators in the country and have experience of investing through other large brokerages as well.

• In what ways do investors educate themselves about accounting standards and changes to accounting standards? For example, do investors review accounting standard setters’ project activities and related board materials? Observe meetings? Review meeting summaries? Review other observers’ commentaries?

Investors can educate themselves by visiting the following internet address destinations: FASB.org, SEC.org, IFRS.com, IRS.gov, AICPA.org, and by maintaining professional relationships among themselves. This includes observation and reviewing of meetings, but also subscribing to tweets and automated messages from their professional associations. I do observe meetings and review both meeting summaries and other observers’ commentaries and I recommend them all.

• At what point do investors educate themselves about standard-setting activities? Is it during the standard-setting process? Is it after completion of the standard-setting process? Would the timing of investors’ education processes change if accounting standards for U.S. issuers were primarily developed by an organization other than the FASB?

Education is an ongoing and never ending process. Continuing education requires additional course load for each properly licensed professional. Education takes place at all stages of the standard-setting process. The biggest change would be if standards became the law of the land legislated by the US Congress and signed by the The President. Whether through FASB or its potential replacement, the institutional form is not critical for IFRS adoption in the United States. With today’s advanced communication tools the location of the standards setting body plays a smaller role  than in the past, but it is still important for maintaining any relevant presence.

• To what extent and in what ways do investors participate in the standard-setting process when the FASB and IASB set standards? Do they monitor standard-setting deliberations? Do they prepare response letters to requests for comment? Do they participate in the standard setters’ working groups and roundtables?

Today, investors can participate by signing up to come to the meetings and by keeping in touch via websites, blogs, and tweet feeds. Observers by definition cannot more actively participate in the meetings, so written comments remain the only valid form of communication with oral commentaries being effectively withheld from the investing public.

• To what extent does the timing of an investor’s education about a possible outcome of the accounting standard-setting process affect investment decisions? Do investors consider possible changes in accounting standards when analyzing an issuer’s reported financial information, even before any such change in accounting is required to be adopted?

The standards setting process is very slow when compared with the speed at which stock markets move that until the process is completed most investors will ignore the progress in adopting new standards or the lack of such progress. Before the change is actually implemented analyzing the financial statements is of limited value.

• Are there ways to improve the representation and communication of investors’ perspectives in connection with accounting standard setting?

The communication with investors can be improved by reducing the number of standard setting bodies and mandating one uniform federal law overwriting all administrative and local jurisdiction decisions (including tax). This idea seems very remote and I do not expect any changes in the process in my lifetime, but it is still a possibility.

• To what extent do investors believe more education or communication about accounting standards or accounting standard-setting is needed? If more education or communication is needed, how should the education or communication be delivered? By whom?

More than education a disciplined public debate is needed. Current social media should be incorporated into the possible communication campaign. Education will be sought after by the professionals and their associations, but the average investor will rely on others’ providing the information, raw data as well as interpretation of that data’s meaning.

• How much time, if any, do investors need to improve their understanding of IFRS and related education processes so they have a sufficient understanding of IFRS prior to any incorporation?

Between one and two years should be sufficient to get proficient in understanding the basics of IFRS by the average licensed financial professional.

• What mechanisms would aid investors in improving their understanding of IFRS? Who should provide those mechanisms?

The following can be put to a higher use: social media, public debate, educational system, as well model reporting systems. They would all help in making the subject matter more relevant to the investing public.

 

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• 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?

Since IFRS is in many ways similar to US GAAP and US GAAP is not a body of law there should be no conflict between accounting standards and contractual obligations arising from agreements, indentures, plans, and designations. Adopting IFRS does not change a single law, whether federal, state, local, or any law arising from an international treaty. Also, being principles based, IFRS does not contain as many technical prescriptions as to what the financial statement preparer needs to consider nor a multitude of safe harbors to comply with.

• 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?

For the same reasons as stated above, IFRS does not in any way modify, change or affect any existing or future laws of the land, but rather presents a uniform framework to make financial information available to any interested party, within and outside of the United States.

• 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?

For the same reasons as stated above, IFRS would not cause any different treatment of any legally binding agreements.

•  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)?

Introducing additional accounting system is the most likely scenario when IFRS is being adopted. Since IFRS is not a law it will not affect any legal standing to a party to any contracts. Being subject to system upgrade and staying competitive in the technological plane requires at least as much effort in modifying accounting systems as the adoption of IFRS would.

•  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?

Since there would be no impact, no mitigation is called for in incorporating IFRS. A transitional period should not be less than 18 months and not more than 3 years, driven mainly by technological adjustment like XBRL tagging and mapping of legacy reporting applications to the new interfaces required for presenting financial information to investors.

• 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?

Incorporating IFRS will have an impact on compliance with exchange listing requirements and the composition of audit committees as additional education is required which should not be more effort than in educating relevant bodies about Accounting Standards Codification which has recently replaced SFAS and other forms of communication from FASB.

•  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” or the stock exchange listing requirements related to accounting or financial management expertise following the incorporation of IFRS into the financial reporting system for U.S. issuers? Would there be adverse effects 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?

Current members of audit committees are unlikely to possess expert knowledge about IFRS, but it will be remedied by taking steps as listed above through continuing education and hiring those who are already experts. There would be an adverse effect were a committee member to admit lack of knowledge and experience in disseminating any information, including financial. With proper incentives the educational gap can be quickly closed as financial experts start perceiving passion of IFRS knowledge and expertise as competitive advantage over those who lack such knowledge.

•  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?

Financial experts that are at the disposal of board members ensure the speedy and thorough education in IFRS and any other standard modification, just like today’s marketplace and technology, through the competitive pressures, ensure that each financial professional is schooled in the latest requirements, reporting and any other financial educational requirement.

• 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?

There should be no impact on quantitative standards, whether required by securities exchanges, by the Securities and Exchange Commission, the Internal Revenue Service, or any other governmental or private industry governing body.

•  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?

Any adverse effects should be mitigated within 2-3 year timeframe. Since the adverse effects are minimal they can be avoided by continuing education and information exchange in the traditional and through the new social media.  The traditional and new communication media are sufficient for mitigating any information deficiencies resulting from IFRS or any other financial reporting requirement.

• 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?

Other changes that come mind are for example future press releases that may possibly start containing the new (IFRS) acronym and published figures that would start having a disclaimer “non-IFRS earnings” or similar. There should not be any other change in the behavior of registrants.

• 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?

There will be no impact on state statutes just like there is no impact on federal statutes or international treaties. Existing and future equity securities holders have exactly the same rights and obligations whether IFRS are adopted by the US issuers or not.

• 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? Which statutes, and why?

There are no such statutes to my knowledge and if they are they need to become a part of educating financial experts to evaluate financial information as drafted under IFRS.

• 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?

Since there is no impact there is no need to address the issue. In case it is found that in fact there are such statutes they should be handled in the same way they would today in case of US GAAP.

• 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)?

As long as the basis of valuation is provided, differences in the final result are permissible and inevitable, both when resulting in higher and lower valuations. IFRS by themselves do not ensure that there would be no attempts to misuse their intent.

• 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?

There is no need for mitigation according to the rationale provided in earlier answers.

• 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? For example, would the determination of whether such a vote is required change as a result of a change in accounting standards?

There should be no spillover effect between accounting standards and the law just like there is none between US GAAP and US statutes.

• 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?

There are no such statutes to my knowledge and answers can be only provided by a competent legal rather than an accounting professional.

•  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?

Since there is no impact there is no need to address unless legal professionals would find any jurisdictional or common law exposures that would need to be addressed.

• 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?

The conclusions are the same as in the previous answer, but the risks can be avoided or mitigated by competent legal help.

•  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?

Again, answers can be the same as previously, but and I defer this answer to those who are better equipped to answer any legal conflict questions.

• 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? To what extent and in what ways, and why?

Ditto.

http://www.sec.gov/rules/other/2010/33-9133.pdf

http://www.sec.gov/rules/other/2010/33-9134.pdf

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