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Foreign Investments
THE EFFECT OF SEC NEW RULE FOR ACCEPTANCE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH IFRS ON BRAZIL
The U.S. Securities and Exchange Commission (“SEC”) has approved new rules that allow non-U.S. companies that meet the SEC definition of a “foreign private issuer” 1 to submit their financial statements required in connection with SEC filings prepared in accordance with the English language version of International Financial Reporting Standards (“IFRS”) 2 as issued by the International Accounting Standards Board (the “IASB”) without reconciliation to U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) 3. Previously foreign private issuers were required to reconcile their financial statements to U.S. GAAP if they prepared them using any basis of accounting other than U.S. GAAP. The new rules are applicable to financial years ended after November 15, 2007. The rules do not allow U.S. domestic issuers to use IFRS to prepare their financial statements without reconciliation to U.S. GAAP, but the SEC is also considering that change.
The U.S. Securities and Exchange Commission (“SEC”) has approved new rules that allow non-U.S. companies that meet the SEC definition of a “foreign private issuer” 4 to submit their financial statements required in connection with SEC filings prepared in accordance with the English language version of International Financial Reporting Standards (“IFRS”) 5 as issued by the International Accounting Standards Board (the “IASB”) without reconciliation to U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) 6. Previously foreign private issuers were required to reconcile their financial statements to U.S. GAAP if they prepared them using any basis of accounting other than U.S. GAAP. The new rules are applicable to financial years ended after November 15, 2007. The rules do not allow U.S. domestic issuers to use IFRS to prepare their financial statements without reconciliation to U.S. GAAP, but the SEC is also considering that change.
Although, in the near term, the new SEC rules are most likely to benefit companies in Europe, where IFRS financial statements already are required, the new rules should benefit companies in countries around the globe as IFRS usage becomes more wide spread. Although there has been less focus on, and involvement of, Brazil in connection with the adoption of the new rules, the use of IFRS is spreading in Brazil 7 . In fact, some Brazilian Agencies have begun to issue some regulations in this respect. For example, the Brazilian Central Bank (“BACEN”) through the “Comunicado 14.259”, dated December 31, 2006, has announced that it will require that financial institutions shall report financial statements in accordance to standards converging with IFRS as of December 31, 2010. Similarly the Brazilian Exchange Commission (“CVM”) issued the “Instrução 457”, dated July 13, 2007 providing that the IFRS as adopted by IASB is optional for publicly traded Brazilian companies between 2007 and 2009, but such reporting will be mandatory as of 2010. As this trend continues, the new SEC rules in time should greatly benefit Brazilian companies and facilitate the process for them to carry out U.S. public securities offerings. This is because they will spend less amount of time and money to make their financial statements conform with IFRS as adopted by IASB as they would have to spend reconciling such statements to U.S. GAAP 8 , making securities registration in the U.S. less difficult and less expensive for them.
1 A “foreign private issuer” is a company that is incorporated
outside the United States and in which:
• US residents do not hold a majority of the shares; or
• if US residents do hold a majority of the shares, then:
– a majority of its directors and officers are not US citizens or
residents;
– its business is administered from outside the United States; and
– a majority of its assets are located outside the United States.
2 The IASB publishes its standards in a series of pronouncements
called International Financial Reporting Standards (“IFRS”). It
has also adopted the body of Standards issued by the Board of the
International Accounting Standards Committee (IASC). Those pronouncements
continue to be designated "International Accounting Standards" (IAS).
The latest version of IFRS available was issued as of January 1st,
2007. See www.iasb.org.
3 The SEC has adopted a limited exception from the new rules for
European Union companies. The EU version of the IFRS is slightly
different from the version of IFRS issued by the IASB in that EU
companies are not required to follow IAS 39 with respect to derivatives.
The SEC is allowing EU companies to not comply with certain parts
of IAS 39 that relate to derivatives for two years in order to make
the new rules immediately useful to EU companies using IFRS. However,
this exception will not have much effect because most financial
statements from EU companies are in accordance with IFRS as issued
by the IASB anyway.
4 A “foreign private issuer” is a company that is incorporated outside
the United States and in which:
• US residents do not hold a majority of the shares; or
• if US residents do hold a majority of the shares, then:
– a majority of its directors and officers are not US citizens or
residents;
– its business is administered from outside the United States; and
– a majority of its assets are located outside the United States.
5 The IASB publishes its standards in a series of pronouncements
called International Financial Reporting Standards (“IFRS”). It
has also adopted the body of Standards issued by the Board of the
International Accounting Standards Committee (IASC). Those pronouncements
continue to be designated "International Accounting Standards" (IAS).
The latest version of IFRS available were issued as of January 1st,
2007. See www.iasb.org.
6 The SEC has adopted a limited exception from the new rules for
European Union companies. The EU version of the IFRS is slightly
different from the version of IFRS issued by the IASB in that EU
companies are not required to follow IAS 39 with respect to derivatives.
The SEC is allowing EU companies to not comply with certain parts
of IAS 39 that relate to derivatives for two years in order to make
the new rules immediately useful to EU companies using IFRS. However,
this exception will not have much effect because most financial
statements from EU companies are in accordance with IFRS as issued
by the IASB anyway.
7 For companies already using IFRS financial statements in accordance
with IASB, the new rules would bring immediate benefits. For those
companies adopting a version of IFRS that is different than the
form promulgated by IASB, certain adjustments are required by the
companies themselves in order to make the new rules useful to them.
The benefits include better acces to U.S. E.U. markets (since IFRS
became the principal accounting standard in the European Union in
2005), increased liquidity, lower cost of capital, broader investor
base, larger variety of financing options, among others.
8 A Brazilian company using IFRS for its financial statements would
have the same benefit when entering the EU market for it would not
have to face reconciliation to any EU member GAAP.
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