SEC Adopts Rules Eliminating US GAAP Reconciliation for IFRS Financial Statements Effective for 2007

The Securities and Exchange Commission, at its November 15, 2007 open meeting, adopted long-awaited rules eliminating the requirement for foreign registrants that present financial statements in accordance with International Financial Reporting Standards (IFRS) to reconcile their financial statements to U.S. generally accepted accounting principles (US GAAP).

The SEC announced that the new rules will be effective with respect to financial years ending after November 15, 2007, which is significantly earlier than the SEC’s previously announced target of 2009.

The elimination of the US GAAP reconciliation requirement should reduce the costs of U.S. reporting for U.S. listed foreign private issuers, and should make it much easier for non-U.S. companies to list their shares in the United States if they are not already listed. The new rules should also facilitate cross-border public acquisitions, by eliminating one of the difficulties in the preparation of cross-border offer documentation and by reducing the cost of post-acquisition reporting requirements.

Under current rules, a U.S. GAAP reconciliation is required in an annual report on Form 20-F for annual financial statements that are prepared under other accounting principles (including IFRS). It is also required for interim financial statements used in a registered offering of securities when the annual financial statements are more than nine months old.

While the text of the new rules is not yet available, the staff made clear at the open meeting that the final rules are substantially similar to the proposal made in July 2007. In particular, the new rules will only eliminate the US GAAP reconciliation requirement for financial statements prepared in accordance with IFRS as issued by the IASB, and not in accordance with other jurisdictional variations, such as IFRS as adopted by the European Union. While this limitation may present some practical difficulties, the vast majority of European companies publish financial statements that comply with the IASB version of IFRS, and should therefore be able to benefit from the new rules. U.S. listed foreign private issuers will, however, need to work with their auditors to ensure that audit reports will comply with the requirements of both their home jurisdiction and the new rules.

The SEC also announced that it has decided not to shorten the deadline by which foreign private issuers must file their annual reports on Form 20-F, which is currently six months after the end of the fiscal year. The July proposal had requested comment on whether the deadline should be earlier.

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CLEARY GOTTLIEB STEEN & HAMILTON LLP