Current situation and next steps

On November 14, 2008, the Securities & Exchange Commission (SEC or the "Commission") published its Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards (IFRS) by US Issuers (the proposed roadmap). Issuance of the proposed roadmap affirmed the SEC's focus on moving towards a single set of high-quality global accounting standards. The comment period for the SEC's proposed roadmap ended on April 20, 2009. The SEC received over 200 response letters from a wide range of constituents. The tone of the responses was supportive of a global high-quality set of accounting standards; however, there were varied views on how to achieve this goal and over what time.

In the Roadmap, the SEC did not set a definitive adoption date, but rather set forth several milestones that, if achieved, could lead to the required use of IFRS by US issuers beginning in 2014. The proposed adoption would be staged with large accelerated filers being asked to change in 2014, accelerated filers in 2015, and all other public companies in 2016.

The milestones that the SEC will evaluate in determining if they will set a mandatory date include:

• Achieving sufficient improvements to IFRS
• Enhancing the independence, accountability and funding of the IASB and its Trustee Organization
• Achieving sufficient progress on the taxonomy for XBRL compatibility, and
• Sufficient improvement in IFRS education and training in the US

The SEC also indicated in the Roadmap that they will consider consistency in application of IFRS around the globe. This was not included as a specific milestone, but will clearly factor into their ultimate decision.

The SEC has proposed to reconvene in 2011 to evaluate progress toward the milestones in determining whether to make a decision to set the mandatory adoption dates.

The release of the proposed roadmap provided more clarity to the issues around the US transition to IFRS, and demonstrates the SEC’s continuing commitment to common global accounting standards. Moving to a single set of robust, transparent, global accounting standards is in the best interests of investors globally.

IFRS is the best opportunity to meet this goal. Setting a definitive date as soon as possible is the key to motivating market participants to overcome obstacles for the change, but we understand the SEC’s desire to move forward with a thoughtful, cautious approach.

IFRS in light of current events

Due to a new administration, ongoing economic issues, and responses to the proposed roadmap, there is some uncertainty around the final timetable for adoption of IFRS in the US. However, the responses to the proposed roadmap indicate that there still is strong support for a single set of global accounting standards. We remain confident that:

• The SEC is interested in moving forward with IFRS
• The SEC will continue to approach the change with a thoughtful, measured process
• The SEC will ultimately propose a revised roadmap
• Adoption of IFRS in the US is inevitable

We expect to see an increase in SEC-related IFRS activity toward the end of this year, as progress is made on the financial crisis and regulatory oversight matters. Against this backdrop, there are two main areas of focus for US companies:

Near-term convergence in the US

Regardless of the date US companies are required to adopt IFRS, in the near-term we see continued convergence between US GAAP and IFRS accounting standards, followed by ultimate conversion to IFRS. An agreement between the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board ("IASB"), called the Memorandum of Understanding ("MoU") pledges to improve both US GAAP and IFRS in 11 major topical areas. Progress is underway on each of these projects.

As such, US companies will face an unprecedented wave of US GAAP accounting changes over the next several years, most of which will be heavily influenced by IFRS. For example, significant changes are expected in how to account for major accounting areas such as revenue recognition, leasing, consolidation, financial instruments, debt and equity. The effects of these accounting changes reach far beyond just financial reporting. The complexity and significance of these sweeping changes greatly exceeds that of most prior US GAAP changes.

Continued global conversion to IFRS

We continue to see adoption of IFRS in many countries around the world, for use in capital markets and/or statutory financial reporting. Canada, India, and Mexico, among a host of other countries have plans to convert in the next few years (see our adoption by country map). The recent release of IFRS for small and medium-sized entities (SMEs) may accelerate this global adoption.

Therefore, companies with non-US subsidiaries will be increasingly impacted by IFRS. Further, IFRS will drive the behavior of non-US subsidiaries, vendors, and counterparties, impacting areas such as financial reporting, tax policy, and merger and acquisition activity.

US companies should actively participate in the adoption process of their non-US subsidiaries. Failure to do so risks costly inefficiencies or incompatibilities when IFRS adoption takes place in the US.

In light of the unprecedented changes described in the previous tab, US companies should understand the expected upcoming financial reporting changes and how converging standards and continued adoption of IFRS outside the US will impact their business.

We believe as a result of all of these developments that companies should consider the following:

• Focus on the challenge. The next several years will bring major changes to US financial reporting. Whether changes arrive through convergence, an SEC-mandated move to IFRS, or continued IFRS adoption by subsidiaries and counterparties, the effect on the US businesses will be considerable.
• Perform an assessment. Consider the effects these alternation paths could have and identify business, accounting, tax investor, control, systems and work-force issues.
• Be poised to adapt to ongoing change. Use scenario planning to incorporation likely convergence and IFRS adoption explanations into strategic thinking and business planning.
• Monitor actual changes. Closely follow SEC actions and new FASB and IASB standards. Consider how they will influence non-US counterparties (customers and vendors) and affect reporting, long-term contractual commitments, tax structures, financings, systems and controls.
• Maintain corporate oversight. Influence transition timing, strategies, and policy decisions of non-US subsidiaries who are or may soon be IFRS users.
• Identify what can be done now. Be mindful of the specific aspects of convergence and conversion that will take the longest and consider smaller controlled one-off projects and "easy wins" where desirable.