Supplementary News Material:
Concept Release on International Accounting Standards – Summary and Questions
Open Commission Meeting,
February 16, 2000
I. Background and Overview
The globalization of securities markets has challenged securities regulators around the world to meet the needs of market participants while maintaining the current high levels of investor protection and market integrity. While today's investors allocate capital outside their home country capital markets, they may not recognize that they are accepting different regulatory environments – and different levels of investor protection – by doing so.
One area of significant difference is accounting standards. The SEC has supported efforts that promote convergence towards a high quality set of standards and avoid "lowest common denominator" answers. The concept release that the Commission will consider today broadens this dialogue by soliciting public comment on accounting, auditing and regulatory issues that impact the effectiveness of financial reporting in a global environment. The release also will provide the basis for any future rulemaking that would be necessary to reduce or remove the current requirement for foreign registrants to reconcile their financial statements to U.S. GAAP.
The SEC has worked directly and through IOSCO (the International Organization of Securities Commissions) to promote the objective of improving the efficiency of capital formation while pursuing our mandate for investor protection. The focus of efforts to address issues relating to accounting differences has been the International Accounting Standards Committee (IASC), which published the last major component of its core standards work program in 1999.
The SEC staff sought, during the development of the IASC standards, to identify issues based on the assessment criteria articulated in a 1996 Commission press release: the comprehensiveness of the standards; whether they would require comparable, transparent reporting with full disclosure; and whether the standards would be rigorously interpreted and applied.
The release solicits input about the quality of the IASC standards, and frames that discussion in the context of a number of related issues that will affect how the IASC standards are interpreted and applied in practice. This approach is used because an analysis of the IASC standards alone would not necessarily be indicative of the reporting that would result from applying those standards, given differences in business conditions and regulatory systems around the world. Therefore, the release identifies the necessary components of a high quality financial reporting framework, one of which is accounting standards, and asks questions regarding the elements of such a framework.
II. Discussion of the Release
The purpose of the release is to obtain feedback from domestic and foreign parties regarding both acceptance of IASC standards and the broader issue of shaping a global financial structure for increasingly globalized capital markets. The release:
- solicits comment regarding the quality of the IASC standards; and
- raises questions regarding what supporting infrastructure is necessary in an environment where issuers and auditors often are multinational organizations, providing financial information in many countries.
The release seeks to identify what important concerns would be raised by acceptance of IASC standards; and then asks for comment on whether the Commission should modify its current requirement for all financial statements to be reconciled to U.S. GAAP.
The release emphasizes a desire to gain knowledge of respondents' first hand experience with IASC standards. In particular, it asks about experiences that (a) issuers have had with applying IASC standards when preparing financial statements; (b) public accountants have had with auditing the application of IASC standards; and (c) investors have had with using financial statements prepared using IASC standards.
B. Major Issues
The release poses questions that concentrate on three major areas.
1. Quality of the IASC Standards
The acceptance of IASC standards is expected to depend upon the ability of those standards to require the same quality of reporting as U.S. GAAP, even if they do not provide the same reporting as U.S. GAAP. A document prepared by the FASB is attached to the release to assist readers in understanding differences between U.S. GAAP and IASC standards.
2. A "Level Playing Field" for U.S. Domestic Issuers
Questions 4–7 ask how the quality of IASC standards compares with U.S. GAAP, and whether modification of the SEC's current reconciliation requirements would put domestic registrants at a competitive disadvantage to foreign issuers.
3. Infrastructure for Supporting IASC Reporting
Questions 8–18 pose questions relating to the different elements of a financial reporting framework that affect how IASC (and other accounting standards) are applied in practice. These include questions about the experience of auditors, preparers and regulators with IASC standards and the IASC's interpretive body.
List of Draft Questions in the Concept Release
Criteria for Assessment of the IASC Standards
Are the Core Standards Sufficiently Comprehensive?
| Q.1||Do the core standards provide a sufficiently comprehensive accounting framework to provide a basis to address the fundamental accounting issues that are encountered in a broad range of industries and a variety of transactions without the need to look to other accounting regimes? Why or why not?|
|Q.2||Should we require use of U.S. GAAP for specialized industry issues in the primary financial statements or permit use of home country standards with reconciliation to U.S. GAAP? Which approach would produce the most meaningful primary financial statements? Is the approach of having the host country specify treatment for topics not addressed by the core standards a workable approach? Is there a better approach?|
|Q.3||Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards? Are the IASC Standards of Sufficiently High Quality? Why or Why Not?|
|Q.4||Are the IASC standards of sufficiently high quality to be used without reconciliation to U.S. GAAP in cross-border filings in the United States? Why or why not? Please provide us with your experience in using, auditing or analyzing the application of such standards. In addressing this issue, please analyze the quality of the standard(s) in terms of the criteria we established in the 1996 press release. If you considered additional criteria, please identify them.|
|Q.5||What are the important differences between U.S. GAAP and the IASC standards? We are particularly interested in investors' and analysts' experience with the IASC standards. Will any of these differences affect the usefulness of a foreign issuer's financial information reporting package? If so, which ones?|
|Q.6||Would acceptance of some or all of the IASC standards without a requirement to reconcile to U.S. GAAP put U.S. companies required to apply U.S. GAAP at a competitive disadvantage to foreign companies with respect to recognition, measurement or disclosure requirements?|
|Q.7||Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting (recognition, measurement or disclosure) than financial reporting prepared using U.S. GAAP? If so, what are the specific aspects and reason(s) for your conclusion?|
Can the IASC Standards be Rigorously Interpreted and Applied?
The Experience to Date
|Q.8||Is the level of guidance provided in IASC standards sufficient to result in a rigorous and consistent application? Do the IASC standards provide sufficient guidance to ensure consistent, comparable and transparent reporting of similar transactions by different enterprises? Why or why not?|
|Q.9||Are there mechanisms or structures in place that will promote consistent interpretations of the IASC standards where those standards do not provide explicit implementation guidance? Please provide specific examples.|
|Q.10||In your experience with current IASC standards, what application and interpretation practice issues have you identified? Are these issues that have been addressed by new or revised standards issued in the core standards project?|
|Q.11||Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur? The Need for a Financial Reporting Infrastructure|
|Q.12||After considering the issues discussed in (i) through (iv) below, what do you believe are the essential elements of an effective financial reporting infrastructure? Do you believe that an effective infrastructure exists to ensure consistent application of the IASC standards? If so, why? If not, what key elements of that infrastructure are missing? Who should be responsible for development of those elements? What is your estimate of how long it may take to develop each element?|
The Interpretive Role of the Standard-Setter
|Q.13||What has your experience been with the effectiveness of the SIC in reducing inconsistent interpretations and applications of IASC standards? Has the SIC been effective at identifying areas where interpretive guidance is necessary? Has the SIC provided useful interpretations in a timely fashion? Are there any additional steps the IASC should take in this respect? If so, what are they?|
|Q.14||Do you believe that we should condition acceptance of the IASC standards on the ability of the IASC to restructure itself successfully based on the above characteristics? Why or why not? The Role of the Auditor in the Application of the Standards|
|Q.15||What are the specific practice guidelines and quality control standards accounting firms use to ensure full compliance with non-U.S. accounting standards? Will those practice guidelines and quality control standards ensure application of the IASC standards in a consistent fashion worldwide? Do they include (a) internal working paper inspection programs and (b) external peer reviews for audit work? If not, are there other ways we can ensure the rigorous implementation of IASC standards for cross-border filings in the United States? If so, what are they?|
|Q.16||Should acceptance of financial statements prepared using the IASC standards be conditioned on certification by the auditors that they are subject to quality control requirements comparable to those imposed on U.S. auditors by the AICPA SEC Practice Section, such as peer review and mandatory rotation of audit partners? Why or why not? Why or why not? If not, should there be disclosure that the audit firm is not subject to such standards?|
|Q.17||Is there, at this time, enough expertise globally with IASC standards to support rigorous interpretation and application of those standards? What training have audit firms conducted with respect to the IASC standards on a worldwide basis? What training with respect to the IASC standards is required of, or available to, preparers of financial statements or auditors certifying financial statements using those standards?|
The Role of the Regulator in the Interpretation and Enforcement of Accounting Standards
|Q.18||Is there significant variation in the interpretation and application of IASC standards permitted or required by different regulators? How can the risk of any conflicting practices and interpretations in the application of the IASC standards and the resulting need for preparers and users to adjust for those differences be mitigated without affecting the rigorous implementation of the standards?|
|Q.19||Would further recognition of the IASC standards impair or enhance our ability to take effective enforcement action against financial reporting violations and fraud involving foreign companies and their auditors? If so, how?|
|Q.20||We request comment with respect to ways to assure access to foreign working papers and testimony of auditors who are located outside the United States. For example, should we amend Regulation S-X to require a representation by the auditor that, to the extent it relied on auditors, working papers, or information from outside the United States, the auditor will make the working papers and testimony available through an agent appointed for service of process? If not, should we require that the lack of access to auditors' workpapers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers?|
Possible Approaches to Recognition of the IASC Standards for Cross-Border Offerings and Listings
|Q.21||What has been your experience with the quality and usefulness of the information included in U.S. GAAP reconciliations? Please explain, from your viewpoint as a preparer, user, or auditor of non-U.S. GAAP financial statements, whether the reconciliation process has enhanced the usefulness or reliability of the financial information and how you have used the information provided by the reconciliation. Please identify any consequences that could result from reducing or eliminating the reconciliation requirement.|
|Q.22||Should any requirements for reconciliation differ based on the type of transaction (e.g., listing, debt or equity financing, rights offering, or acquisition) or the type of security (e.g., ordinary shares, convertible securities, investment grade or high yield debt)? Are there any other appropriate bases for distinction?|
|Q.23||If the current reconciliation requirements are reduced further, do you believe that reconciliation of a "bottom line" figure would still be relevant (e.g., presenting net income and total equity in accordance with U.S. GAAP)?|
|Q.24||Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?|
|Q.25||The IASC standards finalized as part of the core standards project include prospective adoption dates. Most standards are not required to be applied until fiscal years beginning on or after January 1, 1998, at the earliest. Should we retain existing reconciliation requirements with respect to the reporting of any fiscal year results that were not prepared in accordance with the revised standards or simply require retroactive application of all revised standards regardless of their effective dates? If not, why not?|
|Q.26||Does the existence of a reconciliation requirement change the way in which auditors approach financial statements of foreign private issuers? Also, will other procedures develop to ensure that auditors fully versed in U.S. auditing requirements, as well as the IASC standards, are provided an opportunity to review the financial reporting practices for consistency with those standards? If so, please describe these procedures. Alternatively, will the quality of the audit and the consistency of the application of the IASC standards depend on the skill and expertise of the local office of the affiliate of the accounting firm that conducts the audit?|