Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington DC 20545 - 0609
May 23, 2000
Subject: International Accounting Standards
File No. S7-04-00
Thank you for the opportunity to comment on the concept release of the Commission regarding the acceptance of International Accounting Standards for cross border offerings and listings of securities.
Our comments are provided in the same order as the questions contained in the release document:
1 The framework of IAS embodies core standards which provide accounting guidance based on concepts which are then applied to specific transactions. These concepts are supplemented by both specific implementation guidance in the standards and also the pronouncements from the Standing Interpretations Committee (SIC). In addition there also exists the IASC's conceptual framework providing not only a route map for IASC standard setting but also an additional source of guidance to practitioners.
This conceptual approach is consistent with the frameworks which exist within many European jurisdictions and is familiar to preparers of financial statements. In the absence of explicit guidance on industry specific transactions certain industry groups determine acceptable accounting guidance within the framework of IAS.
There are significant drawbacks of an accounting framework which is rule driven and for which implementation methodologies are specified. The emphasis on specific rules and tests inevitably leads to "bright lines" which may result in transactions being artificially constructed thereby potentially misreporting the original substance of the transaction. The specification of implementation methodologies may result in the belief that the resulting outputs are robust when in practice the associated data inputs require significant judgement eg fair value accounting and loan loss provisioning. Accordingly a framework which draws more heavily on concepts and reporting the substance of transactions may avoid these difficulties.
2 It is unclear what the relevance of reference to home country standards is to a discussion of the merits of IAS. The acceptance of the core standards as comprehensive framework together with the approach of interpretation of accounting concepts rather than reliance on detailed rules enables preparers to compile acceptable financial statements.
The absence of specific industry guidance may be an issue for certain industries for example insurance and accordingly specific authoritative IAS industry guidance may be desirable in certain cases. Currently industry specific accounting guidance in respect of any GAAP (US GAAP included) is driven by national or regional groups whether authoritative industry bodies or national standard setters.
We note that the Basle Committee on Banking Supervision recently completed a review of 15 IAS core standards which are directly relevant to the banking industry (Report dated April 2000 to the G7 Ministers and the Central Bank Governors). They concluded that there were only two principal issues of supervisory concern. Those issues were the need to update IAS 30 and the impact of adopting IAS 39. The Committee also expressed its support for the standards developed by the IASC.
The use of US GAAP for specialised industries for non-US preparers could be inappropriate. The experience of foreign preparers to date has highlighted the difficulty that US GAAP is designed to deal with US companies operating in the US with transactions and practices typical to the US. This difficulty is accentuated in specialised industries. For example under US GAAP loans are placed on non-accrual and specifically identified. Other countries banking practices periodically reverse uncollectible interest rather than place loans on non-accrual status which is acceptable under IAS. Both accounting practices seek to ensure that only collectible interest is recognised in the income statement. Accordingly IAS forms an appropriate basis for preparers in different countries. This is not because it is a "compromise" but because it builds on concepts which are then interpreted and applied.
A key issue for all GAAPs is to ensure that there is full disclosure of accounting policies.
3 The development of further guidance on fair value accounting and the extent to which this will be applied to all accounting transactions. This comment is not however restricted to IAS and is relevant to all GAAPs. The aforementioned report in 2. above explains that the Basle Committee does not believe the time is right to prescribe full fair value accounting in preparing financial statements.
4 Based upon the criteria established in 1996 we consider that the use of IAS is adequate for the SEC to dispense with the requirement to reconcile to US GAAP. We consider that this is due to a number of factors:
We recognise that IAS continues to develop to match changes in economic environments, thinking on accounting techniques and developments in transaction types etc. We consider however that this applies equally to all GAAP and is not unique to IAS.
5 The differences between IAS and US GAAP are well documented elsewhere (most recently in the 2nd survey conducted by the FASB at the end of 1999). As mentioned previously US GAAP tends to be more rule driven and specific to the US environment which partly explains why it is difficult to apply by non-US preparers. The disclosure requirements can be more extensive under US GAAP compared to IAS in certain areas however it is the requirements of the SEC regulations which significantly increase the extent of disclosure. This is applicable to all filers regardless of the GAAP being used and therefore not relevant to an evaluation of IAS.
The existence of differences between IAS and US GAAP does not in itself imply that one GAAP is superior to the other.
6 The SEC reporting and disclosure regulations are the most significant requirements affecting all filers in the US and therefore is not relevant to a comparison between US GAAP and IAS and whether it would be beneficial to a company adopting one or the other. Furthermore following the implementation and adoption of IAS 39 the additional disclosures required by US GAAP (as distinct from SEC requirements) are not significant.
We note that there are significant practical disadvantages for foreign companies filing financial data at the SEC. In Germany companies are required to prepare financial statements using either IAS or US GAAP as well as compiling accounts using German GAAP. Currently all foreign filers in the US market when using IAS are also required to prepare a reconciliation to US GAAP.
7 It is inappropriate to conclude that the existence of certain other recognition/measurement differences between IAS and US GAAP that one GAAP is better than the other. As noted elsewhere IAS does enable companies to report what they consider to be the substance of transactions in the context of the environment in which they operate. Accordingly US GAAP occasionally suffers from a rigidity which seeks to apply a US solution to an economic framework not found outside the US.
8 It is appropriate to recognise that IAS is not as rule driven as US GAAP and accordingly the smaller volume of guidance does not necessarily undermine the quality of IAS as a body of accounting.
9 In the event that the core standards do not provide specific guidance there are a number of reference points to assist the preparer:
10 There are some practical issues which have been encountered by preparers:
11 Within a particular region/country there is probably not a significant variation in the way IAS are applied. The question which is more difficult to evaluate is whether the standards are being applied globally on a consistent basis. Difficulties may arise because national bodies (authoritative industry groups or otherwise) may determine specific industry implementation issues but their authority will typically be limited to national or regional jurisdictions.
12 As the number of users of IAS increases there is an increasing number of forums at which the application and interpretation of IAS, both generally and within specific industries, is being considered. These forums include academia, industry groups, professional services organisations and regulatory/quasi regulatory bodies. This is likely to continue to grow thereby enhancing the level of understanding and consistency of application of IAS.
Currently all filers in the US markets are subject to monitoring and control by the SEC. The infrastructures for overseeing compliance with accounting regulations in other jurisdictions are governed by the regulations applicable in those jurisdictions. Accordingly the question raised is relevant to the regulatory environments in which the preparers are listed rather than the GAAP used by those preparers.
13 The existence of a responsive interpretative function is a necessary part of a standard setting body. This ensures that market developments can be effectively accommodated within the accounting framework, abuses of existing standards and clarification of existing standards as required can be dealt with without constant revisions to core standards. The SIC has been an important function to supplement the guidance contained within the core standards. The SICs issued have been effective in providing specific guidance and some include strict interpretations of core standards.
14 The ability of the framework to remain relevant and current is dependant on the resources and structures in place to undertake research, have a programme of development etc. Without such a structure the core standards could become out of date and therefore undermine the quality of IAS.
We note that the IASC has been productive as evidenced by the last 2-3 years. Its activities include the completion of the revision project of the core standards, the issue of various SICs and the issuance of IAS 39 notwithstanding the fact that the prescribed accounting treatment of derivatives does not mirror portfolio based risk management techniques.
15 The auditing standards of the Institute of German Auditors are consistent with the requirements of International Auditing Standards. These include, amongst other requirements, internal working paper inspection programmes. There are currently no peer review processes within Germany which explicitly relate to application of IAS. Proposals are in the course of development for establishing external peer review processes which will further enhance the quality of the external audit process.
16 The existing SECPS process and requirement to issue audit opinions under US GAAS is a suitable approach for ensuring that quality of audit and related issues (e.g. independence, limitation of liability etc) are satisfactorily dealt with. The rotation of audit partners on listed companies is required by law in Germany.
17 Typically the large accounting firms in Germany have dedicated IAS technical departments which are cascaded to regions and industry groups. The objectives of these technical infrastructures are:
Preparers of accounts develop their expertise in IAS through a variety of methods including:
18 Currently the framework for monitoring accounting compliance is designed to ensure adherence to National GAAP rather than the application of foreign GAAP (including IAS, US etc). An important reason is that within a developed economic environment a number of institutional mechanisms develop to underpin this. E.g. the tax authorities, the industry regulators, the auditing profession, national academia as well as the large number of users and practitioners.
With respect to the consistent application of IAS within Germany as noted elsewhere reference is made to:
19 The use of IAS does not in itself impact the extent to which enforcement actions can be taken against registrants or their auditors. The enforcement actions are based (amongst other things) upon non-compliance with the stated accounting rules rather than a qualitative assessment of the rules themselves. Accordingly we do not consider that the use of IAS or US GAAP has an impact on the ability of the SEC to detect inappropriate or fraudulent accounting practices.
20 Access to audit working papers should be regulated by the policies of the auditing firms who produce these working papers and therefore own and control them. It would likely be sufficient if the audit firms establish and maintain policies which allow access to them as well as other measures necessary for an external review of the audit. The audited firms themselves would have no objections to policies which are designed to assure or improve adequacy of audits, provided that confidential client data is protected. This should be achievable through the voluntary participation and policy setting of the audit firms, without the need for additional regulation. The auditing professional organizations in each country could monitor and enforce their individual firms' participation in the review process.
21 In principle the use of reconciliations is more likely to confuse rather than enhance the presentation of financial information because it invites the reader of financial statements to make a qualitative judgement on the merits of different accounting bases. Accordingly the reader is unlikely to be able to determine which financial result is the "correct" one. We consider that it is less confusing for the reader if the accounts are drawn up using one GAAP and that reconciliation to another GAAP is not included.
22 We refer you to our comments in 21. above. Accordingly the filer should adopt one GAAP which forms the consistent basis for all financial information presented regardless of the purpose for which the filing is made.
23 If reconciliations are retained it is more informative for the reader to be able to identify the items which give rise to different measurement under either US GAAP or IAS. The presentation of single line items, e. g. "bottom line" figures, may in certain circumstances result in the reader misinterpreting the stated US GAAP figures.
24 If reconciliation to US GAAP is required by the SEC, in view of the fact that accounting standards and reporting requirements are developing in all jurisdictions (including the US) it is necessary that this issue is kept under regular and at least annual review.
25 We note that the adoption of new core standards (under any GAAP) often results in significant practical implementation issues. This is a principal reason why core standards include transition and timing clauses.
If however the meaning of this question is to suggest that the full adoption of all revised core standards would result in the requirement to reconcile to US GAAP being lifted we would strongly recommend to our members that they fully adopt all revised core standards as quickly as possible.
26 The reconciliation requirement influences the auditor to the extent that knowledge of US GAAP is an additional skillset required by the auditor in addition to knowledge of IAS and local GAAP. The existing SECPS procedures are appropriate to ensuring that the local affiliate possesses enough knowledge of US GAAP, US GAAS and the SEC filing/disclosure requirements. This achieves an appropriate balance between local industry and environment knowledge of the client by the local affiliate and the internal quality control processes to ensure that the auditor has an understanding of US requirements. In the event that US GAAP reconciliations were not required, knowledge of SEC reporting/disclosure requirements would still be necessary.
Please let us know if you should require any additional information.
Bundesverband deutscher Banken
H. H. Rixen