TEL: (301) - 34 94670
FAX: (301) - 34 94679

Mr. J.G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20549-0609

Comment letter from Delta International Holdings S.A.
In response to SEC file number S7-04-00

Q1. 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?

Many companies are using IAS as the basis for both internal and external accounting and reporting. These standards have developed to the point where, with the implementation of IAS 39 and 40 next year, they will provide an excellent and very comprehensive accounting framework because they address all the main recognition, measurement and disclosure issues.
In recent years there were few instances where someone had to look beyond IAS: one area was on in-process R&D, and another the treatment of derivatives. With the revision of IAS 22 and the introduction of IAS 39, these issues are now covered. By approaching accounting issues in terms of principles and according to the notion "substance over form" IAS give a sound foundation for resolving specific problems. More detailed regimes often fail to do this and have to resort to cumbersome "EITF"-type solutions.

Q2. Should we require use of US GAAP for specialized industry issues in the primary financial statements or permit use of home country standards with reconciliation to US 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?

It would not be logical to accept IAS as a basis for financial statements and then require US GAAP for specific issues. This would tend to produce "hybrid" financial statements lacking conceptual consistency and being therefore less meaningful. USGAAP is at present more advanced in solving accounting issues for specialised industries but these specialised rules are normally written exclusively in the US context. IASC will no doubt continue its work of addressing such issues as it does for agriculture, insurance and extractive industries.

Q3. 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?

Different people have quite different - and not always open-minded - perspectives on the question of "High Quality". To use a metaphor, one could say, "the proof of the pudding is in the eating". In our view, IAS now produce financial statements of high quality. Standards, and also certain options, must be applied consistently; they provide transparency and sufficient disclosures in which material information which is relevant to the user is meaningfully presented - indeed of higher quality than many alternative regimes where material information is submerged in an intransparent welter of less material data presented just because some detailed legalistic regulation requires it. IAS are consistent with the underlying conceptual Framework, are clear (including being in generally understandable English) and unambiguous and result in comparable accounting by registrants.

With regard to the remaining allowed alternatives in IAS, our experience is that, even if these alternatives exist, they generally do not produce materially different accounting in practice. Most multinationals do not revalue PP&E and intangibles, do not capitalise interest costs or do not use LIFO for inventories (in the latter case, in contrast to the US). We note that the concerns of SEC staff in respect of assessing the quality of IAS appear to focus more parochially on comparability of IAS financial statements with US GAAP financial statements.

Q4. Are the IASC standards of sufficiently high quality to be used without reconciliation to US GAAP in cross-border filings in the US? Why or why not? Please provide us with your experience in using, auditing or analyzing the application of such standards....

We find that IAS are certainly of sufficient high quality to be used without reconciliation to US GAAP in cross-border filings in the US. Two aspects need to be distinguished: the quality of IAS and IAS-based financial statements per se, and the comparability of such financial statements with US GAAP financial statements. There is a presumption in the question that reconciliation to US GAAP ensures "high quality", which is logically not the case: it only gives the user an idea of how the income and equity would look under a different - not necessarily better - set of rules. Most differences between IAS and US GAAP are not important enough so that US investors would take a wrong decision in the absence of a reconciliation. One could envisage a solution in which the SEC specifies its "chosen" allowed alternatives in IAS and requires from cross-border registrants using IAS an indication of the effects on income and equity of any material individual divergences resulting from using another allowed alternative (e.g. of expensing rather than capitalising interest).
It is, incidentally, conceivable that many potential cross-border listings are put off as much by the SEC's attitude to materiality as by the reconciliation requirement. Currently reconciliation statements will very often show a couple of large items relating to differences on purchase accounting and goodwill followed by minor differences which could scarcely be regarded as distorting comparability.

Q5. What are the important differences between US GAAP and the IASC standards? Will any of these affect the usefulness of a foreign issuer's financial information reporting package?

One needs to distinguish here between standards on recognition and measurement and standards on disclosure. With regard to the former, the main areas of difference in our experience are:
- Goodwill pre-1995 (under IAS, charge to equity was still possible);
- Acquired in-process R&D;
- JV entities;
- Capitalisation of interest;
- PP&E and Intangibles revaluation;
- Limitation of useful lives of intangibles.

These differences will only affect usefulness if the US investor wishes to see information on a local (US GAAP) basis. (Such a wish is not normally encountered in other jurisdictions).
As far as disclosure requirements are concerned, their sheer volume and lack of differentiation in US GAAP are also conceivably reasons for potential issuers shying away from US markets.

Q6. Would acceptance of some or all of the IASC standards without a requirement to reconcile to US GAAP put US companies required to apply US GAAP at a competitive disadvantage to foreign companies with respect to recognition, measurement or disclosure requirements?

We do not think so. IAS are equally transparent and have detailed disclosures so that investors have sufficient ability to see behind financial statements to the underlying economic realities for forecasting future cash flows. From this viewpoint it is often argued, for instance, that it does not matter how goodwill is accounted for as long as it is clear what has been done. We would refute a presumption that IAS financial statements are less transparent than US GAAP.

Q7. Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting ... than financial reporting prepared using US GAAP?

We do not believe that using IAS criteria instead of US GAAP results in better or worse reporting in any specific areas. However, it is an advantage that IAS is very strongly based on the principle of "substance over form" whereas US GAAP has many standards with very specific thresholds that quite often are abused. Examples are the use of "pooling of interests accounting" and in lease accounting. It is fair to say that in particular areas IAS result in better financial reporting. We also do believe that IAS concentration on material items improves financial reporting in enabling the investor to focus attention on the key information which he needs to have to make an investment decision.

Q8. 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?

General experience does lead to the conviction that the level of guidance in IAS is quite sufficient to result in consistent application in all material respects. In our understanding of the word "rigorous", the application can only be rigorous on the part of the preparer: the guidance is generally clear enough to permit little "manoeuvring". Also, by concentrating more on principles, they leave less room for doubt on the treatment of transactions not specifically covered. We also think that IAS form a sound basis for auditing the accounts.

Q9. 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.

(1) SIC. (2) Technical advice and audit by worldwide firms. (3) Professional discussion groups such as working in certain countries (like Switzerland and France) and on a European level within the ERT (European Round Table of Industrialists).

Q10. 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?

A key element over the last 10 years has been how to ensure within a worldwide group consistent application of the increasingly complex standards. Particular areas for attention have been:
- small group companies with few resources to devote to understanding and implementing complex guidance,
- companies in regions where accounting is understood as a tool to help run a business rather than as an end in itself and where expertise in highly technical aspects of accounting is correspondingly less developed, and
- management understanding as some new and revised IAS have moved away from business reality and towards prevention of abuse.

However, these are practical application issues which IAS in fact help to resolve better than US GAAP in that they are clearer, more principle-oriented and generally more easily understandable.
Some application issues arose with the implementation of IAS 19 as employee benefit plans are notorious in varying considerably from country to country in their legal and social forms and characteristics. However, since IAS 19 focuses on principles rather than giving a recipe, these were generally resolved more easily than would have been possible with guidelines which only address the social and legal institutions of one geographical area.

Q11. Is there a significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?

We are not aware of any significant variations outside of that to be expected from the allowed alternatives. Even here practice is pretty uniform. Revaluation of PP&E and intangibles is not commonly found, nor is the use of inventory valuation at LIFO.

Q12. After considering the issues discussed in (i) through (iv) ..., 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 essential elements of an effective financial reporting infrastructure are:

  • companies should have en effective corporate governance structure that supports strict application of accounting standards;
  • high quality audits by high quality auditors. The auditor is the closest independent observer and has the technical expertise and sufficient insight into the transactions in question to be able to make informed judgements. Concomitant with this are procedures to ensure that auditors fulfil their role properly, which is an aspect which we believe is best left to the profession to regulate.

    However, such procedures must be kept in proportion: costly double- and triple-checks all end up getting paid for by the customer.

  • an effective enforcement body.

In second place we would put the work of the SIC. As IAS are principle-based rather than a cookbook, the role of the SIC is vital for resolving interpretation questions. (It is a credit to the quality of the IAS that, of the 17 SIC so far approved, the majority deal with nothing more than points of detail).
The regulatory authorities come in third. Here again, procedures must be kept in proportion from a social and cost-effectiveness viewpoint.

Q13. What has been your experience with the effectiveness of the SIC in reducing inconsistent interpretations and applications of IASC standards? Has the SIC been effective at identifying areas where interpretative guidance is necessary. Have 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?

We believe that the SIC has performed, and continues to perform, its function well. As an example, the concrete, practical guidance in SIC-6 was of considerable help in the pre-Y2K phase, and SIC-1, 2 and 9 have apparently been helpful in stemming a few attempts at aggressive accounting. We see absolutely no reason at this time to modify this process.

Q14. Do you believe that we should condition the acceptance of the IASC standards on the ability of the IASC to restructure itself successfully based on the above characteristics? Why or why not?

Certainly not. Since the IASC has almost finished restructuring itself, we see this question as almost superfluous. The issue is whether IAS are acceptable as a basis for financial reporting in connection with US listings or not.

Q15. What are the specific practice guidelines and quality control standards accounting firms use to ensure full compliance with non-US 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 US? If so, what are they?

Please see Q12 above. This is primarily a question for the professional accounting firms. We are aware that many large international firms are very active in providing education in IAS. We must emphasise, however, that procedures which would result in substantial extra costs to the client and thus to the final customer/consumer will in no way encourage cross-border listings.

Q16. 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 US auditors by the AICPA SEC Practice Section, such as peer review and mandatory rotation of audit partners? Why or why not? If not, should there be disclosure that the audit firm is not subject to such standards?

As for Q15. This seems excessively bureaucratic.
We consider that the question of worldwide audit and professional standards should be treated as a separate issue independent of judging the acceptability or not of IAS.

Q17. 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?

In our experience, IAS expertise in the companies with which we deal is excellent. In many countries, as in the US, there are no training requirements for preparers of financial statements. However, the qualifications equivalent to CPA and CMA both have significant elements on IAS in their syllabus.
On the question of global expertise, one must also point out that it is not a necessary condition for high-quality financial reporting by a multinational. All group companies have to report according to, and their local auditors have to audit against, the group's accounting guidelines, which have to be, and the group auditors check, as being in accordance with IAS.

Q18. Is there any 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?

We are not aware of any major difficulties arising in this respect between different regulators who currently accept IAS-based financial statements. These regulators appear generally open to discuss issues arising on a practical, pragmatic basis, and one would trust that this would continue.

Q19. 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?

We think it would neither impair nor enhance your ability to take enforcement action within the USA.

Q20. We request comment with respect to ways to assure access to foreign working papers and testimony of auditors who are located outside the US. For example, should we amend Reg. S-X to require a representation by the auditor that, to the extent that it relied on auditors, working papers, or information outside the US, the auditor will make the working papers and testimony available through an agent appointed for service of process? If not, should we require lack of access to auditors' workpapers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers and witnesses outside the US?

We are probably missing the point, but this question seems totally irrelevant to the acceptance of IAS as a basis for financial statements. Certainly any attempt by the SEC to extend its jurisdiction further into foreign sovereign areas is unlikely to enhance the attraction of the US capital markets to foreign issuers.

Q21. What has been your experience with the quality and usefulness of the information included in US GAAP reconciliations? Please explain, from your viewpoint as a preparer, user, or auditor of non-US 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,
including quantification of any decrease or increase in costs or

benefits, that could result from reducing or eliminating the reconciliation requirement.

The usefulness of the reconciliation is only limited to facilitate a comparison between financial statements prepared under US GAAP and those under IAS. Besides the cost in time and money for preparing and auditing the reconciliation, there is a risk of misunderstanding by readers of the financial statements being presented with two different true and fair results of the same company. As accounting standards are not the result of any intrinsic reality but of certain assumptions, it is far better to present in a consistent way only one net result and one equity amount for the same company.

Q22. 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

We suggest an approach whereby it is up to the issuer whether he wishes to provide indications of IAS/USGAAP differences according to the participants of the capital market he wants to reach. It would seem to make sense to tailor disclosure requirements to reflect the risks of the transaction and type of security involved: an investor will have somewhat different needs when considering an equity investment in a newly-listing company than when an established company makes a debt offering.

Q23. 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 US GAAP)?

The main points at issue are whether any information on IAS/US GAAP differences should be prescribed and, if so, at what level of materiality. The work to produce a "bottom line" figure would be the same, whether the detail of the reconciliation is presented or not.

Q24. Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?

IAS are already of sufficiently high quality to be acceptable for financial statements of foreign issuers, with the option for the issuer to disclose information on material IAS/US GAAP differences if he feels this desirable to help less sophisticated US investors not yet familiar with IAS.

Q25. 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 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?

All core standards with the exception of IAS 39 "Financial Instruments" and IAS 40 "Investment Property" will be required to apply for the financial year ending at December 31, 2000. We do not see the point of retroactive application you are suggesting. In addition, this would involve substantial extra costs for preparers without sufficient benefit to future-oriented investors.

Q26. 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 US 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?

No it does not. The existence of a reconciliation requirement only results in extra work for the preparer and the auditor which means considerable extra cost.
As already indicated we suggest that audit standards and procedures to ensure their application are a separate topic.

Version H.K.Schmid, based on Roche, Nestlé, Novartis and Sulzer
19 May 2000