Date: May 23, 2000
Re: response from FESCO Members to the US Securities and Exchange Commission - International Accounting Standards CONCEPT RELEASE
What is FESCO (Forum of European Securities Commissions)?
FESCO assembles the 15 statutory securities commission of the European Union and 2 other statutory securities commissions of the European Free Trade Association (EFTA)(1). FESCO was founded to respond to the challenges of creating the European single market in financial services and to intensify co-operation, both within Europe and beyond.
The members of FESCO have committed themselves:
FESCO's work concentrates on developing common regulatory Standards and enhancing co-operation between members on enforcement and market surveillance issues trough a Multilateral Memorandum of Understanding (MoU).
Common standards are FESCO's tool towards a harmonized European framework for securities regulation. FESCO is developing standards that complement the legal framework established by the European directives or that cover areas where no European law exists. Each FESCO member is committed to implementing these standards in its home jurisdiction.
Interest to regulators
FESCO members wish to offer their comments for three main reasons:
a) As market regulators, they also have a strong interest in the quality of the accounting standards used
The quality of financial reporting, which relies on high quality accounting standards, is a key element for the transparency of financial information and the investors' protection.
b) For the sake of investors' protection worldwide, they believe that market regulators should adopt common approaches in the field of financial reporting
In the context of globalization of economies and markets, common approaches enable to enhance investors' protection, whatever the origin of investors and issuers may be. In particular it is desirable to ensure better comparability of consolidated financial statements globally, by pursuing the objective of a single set of consolidated financial statements.
c) FESCO members wish to recommend measures be taken in order to facilitate the use of IASC standards by issuers and to implement the recent IOSCO recommendation
By responding to the SEC concept release, FESCO members wish to highlight the interest that world applicable and enforceable standards represent.
As the IASC standards are now the benchmark in the areas they cover, FESCO members also wish to express their desire that all national accounting standards used for listing purposes converge towards the solutions that are developed and recognized internationally. Similarly, in the cross-border operations, they call for the effective recognition of the standards assessed by IOSCO and deem it necessary to consider the general quality of IASC standards, rather than differences or a selection of differences with national GAAP.
Finally FESCO members take that opportunity to highlight that measures are already in the process of being taken in the European Economic Area. An approach based on the use by EU public companies of the IASs endorsed by a mechanism at both technical and political level received support by the Lisbon summit of the EU Prime Ministers.
Background Information on IOSCO/IASC work
In 1993, IOSCO reached consensus and wrote to the IASC detailing the necessary components of a reasonably complete set of standards to create a comprehensive body of principles for enterprises (other than those in specialised industries) undertaking cross-border securities offerings. In 1994, IOSCO completed a review of the then-current IASC standards and identified issues that would have to be addressed, as well as standards that IASC would have to improve, before IOSCO would consider recommending IASC standards for use in cross-border listings and offerings.
In 1995, IOSCO indicated to the IASC that it has already endorsed IAS 7, «Cash Flow Statements» and that 14 of the existing international standards do not require additional improvement, providing that the other core standards are successfully completed. IOSCO stated that, if the resulting standards were acceptable to its Technical Committee, IOSCO would recommend endorsement of such standards for cross-border capital raising and listing purposes in all capital markets.
The IASC's core standards work program identified areas involving new or substantially revised standards. These were virtually complete during 1999, and finally completed in March 2000, and in January 1999 IOSCO began its assessment of the standards. The IOSCO Technical Committee recommended in May 2000 that IOSCO members should permit incoming listers to use the IASC standards to prepare their financial statements for cross-border offerings and listings.
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?
FESCO members believe that the core standards identified in 1993 by all IOSCO members - including the SEC - continue to 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, in particular with regard to cross-border offerings and listings.
They note that the objective defined in 1993 is to cover the accounting issues that an enterprise would likely encounter in preparing its financial statements for use in cross-border offerings and listings and does not cover the accounting issues relating to specialized industries.
Regarding non specialized industries, based on the published comments of IOSCO members (comments on the IASC core projects) FESCO members believe that the IASC core standards provide an accounting framework sufficiently comprehensive to be acceptable in cross-border offerings and listings; they also believe that the core standards meet the objectives and conditions set out by IOSCO.
Regarding specialized industries, FESCO members note that the IASC is involved in areas that are significant with regard to cross-border operations: in particular the IASC has undertaken projects on Insurance and Extractive Industries and has decided to review IAS 30, Disclosure by Banks and Similar Financial Institutions.
While recognizing the importance of that review, FESCO members believe that the IASC core standards and IAS 30 cover a broad range of transactions and provide a reasonable basis to continue to work on the issues encountered by banks and similar financial institutions. They highlight that IAS 39 has been developed using similar approaches to those used in several FASB standards (in particular FAS 91, 115, 125 and 133).
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?
FESCO members believe that use of US GAAP should not be required in the financial statements of incoming issuers; they note that any such measure would constitute an obstacle for the European enterprises operating in specialized industries (in particular banking and insurance industries) that are seeking an access or a listing in the US capital markets; as in most countries of the European Economic Area, enterprises operating in some specialized industries must comply with industry specific accounting laws and rules (e.g. European accounting directive applicable to financial institutions, European accounting directive applicable to insurance companies) and the compatibility of US GAAP with regional and national provisions and rules is uncertain.
The IASC is fostering changes in global financial reporting into accounting standards, and in many areas is now leading rather than following accounting developments.
Also it should be noted that US GAAP still have to evolve towards internationally developed solutions (e.g. investment properties, covered by IAS 40, insurance).
FESCO members believe that the use of standards that are recognized at the national level in the primary financial statements (in particular national standards and, more and more frequently, IASC standards) should be allowed by the SEC. They also believe that the quality of regional and home country standards should be considered.
As it proves increasingly necessary to improve financial reporting globally, FESCO members believe that common solutions should be developed by an international organization after an assessment by IOSCO. In their view, that approach is most likely to produce meaningful primary financial statements, provided that those developments involve all interested parties and the due process is adapted to an international environment (representativeness, frequency of meetings, steering committees, international comparative studies, field tests, consultation, comment periods sufficiently long, due consideration of comments, bases for conclusions).
The definition of meaningful primary financial statements and accepted principles facilitates the evolution of accounting laws and rules, thus enabling their use in primary financial statements.
FESCO members believe that the approach of having the host country specify treatment for topics not addressed by the core standards is a workable approach both at the national and global levels. However they believe that additional developments may remedy that situation.
FESCO members believe that the host countries should firstly consider acceptance of IASC standards.
When IASC standards are not part of the core standards, IOSCO members should also consider acceptance of such standards for cross-border offerings and filings; as any other approach would hinder global comparability of financial statements and access to financial markets and would be detrimental to international investors.
In the situation where the IASC work program does not cover topics that are deemed to be important, FESCO members believe that IOSCO should identify a list of first priorities to the attention of IASC.
Q.3. Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards?
Our response is in many respects similar to our responses to questions 1 and 2.
In 1993, IOSCO reached consensus on the necessary components of a reasonably complete set of accounting standards that would comprise a comprehensive body of principles for enterprises undertaking cross-border offerings and listings. The objective of establishing core standards is to cover the accounting issues that an enterprise would likely encounter in preparing its financial statements for use in cross-border offerings and listings.
FESCO members believe that the core standards identified in 1993 by all IOSCO members - including the SEC - continue to provide a sufficiently comprehensive accounting framework to address the fundamental accounting issues that are encountered in a broad range of industries and a variety of transactions, in particular with regard to cross-border offerings and listings.
In the situation where the IASC work program does not cover items that are deemed to be important, FESCO members believe that IOSCO should identify a list of first priorities to the attention of IASC.
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.
FESCO members highlight that the review of the IASs by IOSCO has recently led its Presidents Committee to recommend that IOSCO members permit incoming multinational issuers to use the IASC standards to prepare their financial statements for cross-border offerings and listings.
FESCO members hold the view that IASC standards are an important vehicle to enhance the quality and comparability of financial reporting globally.
They note that IASC standards constitute a comprehensive and consistent basis of accounting, which has been developed based on an internationally recognized framework; they also note that they benefit from a broad participation and an international recognition and are in most cases comparable to US GAAP.
The vast majority of EU member states already allow consolidated financial statements to be drawn up according to IASC standards for incoming issuers. In addition, with the objective of convergence in mind, the European Union is in the process of considering the use of IASs by domestic public companies, provided that these standards are consistent with the European legal framework; also national developments take into consideration IASC standards. In some EU countries domestic companies are also allowed to use IASC standards compatible with the EU legislation.
No significant problems have been encountered in the European Economic Area from using and auditing consolidated financial statements drawn up according to IASC standards.
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?
The use of IASC standards in the European Economic Area does not raise significant problems and does not prove more complex than the use of other sets of standards currently accepted in the European Economic Area.
On the contrary, use of IASC standards improves the transparency and comparability of the financial information used by investors and analysts internationally. In the context of both the consolidation of European stock exchanges and the creation of a European single market, the European Commission and the EU member states are therefore considering the introduction of a requirement for publicly traded companies to draw up their consolidated financial statements according to IASC standards.
FESCO members are much attached to the high quality of financial information in Europe and fully support the objective of comparability; they believe that the IASC standards represent the most appropriate benchmark for the development of a single set of accounting requirements.
FESCO members are aware that there are differences between US GAAP and IASC standards. However they believe that the existing differences do not affect the overall quality and global usefulness of a reporting package established according to IASC standards.
They believe that it is important that all national accounting standard-setters seek convergence towards the rules developed by the IASC, insofar as those rules improve the quality of financial reporting and are accepted internationally (which is the case for the IASC core standards).
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?
FESCO members believe that the acceptance of a single set of international standards and the convergence of all national accounting standards towards that accounting basis should be primarily guided by the high quality of the international standards in question, the fact that they constitute a reasonably complete set of standards and their suitability for international operations.
They have no reasons to believe that use of IASC standards puts enterprises applying US GAAP at a competitive disadvantage to those applying IASC standards. In fact they note that some of the IASs are more demanding than the comparable US GAAP.
Q.7. 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? If so, what are the specific aspects and reasons for your conclusion?
FESCO members have no comments to make on the use of US GAAP by domestic US companies, but are concerned that it may be misleading to investors to require overseas companies to conform to US accounting rules. US GAAP is intended to reflect the particular legal and cultural environment in the US, and will often fail to highlight the different environment that may have influenced the overseas company's business.
The FESCO members therefore believe that companies seeking a listing in the US should be allowed to use IASs rather than to be required to use or reconcile to US GAAP. The incoming lister will then be able to highlight the way in which the environment in their home country influences the business.
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?
FESCO members believe that the level of guidance provided in IASC standards is sufficient to result in a rigorous and consistent application.
Even if some of the most critical standards (IAS 39) have been issued recently in the EU there is some practical experience of the implementation of the IASC standards.
The IOSCO recommendation is based on the assumption that the standards constitute a sufficiently comprehensive, high quality and detailed group of standards.
In addition, those standards that in some countries have been already implemented have proved to be sufficiently rigorous, even if reliance on a robust interpretative infrastructure appears to be crucial in order to have a cross border harmonized interpretation.
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.
FESCO members believe that the structures that are presently in place, are adequate to provide consistent and meaningful interpretations of the IASC standards where they themselves do not provide explicit implementation standards.
Since 1997, pursuant to an IOSCO request, the IASC has put in place a Standing Interpretation Committee. Until now this Committee has published 17 final interpretations which have been duly reviewed by the IOSCO Presidents Committee as part of its assessment process.
The FESCO members will be pleased to provide their comments to the SIC in the context of a cooperation that until now has proved to be fruitful.
In March 2000 the Board set up a new Committee which, in addition to the SIC, is in charge of identifying interpretative and implementation issues relating to IAS 39.
FESCO members consider such an initiative of utmost importance to the enhancement of international harmonization based on high quality international standards.
Q.10. In your experience with current IASC standards, what application and interpretation practice issues have you identified? Are there issues that have been addressed by new or revised standards issued in the core standards project?
Following the experience made in the EU, FESCO members have identified some application and interpretation practice issues. These issues do not put in question the overall quality of the IASC for the purpose of their use by multinational issuers.
FESCO members also believe that the standard setting and interpretative process is a mechanism, which works on a continuum basis. The most important thing in this field is to put in place a due process and an organization which is appropriate to a prompt reaction to the needs of the markets.
To this end FESCO Members believe that the new structure decided by the IASC may be sufficiently market oriented to be up to this task.
However, FESCO Members hold the view that an appropriate mechanism should be based on a cooperation between IASC and the IOSCO, which should continue to monitor the entire process for the sake of investors protection.
Q.11. Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?
Variation in the way enterprises apply accounting standards is not specific to IASC standards and may equally apply to other sets of standards (IAS, US GAAP, national GAAP).
FESCO Members believe that it is important to have a worldwide common accounting framework.
The IASC standards present specific advantages: accessibility, broad knowledge (by preparers, auditors and users), capability of being recognized at the international level, allowing them to be consistently applied internationally.
The issuers may apply differently specific provisions contained in any kind of accounting standards (IAS, US GAAPs, other national GAAPs).
As far as IASC standards are concerned, continuous involvement of IOSCO in the IASC work and structure may give the IASC appropriate input and enhance the clarity of its standards and interpretations.
In addition, FESCO members hold the view that cooperation between IOSCO and the IASC enables to enhance the global enforceability of IASC standards.
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?
In November 1999,the IASC Board adopted the restructuring plan of the IASC and the SEC itself noticed that the acceptance of the restructuring would depend on the high quality of the selection of the Trustees and of Members of the Board. A Nominating Committee has been set up, chaired by the SEC Chairman and has selected 19 Trustees, who will be in charge of selecting Board members. In its press release of 14 February 2000 the Nominating Committee reaffirmed the importance of selecting first class Trustees with a high commitment to public interest.
Can the IASC Standards be rigorously Interpreted and Applied?
Q.13. What has your experience been with the effectiveness of the SIC in reducing inconsistent interpretations and application of the IASC standards? Has the SIC been effective at identifying areas where interpretative guidance is necessary? Has the SIC provided useful interpretations in a timely fashion? Are there any additional steps IASC should take in this respect? If so, what are they?
FESCO members believe that the mechanism and the structure in place enable to promote consistent interpretation of the IASC standards. The creation of the SIC in 1997 was supported by IOSCO and, at this stage, no doubt has been expressed about the capability and effectiveness of the SIC in reducing inconsistent interpretation and application of the standards.
IOSCO has two observers at meeting of the IASC's Standing Interpretations Committee (SIC) and there has been an EU member of IOSCO at nearly every meeting. We therefore have a good understanding of the SIC process.
The members of IOSCO have been impressed with the quality of debate and decision making process at the SIC. The SIC's Operating Procedures are published, and are updated as necessary to reflect evolving practice. We are confident that the procedures have been followed consistently.
It remains to be seen whether the SIC will need to consider Emerging Issues (in particular those that do not merit a separate standard but are not covered by the current IASs) as well as interpretations.
The workload of the SIC may change in the future due to increasing completeness of the IASs and the growth of the number of companies applying them. It is not clear whether the SIC will need to increase its own meeting frequencies and staff or change its operating procedures.
Q.14. Do you believe that we should condition acceptance of the IASC standards on the ability of the IASC to restructure itself based on the above characteristics? Why or why not?
FESCO members have followed the development of the IASC's restructuring very closely through the European Commission and IOSCO. The new system will take time to bed down, but there is no reason to expect it not to be successful, and we strongly urge the SEC not to wait for the new structure to be fully operational before making a decision about the IASC standards that have been assessed and endorsed by IOSCO.
Q.15. 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 world-wide? 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?
FESCO members are firmly of the view that the ability of the IASC Core Standards to enhance global financial reporting will be increased if they are consistently interpreted and applied. The external audit is a key element of enforcement, and we note that IOSCO has a project in mind to look at the International Standards on Auditing produced by the International Auditing Practices Committee. As noted below, the European Commission is looking at auditing practices in the EU, and is close to agreeing with member states a set of recommendations on quality control procedures that will constitute best practice in the EU.
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 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?
In the EU, there have been moves in recent months to improve standards of audit quality control. The European Commission, in conjunction with member states, is developing harmonised guidance on quality control and auditor independence. We would encourage the SEC to take account of the EU standards in assessing incoming issuers' financial statements.
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 world-wide basis? What training with respect to the IASDC standards is required of, or available to, preparers of financial statements or auditors certifying statements using those standards?
While the IASC Core Standards are still relatively new, national standard setters around the world have taken up many of the elements, and so expertise in the principles of the IASs is growing very quickly.
While some IASC Core standards are new, many EU member states already allow consolidated financial statements to be drawn up according to IASC standards. Many European companies are using that possibility, as most IASC core standards are compatible with the Accounting Directives (the main exception is IAS 39, where European directives are in the process of being harmonized with the IASC standard).
Based on our experience of companies using IASC standards or US GAAP, we are confident that there is enough expertise in the European Economic Area and that the expertise in the new standards is growing very quickly.
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?
The European Commission will shortly present its proposed strategy with regard to the use of IASC standards within the Union for endorsement by Member States and the European Parliament.
FESCO members are willing to participate actively in the relevant process and consider it a key element in the harmonized implementation of accounting standards.
In order to achieve that objective internationally, FESCO Members believe that IOSCO endorsement of the IASC standards should be complemented by a continuous involvement of IOSCO in the interpretation of accounting standards.
In the interest of investors and preparers, such commitment should be aimed at reducing substantially possible differences in the interpretation and application of accounting standards.
In addition, were different practices be permitted or required, regulators should ensure that financial statements provide full quantitative and qualitative disclosure of the treatments applied.
EU Member States will address the need to ensure consistent implementation of the standards.
Q.19. Would further recognition of the IASC standards impair or enhance our ability to take effective enforcement against financial reporting violation and frauds involving foreign companies and their auditors? If so how?
FESCO members believe that the IOSCO endorsement of the IASC standards may enhance the effectiveness of enforcement action against financial reporting violations involving cross-border issuers.
Global accounting enforcement requires indeed cooperation among regulators in different countries. This may be possible only if a common accounting framework is established.
As it is mentioned under Q.18, international agreement on the IASC standards will necessarily encompass a higher level of cooperation and commitment by regulators to work together on enforcement action against financial reporting violations involving cross border issuers.
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 work papers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers?
FESCO members believe that access to audit working papers is crucial to conduct enforcement on financial statements.
However, in the case of foreign issuers enforcement practices should consider provisions of foreign countries legislation.
Until now the existing MoUs among regulators proved to be a useful tool in order to make auditors' documents available for enforcement action.
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, including quantification of any decrease or increase in costs or benefits, that could result from reducing or eliminating the reconciliation requirement.
FESCO members believe that the realization of the objective to develop a single set of international accounting standards, used around the world, would bring great benefit to financial markets. It would result in a significant increase in comparability and transparency in company financial statements. FESCO members are favorable to an approach based on the overall and global quality of accounting standards, rather than on a selection of differences with national GAAP that would lead to put additional constraints upon incoming issuers.
They recognize that reconciliations might be requested in limited circumstances, when the use of accounting standards could influence the economic decisions of users taken on the basis of inappropriate treatments. Those limited circumstances are essentially the following: need to enhance investors' protection, agreement of market regulators, market regulatory issues, areas not covered by the accounting standards used.
However they believe that efforts should be pursued to reduce the supplemental treatments that would be required; in particular, such supplemental treatments should not be required when the improvement of financial information is not clearly demonstrated.
On the assumption that supplemental treatments would be required for comparison with national GAAP (e.g. US GAAP) and in order to avoid discriminating practices towards incoming issuers, FESCO members believe that incoming issuers should be allowed to use national GAAP.
Finally FESCO members wish to underline that an enterprise could not be required to change the primary financial statements that it prepares in its home country; such a solution is unworkable at an international level, as primary financial statements generally are approved by shareholders, registered or filed with national authorities. Also individual financial statements are used for distribution and tax purposes in many countries.
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?
As mentioned in response to question 21, FESCO members are favorable to an approach based on the overall and global quality of accounting standards, rather than on a selection of differences with national GAAP that would lead to put additional constraints upon incoming issuers.
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)?
On the assumption that reconciliation would still be required for comparison with US GAAP, FESCO members believe that efforts should be pursued to further reduce those reconciliation requirements. The suggested approach deals with the presentation rather than the substance of reconciliation requirements; however that approach seems more workable at an international level than a full reconciliation of the financial statements.
Q.24. Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?
On the assumption that reconciliations would still be required for comparison with US GAAP, FESCO members believe that the relevance of such reconciliations should be reconsidered periodically, based on an assessment of the quality of both the IASC standards and the other standards referred to in such reconciliations. The objective of developing a single set of accounting standards, used around the world, and the convergence of all national standards towards that accounting basis should remain primary objectives.
FESCO members note that the IOSCO recommendation provides that IOSCO will be surveying its membership by the end of 2001 in order to determine the extent to which members have taken steps to permit incoming issuers to use 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?
Most of the 31 core standards have now come into effect and must be applied by companies using IAS ; as mentioned in the Concept Release, more than half of the core standards have become operative before 1998 (16 before January 1, 1998 ; 1 since July 1, 1998; 6 since January 1, 1999; 4 since July 1, 1999; 1 since January 1, 2000); the standards that have come into effect since 1998 include revision to 8 standards that have come into effect before 1998 (e.g. IAS 19, Employee Benefits). The standards that have not yet become operative are only IAS 39, Financial Instruments : Recognition and Measurement, which will become operative at the same time as FAS 133, and IAS 40, Investment Property, without equivalent in the US GAAP, which will become operative at the same time as IAS 39 (IAS 39 and IAS 40 will be superseding IAS 25, which is applicable since 1987).
For all the standards that have come into effect on or after January 1, 1998, earlier application is encouraged or permitted ; even without earlier application, for financial statements published in 2001, issuers using IASC standards will be able to produce in most cases at least one year of comparative information resulting from their previous financial statements (2 years for financial statements published in 2002). Therefore, in many cases, the question is not well-founded.
Also, as the Concept Release notes, the benchmark treatment of IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies provides that accounting changes require restatement of prior periods, unless the amount of the resulting adjustments are not reasonably determinable (In specific circumstances, US GAAP also allows changes in accounting principle to be handled prospectively).
In exceptional circumstances, the IASC standards provide a possibility of prospective treatment (with appropriate information in the notes, where an enterprise first adopts IAS 19, Employee Benefits, for defined benefit plans) or do not allow a retrospective treatment. The latter case mainly addresses the situation where retroactive measurements might prove difficult or might lead to abuses (IAS 36, Impairment of Assets ; IAS 37, Provisions ; IAS 39, Financial Instruments : Recognition and Measurement for an application of fair value measurements).
FESCO members believe that it is desirable to have comparative information measured on similar bases. However they note that the development of accounting standards is an ongoing process, which results in improvements of financial information. Without choosing sides on the respective possibilities of the IASC standards or US GAAP, FESCO members recognize that it can prove difficult or not desirable to require retroactive adjustments in specific circumstances, in particular when the reliability of those adjustments is not reasonably assured. Therefore FESCO members believe that the relevance of retroactive treatments should be carefully assessed and that such treatments should not be systematic.
As mentioned in response to questions 23 and 24, FESCO members believe that reconciliation requirements should be limited and, if any, further reduced.
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?
As mentioned in response to questions 23 and 24, the objective of developing a single set of international accounting standards, used around the world, and the convergence of all national accounting standards towards the international accounting standards should remain primary objectives. On the assumption that reconciliations would still be required for comparison with US GAAP, FESCO members believe that efforts should be pursued to further reduce those reconciliation requirements.
FESCO members believe that the use of IASC standards presents major benefits, which should be taken into consideration: greater assurance as to the use of similar accounting standards in most countries or entities of a group, broader knowledge of the accounting standards used by preparers and auditors, thus increased easiness for the establishment and control of financial statements.
The existence of reconciliation requirements or the absence of such requirements should change the way in which auditors approach financial statements of foreign private issuers; as the use of IASC standards enables to enhance monitoring of financial information at the local level and at the reporting entity level, the conformity with the accounting standards used being essentially controlled at those two levels.
FESCO members are confident that the capacity of auditors (North-American or European) to develop and implement procedures to review consistency with the IASC standards
are is not an obstacle to the use of those standards in the US ; as IASC standards bring about simplification in many respects :
FESCO members also note that the issues relating to the audit of financial statements are not specific to the IASC standards and equally apply to US GAAP. However they underline that the work carried out by IOSCO has not shown significant differences between the US auditing requirements and the international auditing standards, which are applied in the European Economic Area.
ELEMENTS FOR CONCLUSIONS
IOSCO recommendation on acceptance of IASC standards
Benefits attached to IASC standards
Encourage the convergence of all national accounting standards towards IASC standards
Auditing and enforcement issues
Implementation of the IOSCO recommendation to use the IASC standards
1 ) The Forum of European Securities Commissions (FESCO) assembles the following 17 Statutory Securities Commissions of the European Economic Area (EEA): Bundes-Wertpapieraufsicht (Austria); Commission bancaire et financière/Commissie voor het Bank- en Financiewezen/ Kommission fûr das Bank- und Finanzwesen (Belgium); Finanstilsynet (Denmark); Rahoitustarkastus (Finland); Commission des opérations de bourse (France); Bundesaufsichtsamt für den Wertpapierhandel (Germany); ________ _____________ / Capital Market Commission (Greece); Financial Supervisory Authority (Iceland); Central Bank of Ireland; Commissione Nazionale per le Società e la Borsa (Italy); Commission de surveillance du secteur financier (Luxembourg); Stichting Toezicht Effectenverkeer (Netherlands); Kredittilsynet (Norway); Comissão do Mercado de Valores Mobiliários (Portugal); Comisión Nacional del Mercado de Valores (Spain); Finansinspektionen (Sweden); Financial Services Authority (United Kingdom). The European Commission attends FESCO meetings as an observer. The Chairman of the IOSCO European Regional Committee is also invited as an observer. FESCO is chaired by Georg Wittich, Chairman of the Bundesaufsichtsamt für den Wertpapierhandel (Germany).