Jonathan G. Katz Esq May 19 2000
Securities and Exchange Commission
450 Fifth Street N W
Washington D C
20549 - 0609
Dear Mr Katz
SEC Concept Release on International Accounting Standards
The CBI is pleased to have the opportunity to respond to the SEC consultation
and I attach a copy of the CBI response.
Company and Commercial Law Group
Secretary, CBI Financial Reporting Panel
CCL 00 119
US SECURITIES AND EXCHANGE COMMISSION CONCEPT RELEASE
ON INTERNATIONAL ACCOUNTING STANDARDS
CRITERIA FOR ASSESSMENT OF THE IASC STANDARDS
The Confederation of British Industry is the UK's premier independent business organisation.
Founded in 1965, the CBI is a non profit making, non party political organisation funded by the subscriptions paid by its members. It exists to ensure that the UK government of the day, the European Commission and the wider community understand both needs of British business and the contribution it makes to the well being of society.
The CBI's objective is to help create and sustain the conditions in which business in the UK can compete and prosper.
The CBI has a direct membership of businesses employing over four million people, and a business trade association membership employing another six million.
The CBI welcomes the opportunity to respond to the SEC consultation, which raises important issues for both UK companies and business globally, and the investors, stakeholders and the community generally served by business.
We consider that it is important that the SEC continues to support the development of a financial reporting framework that will be accepted by all capital markets internationally. This acceptance must include that of the US capital market. If the US opts out, world-wide financial reporting will be in danger of coalescing around two separate frameworks - IAS and US GAAP. In the long term, such a dichotomy would be to the benefit of no one.
We therefore believe that the SEC should, as soon as is practical, allow foreign registrants to file financial statements prepared using IAS, with no requirement to provide a reconciliation to US GAAP.
II RESPONSE TO QUESTIONS
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?
In our opinion, the core standards do generally provide a such a comprehensive accounting framework. Considerable efforts have been made over recent years to extend and improve IAS standards and while further refinement may be expected in the future, this is also true of all national standards.
Q.2 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 is very undesirable for US GAAP to be imposed on foreign registrants, since this can result in two different sets of accounts which will cause confusion to the user. Therefore, if any specialized industry issues do arise which are not covered by IAS, we would prefer the reconciliation option. It is also important that the national standards setters retain a useful role so that local developments and ideas can be fed into the IASC. At least for the medium term, we support the home country retaining the right to address topics not covered by the core standards.
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?
There clearly needs to be an ongoing process to develop new standards and refine existing ones, but the core standards are comprehensive. The quality of the standards is generally high, although that does not mean that we agree with all of them.
Q.4 Are the IASC standards of sufficiently high quality to be used without reconciliation to US 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.
Our members currently produce financial statements under UK GAAP, with some preparing US GAAP accounts or reconciliations, so our direct application experience to date of IASC standards has been fairly limited. However, we believe that the work done on the standards over the past few years means that they are now of sufficient quality that reconciliation to US GAAP should not be necessary.
Q.5 What are the important differences between US 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 key difference is in the use of substance over form. US GAAP has a detailed rulebook which tries to cover every accounting question. This has a positive aspect, but it appears to have resulted in US companies constructing transactions in order to achieve the accounting treatment they desire, even if this does not accord with the underlying logic of the deal. We much prefer the UK approach whereby companies have to account for transactions according to their substance, and IASC is closer to this model. If anything, this difference can have a positive effect on the usefulness of the financial information.
Q.6 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?
No, in our view acceptance of IAS by the SEC would just remove the competitive disadvantage currently suffered by foreign companies who have to account on two different accounting bases if they wish to take advantage of US capital markets. The disclosure requirements of IASC standards would ensure that analysts would have enough information to scope the size of any significant adjustment if they so wished.
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 US GAAP? If so, what are the specific aspects and reason(s) for your conclusion?
The IAS approach to accounting for intangible assets and goodwill is preferable to the US GAAP treatment. For example, some of our members have many brands which have lasted for 100 years and some which were created more than 200 years ago. We consider the UK and IASC requirements for stringent impairment tests are far more sensible and informative to the user than the rather arbitrary US GAAP straight-line write down.
We also consider the UK and IASC approach to merger accounting, or pooling, is preferable to US GAAP. We accept that true mergers are much less common than acquisitions, however, there have been genuine mergers between equals, which have satisfied the conditions in IAS 22 and which have been correctly accounted for using merger accounting. We understand that the United States has a problem with some US business combinations being inappropriately accounted for using the pooling method and in our view this is due to the detailed US condition-based rules governing pooling in APB 16 not being effective. The approach adopted by the UK and by IAS 22 is more appropriate and appears to be successful in preventing the misuse of merger accounting.
The IASC approach to the impairment of fixed assets also results in better reporting since it does not involve the use of undiscounted cash flows as the initial recognition test.
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?
We consider that the guidance provided is generally sufficient, and the consistent application of IAS will improve over time as there is more general adoption. In addition, over recent years IASC standards have increasingly taken into account the way they could be interpreted, so minimising the scope for differences in application.
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.
The regulatory regimes vary from country to country and there is certainly a need to improve some of them.. We understand that in Europe, for example, this is now under active consideration. If the UK were to adopt IAS as the statutory basis, the Financial Reporting Review Panel would assume this regulatory role, as it does for current ASB accounting standards, and it has an excellent record of enforcing compliance.
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?
We are not aware of any specific issues.
Q.11 Is there 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 specific variations.
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?
See the Introduction above.
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?
The SIC appears to us to be an effective body, despite the inevitable pressures it has faced.
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 important issue is the quality of the standards not the process by which they are produced. In any event, the restructuring of the IASC onto a satisfactory new basis appears to be proceeding to schedule and this should obviate the need to answer this question.
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-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 United States? If so, what are they?
See our response to Question 16 below.
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? Why or why not? If not, should there be disclosure that the audit firm is not subject to such standards?
Both Q.15 and Q.16 introduce issues of the U S perspective of non - U S audit practice, rather than dealing with IAS. We consider that audit approaches can validly vary from country to country, and the U S approach is not the only correct one to follow.
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?
This expertise is increasing all the time. It would be wrong to take a decision based on the current state when this is likely to improve significantly once IASC standards become more generally required and accepted.
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?
See responses to questions 8 and 9 above. There is a need to co-ordinate the interpretation and application of IASC standards by the different regulators.
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?
We do not see how it would be affected either way.
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?
We do not see any reason why a change to some acceptance of IAS by the SEC from the current basis for US filings by foreign registrants should lead to changes in the way the SEC operates in respect of the company and its auditors.
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 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 that could result from reducing or eliminating the reconciliation requirement.
As preparers, our members have found the time and effort involved in preparing reconciliations to US GAAP to be considerable. Generally our members have had few, if any, questions relating to them from analysts and investors, and are not convinced that they serve a particularly useful function.
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?
We would welcome any limitations on the requirements for reconciliations.
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 US GAAP)?
Q.24 Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?
Consideration of need should always be based on the requirements of users. If the SEC do decide to continue with a reconciliation requirement, then this should certainly be regularly reviewed.
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?
Generally, compliance with a new standard requires directly reported comparative amounts to be restated on the same basis. We agree that a reconciliation might be required in respect of any standards which have not been applied to reported periods.
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 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?
We do not consider that it would have any impact on the quality of audit work.
May 19 2000