Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington DC 20549-0609
Düsseldorf, May 17, 2000
Dear Mr. Katz:
Re: SEC Concept Release on International Accounting Standards - File-No. S7-04-00
The Institut der Wirtschaftsprüfer in Deutschland e.V. (Institute of Public Auditors in Germany, IDW) appreciates the Commission's providing us with the opportunity to express our views on the issues raised in the SEC Concept Release on International Accounting Standards.
The IDW represents over 10,000 Wirtschaftsprüfer (German Public Auditors), who are the only auditors in Germany licensed to perform statutory audits of the statutory annual financial statements of German stock corporations, master limited partnerships, large corporations of all types and large partnerships without an unincorporated general partner. All German enterprises that issue securities traded on publicly listed exchanges in Germany are audited by Wirtschaftsprüfer. In addition, members of our Institute are responsible for or are directly involved in the audit of financial statements of SEC registrants and are associated with forms filed by registrants with the SEC. Consequently, our profession has a great interest in developments affecting the accounting principles used by clients that have issued or are contemplating issuing securities registered with the SEC.
Given the increasing globalization of international capital markets and the needs of investors worldwide for financial transparency and hence for an internationally accepted set of accounting standards, we welcome this initiative by the SEC to examine the issues associated with the acceptance of the accounting standards issued by the International Accounting Standards Committee (IASC) for foreign enterprises that wish to have their securities listed in the United States.
If the Commission would like to obtain further clarification of our responses to any of the issues raised, we would be very pleased if the Commission were to contact us in these matters so that we would be able to provide any additional information that it may desire in this respect.
Are the Core Standards Sufficiently Comprehensive?
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?
In our opinion the existing set of core standards and the related interpretations by the SIC provide a sufficiently comprehensive accounting framework. Therefore, we see no need to look to other accounting regimes when addressing fundamental accounting issues.
By issuing the core standards of the work program agreed with IOSCO, the IASC provides a "reasonably complete" set of accounting standards for fundamental issues for enterprises involved in cross-border listings. This had been the specific purpose of the IASC/IOSCO Agreement reached in 1994. In a letter to Mr. Shiratori, the then Chairman of the IASC, IOSCO had defined its concept of a "reasonably complete set of accounting standards". The IASC finalized its work program (apart from the standard on investment property) in 1998 - that is, one year earlier than originally agreed upon.
Q2 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?
According to IAS 1.22, in the absence of a specific IAS or an Interpretation of the SIC, management uses its judgement in developing an accounting policy that provides the most useful information to users of the enterprise's financial statements. In making this judgement, management considers
a) the requirements and guidance set out in International Accounting Standards dealing with similar and related issues;
b) the definitions, recognition and measurement criteria for assets, liabilities, income and expenses set out in the IASC Framework; and
c) pronouncements of other standard setting bodies and accepted industry practices to the extent that these are consistent with the requirements mentioned under a) and b).
These principles also apply to specialized industry issues.
In considering whether there should be a requirement to use U.S. GAAP for specialized industry issues in the primary financial statements prepared in accordance with IASC standards, it should be kept in mind, that IASC standards provide general principles. that may be applied in addressing accounting issues for specific industries. Consequently, only a few specific issues in certain industries - namely insurance, mining and agricultural issues - are exempted from the application of certain IAS (see IAS 2.1(c), IAS 37.1(c), IAS 38.1 (c) and IAS 38.1 (d)). However, for each of these specific issues, the IASC is currently working on projects that any lead to the issues of IASC standards in the future.
As long as there is no specific standard, in financial statements drawn up according to IASC standards, the use of either U.S. GAAP or home country standards for specialized industry issues should not generally be required by SEC, but rather, each case should be decided on its merits pursuant to IAS 1.22. However, in deciding which accounting policy should be used for specialized industry issues not specifically addressed by IASC standards, it should be borne in mind that the underlying framework of the IASC standards and the principles laid down in the Concept Statements of U.S. GAAP are fundamentally congruous (see also our answer to question 4).
Q3 Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards?
No: see our answer to question 1. Neither U.S. GAAP nor IAS are intended to be fully comprehensive, but rather are intended to be a sufficiently comprehensive set of accounting standards. It should be kept in mind that issuing accounting standards is a continuing process. Therefore, no standard setter is able to provide satisfying answers to all emerging issues. For example, the following issues still need to be solved in a comprehensive and high quality manner - not only under IASC standards:
- the definition and treatment of transactions under common control, because this issue is scoped out of IAS 22 (see IAS 22.6);
- the treatment of stock options, because this issue is not addressed by IAS 19.
Are the IAS of Sufficiently High Quality? Why or Why Not?
Q4 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.
In our opinion the IASC standards are of such sufficiently high quality that they can be used by enterprises listed on any stock exchange world-wide without reconciliation to the respective national GAAP. This is especially the case for U.S. GAAP, because the underlying framework of IASC standards and the principles laid down in the Concept Statements of U.S. GAAP are fundamentally congruous. In addition, the IASC standards and interpretations of the SIC are ordinarily consistent with the IASC Framework, as is the case for U.S. GAAP in relation to the Concept Statements.
In assessing the quality of IASC standards we have considered the criteria established in the above-mentioned 1996 press release :
The current IASC standards are consistent with the underlying IASC Framework, as the proper due process in developing new standards or revising existing standards enhances the consistency of these standards with the IASC Framework.
For the reasons discussed above we believe that IASC standards are of such a sufficiently high quality there should be no need to require a reconciliation to U.S. GAAP in cross-border filings in the United States.
Nevertheless, we understand that the existing disclosure requirements of the IASC standards may be less demanding than the requirements of U.S. GAAP. Therefore, it may be considered whether foreign companies applying IASC standards should observe additional disclosure requirements under certain circumstances (see also our answer to question 6).
Q5 What are the important differences between U.S. GAAP and the IAS? We are particularly interested in investors' and analysts' experience with the IAS. Will any of these differences affect the usefulness of a foreign issuer's financial information reporting package? If so, which ones?
We refer to the study recently undertaken by the FASB for a treatment of the technical differences between the IASC standards and U.S. GAAP. In this context, we would like to focus on certain general differences between the IASC standards and U.S. GAAP resulting from differences in structure between an international and a national standard setting body:
For these reasons, in our opinion, there are great advantages to allowing cross-border companies to apply IASC standards for a listing at a U.S. stock exchange.
Q6 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?
As stated above (see our answer to question 4), both IASC standards and U.S. GAAP are a set of high quality and sufficiently comprehensive accounting standards leading to relevant and reliable information for the users of financial statements. In our opinion, one cannot consider one more stringent than the other.
Due to the fact that the fundamental concepts of the IASC Framework and the Concept Statements of U.S. GAAP are fundamentally congruous, normally no material differences ought to arise between recognition and measurement issues under IASC standards and U.S. GAAP derived therefrom, respectively. Consequently, we cannot see a competitive disadvantage for U.S. companies which are required to use U.S. GAAP.
In our opinion, existing disclosure requirements of the IASC standards that may be less demanding do not result in fundamental differences that cannot be resolved. For example, it may be considered whether foreign companies applying IASC standards in (rare) circumstances, in which, from a US perspective, the less demanding disclosure requirements result in an disadvantage for users of financial statements, should observe additional disclosure requirements (for further reasons as to why a reconciliation should not be required, see our answer to questions 4 and 21).
Q7 Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting (recognition, measurement or disclosure) than financial reporting prepared using U.S. GAAP? If so, what are the specific aspects and reason(s) for your conclusion?
In Germany, certain medium-sized companies are listed on a specific equity market called "Neuer Markt". These companies are required to apply either IASC standards or U.S. GAAP. Current analyses show an approximately equal number choosing each accounting regime.
In our opinion, the main criteria for the assessment whether a set of accounting standards results in better or poorer financial reporting, are the information needs of the users of the financial statements. Analyses of as well as our experience with the companies listed on the "Neuer Markt" have shown that the users of financial statements, especially the analysts and financial institutions, welcome a decision by reporting enterprises to apply internationally accepted accounting standards irrespective of whether the enterprises apply IASC standards or U.S. GAAP. In almost all cases financial institutions take part in the preparation of the IPO of the enterprises listed on the "Neuer Markt" and consequently in the decision about the set of accounting standards being applied. Therefore, the approximately equal number of enterprises choosing each set of accounting standards clearly indicates that the users of financial statements do not assess one set of accounting standards as resulting in "poorer" or "better" financial reporting than the other one.
Can the IAS be Rigorously Interpreted and Applied?
The Experience to Date
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?
Compared to U.S. GAAP, the IASC standards provide a lower level of detail. Due to this fact there may be more accounting issues where interpretative guidance is necessary. However, in our opinion, this problem is mitigated by the transparent structure of the IASC standards (see also our answer to question 5), which provide the users of IASC standards with general principles with which accounting issues may be systematically addressed.
On a worldwide level the task of giving guidance and solving emerging ambiguities for IASC standards is a function of the SIC. In practice it is sometimes regrettable that it takes a very long time for the SIC to develop a new interpretation. This time is, however, needed to follow the required due process. On a national level there are panels of experts that provide further assistance in the application of IASC standards. These bodies may react quicker on urgent issues than the SIC. For example, in Germany our Institute has established a working party that addresses problems associated with the application of certain IASC standards by German enterprises in the context of the German environment (e.g. tax or company law). The working party includes current German members of the IASC Board and the SIC as well as other auditors with experience in the application of IASC standards. From the perspective of countries in which such a mechanism does not exist, the implementation of an "EITF" at the IASC level might be considered to be helpful. In addition, there are translations of the IASC standards and SIC Interpretations in different languages "authorized" by IASC (e.g. French, German, Polish, Russian and Spanish). Furthermore, IASC standards have been translated unofficially into more than 30 languages. The availability of these translations helps ensure a rigorous and consistent application of IASC standards, since the IASC standards are then more readily understood in non-English-speaking countries. In contrast, translation of all of the U.S. GAAP is, for all practical purposes, technically infeasible.
Furthermore, many national institutes and organizations provide training on the application of IASC standards and some audit firms provide disclosure checklists for their clients, that contain all IAS disclosure requirements. Perhaps it may be useful for enterprises applying IASC standards to have an "authorized" disclosure checklist similar to the "authorized" translations of IASC standards.
In discussing the existing mechanisms and structures for ensuring a rigorous and consistent application, it should be borne in mind that the globalization of capital markets will positively influence the rigorous and consistent application of the IASC standards.
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.
See our answer to question 8.
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?
Since the current set of IASC standards and the related interpretations by the SIC provide a sufficiently comprehensive set of accounting standards, from our point of view there are only a few accounting issues not sufficiently and comprehensively addressed under the existing IAS. These include, for example, the definition and treatment of transactions under common control and the treatment of stock options.
However, it should be borne in mind that the U.S. GAAP do not provide conclusive answers to a number of accounting issues either, and that many such issues are subject to current G4+1 projects and are included in the current or future work program of IASC.
Q11 Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?
Certain variations in the application of accounting standards are inherent to any set of accounting standards (including U.S. GAAP). This applies to explicit allowed alternative treatments introduced by a certain standard as well as to those areas requiring judgment (e.g., accounting estimates) in addition to the application of the provisions in the standard.
Furthermore, it should be kept in mind, that for those allowed alternative treatments that still remain despite the "comparison project" (E 32: Comparability of Financial Statements), the IASC standards require detailed disclosures to ensure that these financial statements can be compared with other financial statements in which a different treatment is applied. For example, if investment property is measured under the historical cost model pursuant to IAS 40.49 instead of applying the fair value model, the fair value of the investment property presented at cost should be disclosed in the notes.
The Need for a Financial Reporting Infrastructure
Q12 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 our opinion, the essential elements of an effective financial reporting infrastructure are:
- an independent standard setter consisting of members with technical expertise and a representative geographic and functional background;
- a sound due process with adequate consultation of all parties interested in financial reporting and consideration of their interests;
- an effective interpretative function on a worldwide level;
- adequate funding and organization;
- acting in the public interest with complete transparency;
- an effective enforcement mechanism.
Considering the present structure as well as the new structure of IASC as proposed by the IASC Strategy Working Party and already accepted by the IASC-Board, IASC fulfills these criteria subject to a sufficient financial support by all parties concerned.
Where companies use U.S. GAAP or the IASC standards when they are quoted at the NYSE (or other U.S. stock exchanges), they are subject to the enforcement mechanisms of the SEC in any case. In this respect enforcement would be the same for U.S. GAAP and the IASC standards and therefore need not be considered as a decisive element in deciding whether or not to recognize the IAS.
The Interpretive Role of the Standard-Setter
Q13 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?
In our opinion, the work of the Standing Interpretations Committee has been effective in reaching the goals mentioned above (see our answer to question 8).
It should be accepted that the development of effective and consistent interpretations of high quality requires a complete due process with intensive consultation and discussion of the relevant issues. The goal of providing interpretations within a short period of time should by no means affect the quality of the work of any interpretive body.
Q14 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?
In our opinion, this problem has been resolved, since the IASC Board in its meeting in Sao Paulo on March 13-17 , 2000 unanimously approved a new Constitution for the restructured IASC and on May 24, 2000 the current member bodies will vote on acceptance of the new Constitution.
In addition, we believe that the current IASC structure already fulfills the criteria for an effective financial reporting infrastructure as pointed out under question 12.
The Role of the Auditor in the Application of the Standards
Q15 What are the specific practice guidelines and quality control standards accounting firms use to ensure full compliance with non-U.S. accounting standards? Will those practice guidelines and quality control standards ensure application of the IASC standards in a consistent fashion worldwide? Do they include (a) internal working paper inspection programs and (b) external peer reviews for audit work? If not, are there other ways we can ensure the rigorous implementation of IASC standards for cross-border filings in the United States? If so, what are they?
The specific practice guidelines and quality control standards that accounting firms are subjected to vary among the jurisdictions in which they operate worldwide. Nevertheless, a high degree of harmonization of these standards in the various jurisdictions has occurred by the implementation of the standards issued by the IFAC at a national level. For example, in Germany, the Institut der Wirtschaftsprüfer (IDW) and the Wirtschaftsprüferkammer (WPK) are both member bodies of the IAFC, and thereby contribute to its work and have made a commitment to implement the standards issued by the IFAC.
The auditing standard VO 1/1995 "Quality Control in Audit Firms", which was jointly issued by IDW and WPK and complies with the International Standard on Auditing ISA 220 "Quality Control for Audit Work", regulates the policies and procedures concerning quality assurance in the organization of a practice and in the conduct of individual audit engagements. Pursuant to VO 1/1995 compliance with these policies and procedures should be monitored to ensure that the requirements of a reasonable practice organization and the conscientious conduct of audit engagements are observed. German Public Auditors are obliged to comply with this standard. This standard also requires that working papers are inspected as a part of the internal quality control process.
In addition, an external peer review program based on the SECPS peer review program in the United States is currently being implemented in Germany.
We refer to our answers to questions 11 and 12 which discuss further the issue of variances in the application of IASC standards and the essential elements of a financial reporting infrastructure, respectively.
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 U.S. 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?
Different legal and professional regimes in different jurisdictions under which auditors operate may have varying mechanisms in place to ensure quality control that may not be comparable to those imposed by the AICPA SEC Practice Section but may, nevertheless, provide the same level of quality control. In this particular case the question confuses specific requirements with the effect of requirements generally on the level of quality control.
Consequently, systems differing from that of the AICPA SECPS may, in some cases, even lead to a higher level of quality control than resulting from the requirements of the AICPA SECPS. For example, in Germany public auditors are legally barred from engaging in any commercial (i.e., not professional) business, which by far exceeds any U.S. requirement in relation to the involvement by CPA's in commercial business activities.
Therefore, it may not be useful to impose the quality control requirements of the AICPA SECPS on auditors outside the USA without determining the requirements of the legal or professional regime under which these auditor's operate.
Nevertheless, it should be noted that an external peer review program, based on that of the SECPS peer review program in the United States is currently being implemented in Germany.
In our view, disclosure that audit firms are not subject to the requirements of the AICPA SEC Practice Section need not be made to investors because investors would most likely not perceive this information as being useful for investment decisions. A requirement for such disclosure presumes that the requirements of the AICPA SEC Practice Section lead to more reliable audits than requirements elsewhere, which may not be the case.
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 Germany there is substantial and growing expertise with regard to IASC standards as well as to U.S. GAAP. For example, German companies, whose equity or debt securities are publicly traded, when certain conditions are met, may apply IASC Standards or U.S. GAAP instead of German accounting law. Furthermore, companies listed on the "Neuer Markt" are obligated to file their financial statements in accordance to IASC standards or U.S. GAAP (see also our comments to question 7). For those reasons, in Germany, not only large companies, but also medium-sized companies and their auditors have gained expertise with IASC standards.
For preparers and auditors, training is provided by the Institute, by professional firms themselves and increasingly by commercial training and conference organizations. We have also become aware that many audit firms train partners and staff with respect to IASC standards, but we cannot comment on the degree to which this is conducted on a worldwide basis. We refer to our answer to question 8 for further discussion of this issue.
For auditors, this training is available prior to entering into the examination process, as part of the preparation for the examination process and as part of continuing professional development. It should be noted that the IASC standards are also subject to being examined in the professional examinations licensing auditors in Germany.
The Role of the Regulator in the Interpretation and Enforcement of Accounting Standards
Q18 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?
Pursuant to IAS 1 a set of financial statements can only be regarded as being in accordance with IASC standards if the IASC standards are fully complied with. If regulators choose to limit the application of IASC standards to a particular treatment in certain circumstances, when there are allowed alternative treatments in the IASC standards, then the financial statements would still comply with IASC standards. However, when there are options within a IASC standard, this standard requires detailed disclosures ensuring that these financial statements can be compared with other financial statements in which a different treatment is applied (see also our answer to questions 4 and 11).
Even though existing options within the IASC standards may lead to certain variations in the application of IASC standards, this situation is not unknown to U.S. GAAP. Under U.S. GAAP, for example, the treatment of stock options, tax credits, and the costs of issuing equity may be accounted for in accordance with alternative treatments.
The same argument applies to the interpretation of IASC standards, for there are circumstances under U.S. GAAP where there are no specific pronouncements or other guidance, which leads to these circumstances being open to differing interpretations. Nevertheless, the IASC standards were designed in a more systematic fashion than U.S. GAAP, which allows a more consistent interpretation of the principles contained therein.
The risk of conflicting practices and interpretation in the application of IASC standards and the resulting need for preparers and users to adjust for those differences can be mitigated by ensuring that the practices and interpretations applied subject to such problems are appropriately disclosed in the notes to the financial statements. Such properly disclosed variations in practice do not represent an other than rigorous application of the IASC standards.
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?
Further recognition of IASC standards would per se not impair nor enhance the ability of the SEC to take effective enforcement action against financial reporting violations and fraud involving foreign companies and their auditors because the use of accounting standards other than U.S. GAAP does not affect the enforcement powers of the SEC versus foreign companies or their auditors in any way (see also our answer to question 12).
Nevertheless, we do recognize that the recognition of IASC standards may likely result in a significant increase in the number of foreign registrants.
Q20 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' working papers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers and witnesses outside the United States?
In Germany and in most countries in Europe the confidentiality requirement for auditors, which also extends to the working papers, is enshrined in law and therefore auditors are precluded from providing access to their working papers to third parties unless the client specifically allows such access. Consequently, auditors would be legally precluded from allowing SEC access to working papers, irrespective of any amendment of regulation S-X. Therefore, we cannot accept, that it is appropriate for the regulators in the United States to demand access to working papers outside their jurisdiction. Moreover, if access to certain information is needed, this information should be provided by the company concerned rather by its auditor.
Possible Approaches to Recognition of the IAS for Cross-Border Offerings and Listings
Q21 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.
As we have stated in our answer to question 4, we do not see any need to require a reconciliation from IASC standards to U.S. GAAP in cross-border filings in the United States. Reconciliations do not enhance the usefulness or reliability of financial information. The users of financial statements regularly base their analysis and decisions on the figures derived from the original financial statements instead of using the reconciliation.
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?
As stated above (see our answer to question 4), apart from additional note disclosure requirements we do not see any need for a reconciliation. Information should be disclosed that is relevant and useful for the capital market, irrespective of the type of transaction.
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 U.S. GAAP)?
Apart from additional disclosure requirements, we do not see the need for a reconciliation (see our answer to question 4); we are consequently not in favor of a reconciliation of a "bottom line" figure.
Q24 Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IAS?
With reference to our answer to question 4, we - apart from additional note disclosures - do not see any need for reconciliation at all. If, in future, requirements for additional note disclosures are changed, the necessity for a periodical reassessment of such requirements becomes obvious, because standard setting is a continuous process.
Q25 The IAS 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?
With reference to our answer to question 4, we - apart from additional note disclosures - do not see any need for a reconciliation at all. We favor earlier application for IAS with prospective adoption dates.
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 U.S. auditing requirements, as well as the IAS, 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 IAS depend on the skill and expertise of the local office of the affiliate of the accounting firm that conducts the audit?
The existence of a reconciliation requirement leads to an extension of audit scope beyond that if no reconciliation were included in the financial statements. If the IASC standards were accepted, such a reconciliation would no longer be necessary. The removal of the reconciliation requirement may consequently lead to a reduction in audit work and audit cost.
Due to the quality control requirements for audits in various jurisdictions, procedures to ensure that auditors fully versed in U.S. auditing requirements as well as in the IASC standards, would be required to be implemented in each firm with an SEC client. These procedures would ordinarily include the review of the financial statements and other documents filed with the SEC before filing and, as the case may be, a review of the relevant working paper files.
Prof. Dr. Klaus-Peter Naumann
Deputy Executive Director