Jonathan G Katz
Securities and Exchange Commission
450 Fifth Street NW
26 May 2000
Dear Mr Katz,
SEC Concept Release: International Accounting Standards
File No S7-04-00
The International Association of Financial Executives Institutes is firmly committed to the development of a high quality financial reporting framework for use in capital markets across the world. Through our membership of the International Accounting Standards Committee (IASC), we have been closely involved in the work to complete the comprehensive core set of accounting standards, as agreed with the International Organisation of Securities Commissions (IOSCO).
The announcement last week from IOSCO that it had completed its review of these standards was a major step forward in achieving the goal of an acceptable international framework. The recommendation that IOSCO members should permit the use of financial statements (prepared under IAS and with supplemental treatments as necessary) for cross-border offerings and listings provides an opportunity to benefit both users and preparers of such information.
We now look forward to IOSCO members, such as the SEC, confirming their position regarding the use of international accounting standards by foreign issuers. However, the benefits will clearly depend on how each member of IOSCO implements the recommendation in respect of requiring supplemental treatments.
We have reviewed the concept release on international accounting standards issued earlier this year and set out below our responses to the questions raised therein. In general we do of course understand and agree with the SEC view that the US has a high quality system of financial reporting and infrastructure. We would, however, suggest that
- in a number of areas the US does not have the only reasonable approach, especially given the different legal etc. environments around the world. - US GAAP etc. may not in some cases provide the best answer.
- while issues of audit quality, regulatory oversight etc. are important, they are important for all reporting systems regardless of the GAAP used; they should not be allowed to cloud the issue of whether IAS is yet an appropriate GAAP basis for at least cross border listings.
A. Criteria for Assessment of the IASC Standards
1. Are the Core Standards Sufficiently Comprehensive?
We believe that the core set of standards produced by the IASC does 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. This would seem to have been endorsed by IOSCO's recent announcement following completion of its assessment of these standards.
We do not feel that an approach that would require the use of US GAAP by foreign private issuers for specialised industry issues in situations not specifically covered by international standards would produce the most meaningful primary financial statements. It is the very nature of specialised industry topics that can mean a US GAAP solution devised for the specific business and legal environment in the US may not provide an appropriate approach outside of the US. Therefore, in the short term, we would support the use of home country standards with reconciliation to US GAAP where necessary. Over time we would expect international standards to be developed further to cover such specific areas.
While we are by no means in agreement with all aspects of IAS, that would probably be the case with any set of standards for most people. We do not think that there are any additional topics that need to be addressed before the core standards can be adopted as a workable approach. Nevertheless, as with any standard setter, we expect the IASC to continue its work in improving and extending the current number of standards.
2. Are the IASC Standards of Sufficiently High Quality?
We believe that international standards are of sufficiently high quality to be used without reconciliation to US GAAP in cross-border filings in the USA. We can see that there may need to be some supplementary information as envisaged in IOSCO's recent announcement, but this should not be used to require extensive information and so effectively negate the benefits which should arise from that agreement.
Any attempt to compare quality between different sets of standards is clearly subjective. Moreover, the potential faults we, as an organisation, see in IAS such as an excessive concern over trying to draft standards which remove all preparer/audit judgements or which include too much detailed disclosure, are perhaps regarded as positive aspects by others.
There are obviously a number of differences between US GAAP and IAS and the former is more detailed, which is partly driven by the differing approaches to standard setting. However we do not feel that such differences affect the usefulness of a foreign issuer's financial information given the extent of the disclosure requirements under international standards. Any set of standards will still require some exercise of judgement by management and preparers, as well as appropriate analysis by the user community. On this basis we do not see that IAS represents a lower quality solution to cross border filings.
The SEC should not discriminate against foreign registrants but no more should they discriminate in favour of them. We do have US members who would wish to see reconciliation statements from IAS to US GAAP, although this view is not shared by the rest of our members. However, what is generally agreed is that if the SEC agrees that international standards are of sufficient quality to be used by foreign issuers it would seem fair and logical that domestic issuers should be given the same option of preparing their financial statements under IAS rather than US GAAP.
3. Can the IASC Standards be Rigorously Interpreted and Applied?
(a) The Experience to Date
We believe that international standards do provide sufficient level of guidance to result in rigorous and consistent application, as well as ensuring consistent, comparable and transparent reporting of similar transactions by different enterprises. Whilst the level of guidance may appear to be less detailed than US GAAP, it is reasonable and by concentrating on principles, international standards allow less scope for transactions to be "designed" to pass the detailed rulebook approach of US GAAP. Also, in recent years, the wording of IASs have increasingly taken into account the way they could be interpreted, so as to minimise the scope for differences in application.
The promotion of consistent interpretation of international standards where the standards do not provide explicit implementation guidance is provided by the IASC itself, through its Standing Interpretations and other Committees and also by third parties such as accounting and auditing firms providing guidance to their clients. In conjunction with IOSCO, the IASC have been establishing a complex and comprehensive set of standards. These standards have been increasingly adopted around the world and it would be surprising if there were not some "teething" problems. The more IAS are used the more the work of preparers, auditors, analysts etc. will result in reducing the potentially different interpretations (as occurs for any set of standards).
(b) The Need for a Financial Reporting Infrastructure
The essential elements of an effective financial reporting structure comprise the following:
These elements currently exist to varying degrees around the world and while they are important, we are concerned that the question over the quality and acceptance of IAS becomes confused with other issues of corporate governance and audit regulatory quality.
(c)The Interpretative Role of the Standard-Setter
We would suggest that, while still relatively new, the SIC has been very effective in its role of issuing interpretations to reduce inconsistent interpretations and applications of international standards. This is evidenced by the issue of some 17 final interpretations and a further 7 draft interpretations since its formation in April 1997.
With the completion of IOSCO's assessment of the core standards and the restructuring of IASC due to become effective on 1 January 2001, we believe that there is sufficient evidence that a high quality standard setting framework will be in place. Again, we would point out that as an organisation we have some concerns over the structure but these tend to be in those areas where the design is to meet the requirements of regulators - therefore, in the context of the SEC question, the cause of these concerns would no doubt be seen as positive.
(d) The Role of the Auditor in the Application of the Standards
No doubt the audit firms will respond in detail to the points raised under this heading but we do have a few general comments to make.
It would seem that, in requesting comments in this area, the document confuses the quality of IAS with their enforcement. This is not to deny that this is an important issue, but we would question whether it is relevant to consider enforcement of IAS and monitoring of audit quality in order to assess whether IAS is a suitable system of GAAP.
It is primarily the role of the preparer, not the auditor, to ensure proper accounting and this implies that more attention should be devoted to corporate governance arrangements and other checks and balances in entities' own reporting processes.
However investors look to the auditor for comfort that financial statements have been properly prepared and IAS is no different from other GAAP in this respect. As regards the questions raised in the concept release we are concerned as to what might be meant by words such as "comparable" in this context and the extent to which the questions imply that the use of IAS should change the SEC's powers, relationship with preparers/auditors etc. It is our understanding that in many jurisdictions auditors are subject to quality control requirements based on the auditing standards issued by the International Federation of Accountants. We also find it difficult to believe that a major international audit firm would not take the same care over its audit of a company listing in the US regardless of whether the accounting was US GAAP or IAS, or that the US has a monopoly on the best way to monitor and promote effective auditing.
(e) The Role of the Regulator in the Interpretation and Enforcement of Accounting Standards
We are not sure that significant variations exist between regulators, but there would seem to be a need for collaboration amongst regulators to ensure consistency across the world in the interpretation and application of international standards, presumably through the continuing co-operation between IOSCO and the IASC.
As with the audit point above, we are not clear as to why a change to some acceptance of IAS, 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.
B. Possible Approaches to Recognition of the IASC Standards for Cross-Border Offerings and Listings
Any accounting standards are subjective and open to judgement, while the necessity to provide reconciliations between such standards is likely to result in misunderstanding by a reader of the information. In addition any reconciliation is time consuming to produce and audit, further bringing into question its net benefit. It is also worth noting that concentrating on reconciling one or two "key" lines is contrary to the trend we see by standard setters to emphasise that it is necessary to look at the totality of the financial statements rather than one line.
It would seem that the resolution recently approved by IOSCO has provided an opportunity for the SEC to substantially reduce or eliminate the need for the existing reconciliation requirements. We would also envisage that, with the restructured IASC in place, there would continue to be a gradual elimination in differences between national standards and IAS.
We do not think that the question of adoption dates for the core standards is likely to be a concern in practice. It is difficult to presume that the SEC is going to be able to introduce changes that will reduce the requirements before calendar year 2001. Thus adoption dates of on or before 1 January 1998 would not seem to be of great relevance.
We do not feel that the existence of a reconciliation requirement changes the way in which auditors approach financial statements of foreign private issuers. We would assume that the major worldwide auditing firms would ensure that their resources are sufficient to ensure that their quality control procedures are maintained throughout their local offices.
As we said at the beginning of this response, we are fully supportive of the work being carried out by the IASC in moving towards a financial reporting framework that will enable multinational users to use IAS. We hope that the SEC will be able to fully support the recent resolution of IOSCO covering this issue, and its implementation will be in a form which represents progress for all participants.
We thank you for the opportunity of commenting on the concept release and hope that you will find our response helpful.
D C POTTER
Chairman, IAFEI Committee for International Accounting Standards