Mr. Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
May 23, 2000
Dear Mr. Katz,
Please find enclosed the jointed answer prepared by AFEP, MEDEF and "Association pour la participation des entreprises françaises à l'harmonisation comptable internationale" of behalf on French enterprises, to your request for comments on the Securities and Exchange Commission Concept Release, International Accounting Standards (File N° 57-04-00).
We welcome the SEC's commitment to achieving high-quality global accounting and financial reporting standards. The globalization of business and markets demands that regulators, standard setters and others develop one set of high-quality international accounting standards that will provide comparable, transparent, relevant and reliable financial information for making efficient capital allocation decisions.
We believe the International Accounting Standards Committee (IASC) is ideally positioned to become the international standard-setting body that could provide the high-quality global accounting and financial reporting standards that the global market demands with increasing urgency. We support IOSCO resolution concerning the use of IASC standards for the purpose of facilitating multinational securities offering and cross-border listings.
We welcome the opportunity to respond to the SEC consultation, which raises important issues for both French and European Companies and business globally.
|Patrick ROCHET||Jacques CREYSSEL||Jean-François PHELIZON|
Responses 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?
Our answer is yes as we are confident in IOSCO competence. In 1993, IOSCO identified for the IASC what they believed to be the necessary components of a core set of standards that would comprise a comprehensive body of accounting principles for enterprises making cross-border securities offerings. IOSCO later identified a number of issues relating to the then-current IASC standards. The IASC then prepared a work plan designed to address the most significant issues identified by IOSCO -- the "core standards" work program. In 1995, IOSCO and the IASC announced agreement on this work program, and IOSCO stated that if the resulting core standards were acceptable to IOSCO's Technical Committee, that group would recommend endorsement of the IASC standards. The focus of IOSCO's involvement in the core standards project is on use of IASC standards by large, multinational companies for cross-border capital raising and listing.
We understand that IOSCO members agreed to consider industry specific accounting treatment as « suspense issues ».
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?
For topics outside the core standards, such as industry-specific accounting standards, it was agreed that IOSCO members either would accept "home country" treatment or require specific "host country" treatment or equivalent disclosure. We suggest to specify as follows: "home country" treatment should be applied only if it does exist, if not US GAAP should be used.
This approach is transitory as long as suspense issues as industry-specific accounting standards are not addressed by IASC.
Specialized-industry issues should really be limited to « specialized » industries such as oil and gas or insurance and should not be used for any issue arising
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?
No, as the list of core standards has been prepared by IOSCO we think that it provides a comprehensive set of standards.
We think that the IASC Standards are of Sufficiently High Quality and that their quality could only be higher in the future as IASC is restructuring.
However, additional topics always need to be addressed in any comprehensive set of standards, for example stock-based compensation should be addressed by IASC.
You should also consider that although a standard setter produces high quality standards it might experience difficulties with one particular standard. For example IASC is experiencing difficulties with IAS 39, as FASB with FAS 133.
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.
Yes, the IASC standards are of sufficiently high quality to be used without reconciliation to U.S. GAAP in cross-border filings in the United States as we think that they:
We think that the concerns raised by the SEC (in the release) are minor and could be easily solved. In regards of the ability to override an IAS we think that the consequences should not be emphasized because in view of conditions of application (refer to § 16,17 and 18 of IAS 1) the use of the override possibility should be extremely rare.
We agree that compliance with both black and gray letter sections of the IASC Standards should be regarded as necessary and we feel that this issue should be easily addressed by IASC as both black and gray sections are approved by the IASC board. We also support the issuance of Basis for Conclusions.
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?
We do not figure any important difference that may exist between US GAAP and IAS standards and affect the usefulness of a foreign issuer's financial information reporting package. Some very important American investors are « present » on the European stock markets on which financial information under US GAAP is not available.
We concur with the FASB who in the IASC/US GAAP COMPARISON REPORT, wrote « it would be misleading to make sweeping generalizations or blanket assertions about the relative quality of IASC standards based solely on the similarities and differences between two sets of accounting standards. The mere existence of differences between accounting standards is not a sufficient measure of the quality or merit of any particular accounting standard relative to the other. The true test of an accounting standard is whether it satisfies the demand for information in the environment in which it is intended to be used. What is required, therefore, is a fuller understanding of the nature of similarities and differences in the information provided in the financial statements as a result of applying the two sets of accounting principles. »
As the objectives of financial statements whether prepared under US GAAP or IASC standards are " to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions" we feel that any significant event should be reported in the financial statements that is in the Statements or in the disclosures. For example the recognition difference in research costs is not relevant in comparing quality as, owing to IAS disclosure requirements all information is available to the user to compare with financial statements prepared under US GAAP and, even IAS provide analysts with more valuable information.
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?
We cannot figure any relevant reason, which would 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 of today we feel that the disadvantage could be at foreign companies using IAS as some IAS standards (IAS 22, IAS 36) have negative impacts on results compared to 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 (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?
Based on our experience, we are not aware of any specific aspects of IASC standards that result in better or poorer financial reporting (recognition, measurement or disclosure) than financial reporting prepared using U.S. GAAP.
The objectives of financial reporting are the same and we believe that the relative quality of IASC standards and US GAAP is not based solely on the similarities and differences between the two sets of accounting standards.
As the objectives of financial statements whether prepared under US GAAP or IASC standards are " to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions" we feel that any significant event should be reported in the financial statements that is in the Statements or in the disclosures whether prepared under US GAAP or IAS.
We even feel that some IAS standards such as Intangibles or Impairment of Assets do provide analysts with more valuable information on cash-flow projections.
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?
Although it is difficult to evaluate the effectiveness of certain of the IASC standards at this stage as direct use of IASC standards in developed capital markets is limited and a number of the new or revised standards may not have been implemented yet. However, we believe that IASC, Sic or regulators have the capacity to provide sufficient guidance to ensure consistent, comparable and transparent reporting of similar transactions by different enterprises. IASC is even restructuring in order to enhance its capacity to meet this objective. Anyway any accounting standard (even as detailed as US GAAP) always needs to be interpreted.
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.
Yes there are. For example IASC which is experiencing difficulties with IAS 39, as FASB with FAS 133, has appointed in March 2000 a Committee to develop guidance on IAS 39.
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?
Based on our experience we have identified application and interpretation practice issues with IAS 39. IASC has appointed in March 2000 a Committee to develop guidance on IAS 39. On May 8, 2000 that Committee issued 77 questions and answers for comments
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?
We agree that the standard-setter, the auditor and the regulator all have a crucial role to play to build an effective financial structure based on IAS standards. We believe that IASC, which is currently restructuring, together with auditors and regulators have the capacity to achieve the present objective. New IASC together with SIC, auditors and regulators will build the adequate infrastructure to ensure consistent application of the IASC standards.
Today the regulators are not organized to do so, as IASC are not the standards of one financial market. But in the next five years as IASC should be used by European companies, the European SECs should get organized and play a role similar to the one played by SEC with FASB.
We consider that the fact that the SEC staff has noted inconsistent applications of IAS 22 is not relevant as we understand that the SEC staff has spent a lot of time virtually since 1970 on the application of the pooling of interest method (about 40%!).
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 is a very young committee and we think that its today and tomorrow structure is adequate to reduce inconsistent interpretations.
Anyway we think that it is not the role of the SIC to identify areas where interpretive guidance is necessary. It is the role of preparers, auditors, users and regulators.
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 actual IASC structure is already a high quality (based on the characteristics listed in the release) standard setter. IASC has considered structural changes in order to respond to the major changes in the environment. As stated by SEC Chief Accountant (Nov 17, 1999), « final acceptance of the restructured IASC will depend on the selection of high quality Trustees and Board members. However, I believe this structure represents the best opportunity to realize that goal. » Considering the position of the SEC in the Nominating committee we are confident in the quality of the future Trustees and consequently of the future board members
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-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?
As preparers of financial statements we do not feel the relevance of the question as we feel that the issues which are listed are applicable to US standards as well. Worldwide audit firms are able to « audit » US GAAP we do not see any reason why they would not be able to « audit » IAS standards with a similar quality.
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 U.S. 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?
We think that IOSCO should require from its members the implementation of some quality control requirements similar to the ones existing in the US.
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?
Worldwide audit firms are able to « audit » US GAAP we do not see any reason why they would not be able to « audit » IAS standards with a similar quality. We understand that worldwide audit firms have implemented dedicated task forces who have developed technical expertise on IAS and who should support rigorous interpretation and application of IAS.
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?
Although it is difficult to evaluate the effectiveness of certain of the IASC standards at this stage as direct use of IASC standards in developed capital markets is limited and as a number of the new or revised standards may not have been implemented yet. However, we believe that IASC, Sic or regulators have the capacity to provide sufficient guidance to ensure consistent, comparable and transparent reporting of similar transactions by different enterprises. IASC is even restructuring in order to enhance its capacity to meet this objective. Anyway any accounting standards system (even as detailed as US GAAP) always needs to be interpreted and regulated.
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 have any comment, as it is a legal US domestic issue.
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 think that this issue is not linked with the use and acceptance of IAS standards versus US GAAP. The ways to be used by the SEC should be similar to the ones the SEC uses to-day when dealing with filings of foreign companies or / and with foreign subsidiaries of American companies
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 that could result from reducing or eliminating the reconciliation requirement.
We think that a US GAAP reconciliation is not useful as the objectives of financial statements whether prepared under US GAAP or IASC standards are " to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions" we feel that any significant transaction or event should be appropriately reflected in the financial statements prepared under IAS and provide relevant information to the users. As we believe that the IAS meet the SEC high quality criterions we do not believe that the elimination of the reconciliation requirement will negatively affect the quality of financial information. We also believe that the time consumed in the preparation of such reconcilation has a significant cost that outweigh the benefits from such reconciliations.. Although we support the elimination of the reconciliation requirement, we think that foreign registrants should provide US investors with a narrative description of major differences between IAS and US GAAP.
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?
Today some distinctions exist based on the type of transaction or type of security. We feel that these distinctions are no more relevant if IASC standards are recognized by the SEC.
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)?
No, please see our answer to Q21.
Q.24 Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?
We do not have any comment as we feel that is the role of the regulator to assess that need.
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?
We believe, on the basis of practicability and relevance, that you should not retain existing reconciliation requirements with respect to the reporting of any fiscal year results that were not prepared in accordance with the revised standards. On the basis of practicability you should not require retroactive application and you should accept the transition dispositions which are included in the IAS standards. IAS disclosures requirements are intended to provide sufficient information. We note that when a US standard is changed there is most of the time no requirement for a retroactive application and the SEC would not require for such restatement even on a pro forma basis if not required by the Standard itself.
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?
We do not have any comment on that question.