Mr. J.G. Katz
Securities and Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20549-0609
Dear Mr. Katz,
The Confederation of Netherlands Industry and Employers (known as VNO-NCW) is the largest employers' organization in the Netherlands. VNO-NCW represents the common interests of Dutch Business, both at home and abroad and provides a variety of services for its members. VNO-NCW is supporting actively the objectives of the IASC and participates as member of the Dutch Council for Annual Reporting.
VNO-NCW initiated a project 'harmonisation accounting standards' that coordinates activities related to IASC developments (e.g. drafting comments on standards).
The following 17 members of VNO-NCW attributes particularly to this project:
ABN AMRO, Koninklijke Ahold, Akzo Nobel, Arcadis, Buhrmann, CSM, DSM, Fortis, HBG, Heineken, ING, Océ, Philips, Reed Elsevier, Shell International, Unilever and Vopak.
Please note that most of these companies are US-SEC registered and have an excellent knowledge of both US GAAP and IAS requirements.
Attached you find the response of VNO-NCW to the SEC Concept Release on International Accounting Standards. The aforementioned 17 companies are among the members of VNO-NCW. We like to stress that the VNO-NCW comments are supported comprehensively by these companies.
We welcome this opportunity to respond to your questions posed in the Release. We consider that it is important that the SEC continues to support the development of a body of International Accounting Standards that will be accepted by all capital markets internationally.
(originally signed by)
RESPONSE OF THE CONFEDERATION OF NETHERLANDS INDUSTRY AND EMPLOYERS (VNO-NCW) TO THE QUESTIONS RAISED IN THE SEC CONCEPT RELEASE INTERNATIONAL ACCOUNTING STANDARDS
Criteria for Assessment of the IASC standards
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?
Yes, the core standards provide a sufficiently comprehensive accounting framework. Of course, the core standards are not aimed to address all accounting issues within specific industries as banking, insurance, agriculture, oil-and-gas and not-for-profit. However, the core standards provide meaningful and sufficiently detailed requirements for mainstream industry, trade and service rendering companies. In that sense the IASC has accomplished the objectives of the Core Standards Project as agreed with IOSCO.
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?
In our opinion both abovementioned options should be left open until agreement is reached within IOSCO to endorse and accept an accounting standard drafted by the IASC for these specialized industries. This means that, now that the core standards project has been substantially finalized, the IASC should set up projects for a selected number of specialized industries. These projects should produce accounting standards addressing specific accounting issues not sufficiently covered by existing core standards (e.g. the accounting for insurance contracts within the insurance industry). We would welcome support of the SEC to the process of developing world wide accepted accounting standards for specialized industries.
Q.3 Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards?
Employee equity compensation benefits.
Are the IASC Standards of Sufficiently High Quality? Why or Why Not?
Q.4 Are the IASC standards of sufficiently high quality to be used without reconciliation to U.S. GAAP in cross-border filings in the United States? Why or why not? Please provide us with your experience in using, auditing or analyzing the application of such standards. In addressing this issue, please analyze the quality of the standard(s) in terms of the criteria we established in the 1996 press release. If you considered additional criteria, please identify them.
Based on the experience of our members we strongly believe that the IASC standards are of sufficiently high quality. The differences between IASC standards and US GAAP are not that significant that comparability between US GAAP and IASC based financial statements will be distorted. IASC standards in combination with SIC Interpretations provide enough detailed guidance for clear interpretation and consistent application of the requirements. The disclosures required are definitely comparable with those in US GAAP. In the opinion of some of our members, the extent of detail is sometimes even that high, that it lacks relevance for the user of financial statements.
We also like to mention the results of a recent KPMG survey (Global financial reporting, IAS or US-GAAP, April 2000) under 509 large European listed companies, which shows that the quality of IAS compared with the quality of US GAAP differ scarcely according to the 122 respondents (under which 32% used US GAAP, 30% used IAS and the other used domestic GAAP).
We believe further that IAS 22 (revised 1998) and IAS 37 give more detailed guidance on the accounting for business combinations and provisions compared with APB 16 and FAS 5.
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 noted the following important differences between U.S. GAAP and the IASC standards:
True and fair view override and use of substance over form;
Intangible assets: recognition of development costs;
Intangible assets: amortization periods;
Employee benefits: recognition of prior service costs;
Business combinations: detail of criteria describing pooling or purchase accounting; Business combinations: recognition of in-process research and development;
Capitalization of interest;
Employee stock options.
Some IAS standards still contain more alternative treatments that are not allowed under US-GAAP.
These differences will not affect the usefulness a foreign issuer's financial information-reporting package because the IASC standards involved are consistent with its underlying conceptual framework and are clear and unambiguous. However the differences could lead to the reporting of different financial positions and results compared to the situation in which US GAAP is used. Financial analysts could however through the quality of the disclosures analyze these differences. It is important to realize that even within a certain well defined set of accounting standards like US GAAP or IASC, the key figures within financial statements will always be the result of numerous choices and assessments of the management involved which will be reflected in the notes to the statements. These key figures will always demand a careful analysis of policies used and assessments made, especially if different companies are to be compared.
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 of disclosure requirements?
No, we believe it is sometimes just the other way around. IAS complying companies are for instance subject to a stricter regime of liability recognition and have less discretion in the choice of applying purchase or pooling accounting. Moreover, acceptance of IAS by the SEC would remove the competitive disadvantage currently suffered by foreign companies who should use two different accounting bases when entering US capital markets.
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 of disclosure) than financial reporting prepared using U.S. GAAP? If so, what are the specific aspects and reason(s) for your conclusion?
Regarding the true and fair view override and use of substance over form (not included in US GAAP), our members do prefer the IASC approach (which is comparable with Netherlands-GAAP) whereby companies have to account for transactions according to their substance. This could mean in exceptional cases that departure from a requirement is necessary if management concludes that compliance with an IAS standard would be misleading. We can imagine SEC concerns about the true and fair view override. However, in our opinion the override is applied very rarely and, if applied, sufficient safeguards are included in IAS 1,13.
As mentioned we believe further that IAS 22 (revised 1998) gives more detailed guidance on the accounting for business combinations, especially with respect to the identification of an acquirer in a business combination, compared with APB 16.
IAS 37 gives more detailed guidance on the recognition of provisions compared with FAS 5.
With regard to amortization period of intangible assets we believe that in some cases the rebuttable presumption method of IAS 38 will result in a better matching of expenses to benefits then the 40 years limit within US GAAP. Some of our members acquire for example licenses with operating periods of over 40 years. It should be possible to amortize in these kinds of situations license costs over the expected operational period.
We also do believe that the IAS concentration on material items improves financial reporting in enabling the investor to focus attention on the key information, which he needs to have in order to make economic decisions.
US-GAAP gives in general a more detailed guidance by means of the supplemental guidance as included in the Current Text, in the bases for conclusions, in the extended illustrative examples as attached to specific standards and in the numerous EITF-issues. However, this does not mean that the IASC-standards do not give sufficient guidance.
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?
As mentioned above the level of guidance provided in IASC standards doesn't reach the extent of detail in the US-GAAP, but we believe strongly that the level is sufficient for a rigorous and consistent 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.
Interpretations issued by the SIC;
IASC Committees developing implementation guidance;
Interpretation guidance textbooks and seminars as issued and organized by the worldwide operating accounting firms;
Recommendations and/ or guidelines by organizations of financial analysts.
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?
Level of detail of disclosures;
Liability recognition in normal and business combinations situations;
Earnings per share.
In the current standards these issues have been addressed.
Q.11 Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?
In literature (e.g. Street, Gray and Bryant, International Journal of Accounting, vol. 34, no.1 and the reference mentioned in note 30 of the Concept Release) the degree of compliance by companies claiming to comply with IASC standards is very mixed and somewhat selective. This will change however now IAS 1 Revised has become effective (for periods beginning on or after July 1, 1998). We believe that the mixed degree of compliance is not a result of a lack of implementation guidance but a result of significant differences between local accounting and tax requirements on the one side and IASC standards on the other side. The abovementioned study suggests that national standard setters and regulators need to work more closely with the IASC to eliminate significant differences between national accounting standards and IASC standards. We agree with this view.
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?
_ companies having a proper corporate governance structure that supports proper application of accounting standards;
_ management accepting responsibility for properly applying accounting standards;
_ an effective high quality standard setter producing high quality standards;
_ high quality audits performed by independent and well equipped auditors;
_ an effective and efficient enforcement (oversight) body (like an expert panel established to investigate complaints of users of financial statements; e.g. the Financial Reporting Review Panel in the UK).
Although corporate governance may be outside the scope of this release, we do want to stress that a financial supporting infrastructure begins where the process of financial reporting originates, namely at the company level itself. A well-established corporate governance structure is contributing to a business environment in which compliance of requirements and procedures is regarded as normal behavior1.
The restructuring of the IASC will attribute to its objective of achieving uniformity in accounting principles used by companies all around the world. We are also of the opinion that accounting firms do perform high quality audits of multinational listed companies applying US-GAAP, IASC standards, or another body of accounting standards. They are well aware of the fact that the financial statements of these companies are exposed to detailed analyses of various interested parties inside or outside the financial markets. This causes us to believe that another enforcement body should not duplicate the work of the auditor but rather has to consider seriously the complaints of users of financial statements brought to its attention. This kind of infrastructure has been successfully established in the United Kingdom and to a lesser extent in the Netherlands.
It's a well-known fact that enforcement mechanisms within Europe vary from country to country. We understand that the European Commission puts great reliance on the future work of Forum of European Securities Commissions (FESCO) in this respect.
The Interpretative 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 interpretative 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?
We regard the SIC as being an important contributor in enhancing rigorous application and worldwide comparability of financial statements that are prepared using IASC standards. Interpretations of the SIC are part of IASC's authoritative literature (see IAS 1, par. 11). The SIC has drafted 23 Interpretations in a 3 years period, covering a wide area of topics. We are confident that the SIC procedures are effective.
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 new structure of the IASC is planned to become effective as from January 1, 2001. From that date on we are sure that the IASC meets the criteria the SEC has formulated for a high quality standard setter.
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?
We expect that the accounting firms will comment separately.
As we have mentioned earlier, however, it is our experience that the accounting firms do perform high quality audits of multinational listed companies applying US-GAAP, IASC standards, or another body of accounting standards.
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? If not, should there be disclosure that the audit firm is not subject to such standards?
No, auditors should be subject to quality control requirements based on the auditing standards issued by the International Federation of Accountants (IFAC) as being the organization in which all the member organizations can exercise influence. In our opinion these auditing standards are of high quality. The IFAC auditing standards are also used as basis for the Netherlands GAAS (general accepted auditing standards).
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?
In the Netherlands the educational unit of the accountants' professional body and some accounting firms as well, are organizing regularly training courses with respect to IASC standards on various levels of depth. Moreover, course books regarding application of IAS are widely made available by (for example) some accounting firms. Those preparers that are used to work with Anglo-Saxon accounting standards require little additional training. Other preparers changing or planning to change to IAS need to some extent (depending on the nature of the local GAAP) additional training. With respect to the Netherlands these training facilities are sufficiently available.
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?
We are not aware of significant variation in the interpretation and application of IASC standards permitted or required by different regulators. The risk of conflicting practices can be mitigated by preparers and auditors well trained with respect to IASC standards and by the SIC in timely interpreting accounting questions. It is inevitable that the application of a world wide accounting standard, used for cross border listings, is subject to analysis of several regulatory and oversight bodies. If as a result of the analysis important interpretative accounting treatments are questioned, these matters should be submitted to the SIC in order to obtain authoritative guidance. In that sense, we expect the importance of the SIC and its work load to increase in the future.
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?
Effective enforcement action will not be impaired significantly if IASC standards are used because the quality of IASC standards in terms of interpretative power is high enough according to our understanding (see also our answer on the previous question).
Q.20 We request comment with respect to ways to assure access to foreign working papers and testimony of auditors who are located outside the United States. For example, should we amend Regulation S-X to require a representation by the auditor that, to the extent it relied on auditors, working papers, or information from outside the United States, the auditor will make the working papers and testimony available through an agent appointed for service of process? If not, should we require that the lack of access to auditors' work papers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers?
Regulation S-X needs not to be changed. Communicating with one agent seems to us the most efficient way (both for the SEC and the auditing firm).
Possible Approaches to Recognition of the IASC Standards for Cross-Border Offerings and Listings
Q.21 What has been your experience with the quality and usefulness of the information included in U.S. GAAP reconciliations? Please explain, from your viewpoint as a preparer, user, or auditor of non-U.S. GAAP financial statements, whether the reconciliation process has enhanced the usefulness or reliability of the financial information and how you have used the information provided by the reconciliation. Please identify any consequences, including quantification of any decrease or increase in costs or benefits, that could result from reducing or eliminating the reconciliation requirement.
The usefulness of the information in reconciliations depends on certain factors:
_ the detail of the breakdown;
_ the extent to which the local GAAP differs from US-GAAP;
_ the clarity of the descriptive lines within the reconciliation statement and in this respect as well the explanatory notes thereon.
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 the any other appropriate for distinction?
See our answer to the previous question. We do not support mandatory reconciliations to US-GAAP at all when IASC standards are used.
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)?
Regardless which GAAP-body is used, the bottom line outcome will always depend to a certain extent on managerial choices and estimations in recognizing and measuring assets, liabilities, revenues and costs. This will create only an appearance of comparability and will support an always-dangerous fixation on bottom lines (see as well our answer on question 5).
Q.24 Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?
See our answer on question 4. The quality of the IASs is already sufficient high to justify the omission of reconciling statements. Enforcement mechanisms are of more concern.
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 can imagine that your possible decision to permit IAS statements without reconciliations will become effective for fiscal years as from January 1, 2000 or 2001. At that time (or by then) most IAS standards were (or are) effective. With regard to comparative figures, reconciliation statements included in the financial statements of previous years, should not be disclosed in current year financial statements because the reconciliation statements do not relate to any figure in the current year statements.
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?
With regard to your first sub-question, it seems to us that this depends on the extent to which home country GAAP differs from US-GAAP. Financial statements of foreign private issuers using IASC standards comprehensively will provide approximately the same quality as US-GAAP financial statements (Of course, given compatible enforcement).
Subsequently, it should be noted that the group auditor is responsible for conducting a high quality audit on corporate level. This includes procedures as ensuring the quality of local audit teams, issuing detailed audit instructions including elaboration on changes in auditing and accounting standards, analyzing audit planning and summary memoranda, issuing and analyzing audit review questionnaires, periodical quality review of audit files, organizing client service meetings, etcetera.
The quality of the audit and the consistency of the application of the IASC standards will definitively depend on the skill and expertise of the local office of the affiliate of the accounting firm that conducts the audit.
1 In the Netherlands a specific Committee on Corporate Governance (the so-called Committee Peters) has been established that has formulated in its 1997 report 40 recommendations for improving corporate governance structures. Many companies in the Netherlands have to a major extent incorporated these recommendations. We are confident that the subject of corporate governance is put high enough on the European and American political agenda as well.