Denison1

26 April 2000

Mr Jonathan G Katz
Secretary
Securities & Exchange Commission
450 Fifth Street NW
Washington DC 20549 - 0609
USA

Dear Mr Katz

File No. S7-04-00

The Group of 100 is pleased to respond to your invitation for comment on the SEC Concept Release: International Accounting Standards.

The Group of 100 is an Australian organisation of senior finance and accounting professionals from large business enterprises in Australia. The Group of 100 is a strong advocate of the process of international harmonisation and played a major role in the implementation of an international harmonisation program by the Australian standard-setting bodies.

Our comments on the Concept Release are provided within the context of our policy on international harmonisation which provides that:

Endorsement of IASC standards by IOSCO and the US SEC for cross-border listing and capital raising is a pre-requisite for final acceptance of IASC standards by Australia.
The policy should be implemented by :

a. harmonising with IASC standards where the requirements are consistent with United States Generally Accepted Accounting Principles (US GAAP);
b. deferring harmonisation with IASC standards where these standards are different from both Australian standards and practice and US GAAP until the IASC standards have been endorsed by IOSCO and the SEC.

The outcome of this process should be that compliance with Australian accounting standards results in automatic compliance with international accounting standards being those issued by the International Accounting Standards Committee (IASC) which are widely accepted in international capital markets.

RESPONSES TO QUESTIONS

Our responses to questions are set out below. Please note that we have not responded to questions 15, 16, 17, 25 and 26.

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?

Yes.

The present portfolio of core standards and the IASC conceptual framework provides a good basis for addressing issues. In the absence of specific standards a robust conceptual framework serves an integral role in addressing and resolving issues. The most significant shortcoming at present is the lack of a conceptually consistent approach to measurement, for example, the use of the cost basis and the fair value basis, and a partial response to financial instruments.
Should we require use of US GAAP for specialised industry issues in the primary financial statements or permit use of home country standards with reconciliation to US GAAP? Which approach would produce the most meaningful primary financial statements? Is the approach of having the host country specify treatment for topics not addressed by the core standards a workable approach? Is there a better approach?

We believe that until there are generally accepted international requirements on specialised industry issues such as insurance, extractive industries etc. entities should be permitted to use US GAAP, as specified by the regulator, or home country standards with reconciliation to US GAAP. However, there should be a willingness to change US GAAP if IASC standards or foreign standards are seen as providing more relevant and reliable information to users of financial reports. The current requirements of US GAAP should not be a constraint on achieving the objective of provding relevant, reliable and comparable information to users of financial statements.
Are there any additional topics that need to be addressed in order to provide a comprehensive set of standards?

Yes. In addition to accounting for insurance contracts and the extractive industries, further work is required by the IASC in respect of financial instruments and in the measurement area, particularly the use of discounting in financial statements.
Are the IASC standards of sufficiently high quality to be used without reconciliation to US GAAP in cross-border filings in the United States? Why or why not? Please provide us with your experience in using, auditing or analysing the application of such standards. In addressing this issue, please analyse 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.

We consider that the recognition and measurement requirements of IASC standards are sufficiently robust not to require a reconciliation to US GAAP in cross-border filings. The quality of IASC standards has been substantially enhanced as a result of its Comparability/Improvements Project and efforts to address the expectations of IOSCO in respect of a core set of standards. While there are a number of disclosures which are part of the fabric of US financial reporting which are not included in IASC standards the disclosure requirements of IASC standards provide useful information to users without overload with detail. In some cases, for example, revaluation of non-current assets, IASC standards provide more relevant information to users.
What are the important differences between US GAAP and the IASC standards? We are particularly interested in investors' and analysts' experience with the IASC standards. Will any of these differences affect the usefulness of a foreign issuer's financial information reporting package? If so, which ones?

As an organisation that has members who are foreign registrants we are concerned about differences in respect of the revaluation of non-current assets, identifiable intangible assets and accounting for pension liabilities.
Would acceptance of some or all of the IASC standards without a requirement to reconcile to US GAAP put US companies required to apply US GAAP at a competitive disadvantage to foreign companies with respect to recognition, measurement or disclosure requirements?

It is not clear whether the term 'competitive disadvantage' is to be interpreted from the point of view of domestic registrants or foreign registrants and what the term is meant to encompass. If the market perceives that the quality of disclosures of foreign registrants is less than that of domestic registrants that will be reflected in the terms and conditions upon which capital is provided. As mentioned above, the core requirement is consistency in recognition and measurement of assets, liabilities etc. In some areas for example, revaluations and consolidations, many would consider that IASC standards provide better quality information than US GAAP.

IASC standards, as do national standards permit optional treatments in some circumstances. In addition, IASC standards also include a benchmark and an allowed alternative approach. In the interests of consistency and comparability a national regulator should specify which options/treatments permitted in IASC standards are acceptable for cross-border purposes.
Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting (recognition, measurement or disclosure) than financial reporting prepared using US GAAP? If so, what are the specific aspects and reason(s) for your conclusion?

While not supporting the requirements of IAS 38 "Intangible Assets" we believe that information prepared on this basis is superior to that provided under US GAAP. In addition, IAS 24 "Consolidation" provides better information than US GAAP because the definition of a subsidiary is based on the concept of control rather than legal ownership, and IAS 16 'Property, Plant and Equipment' which permits revaluations provides more relevant information to users about the value of the resources of the entity.
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?

Generally IASC standards provide sufficient guidance to ensure consistent and comparable reporting if also interpreted in the context of its conceptual framework. The level of guidance and explanation and the reasons for requiring a particular approach is, in most cases, significantly more detailed and extensive in US standards than in IASC standards and those issued by other national standard-setters. However, that does not necessarily mean that the outcomes will be better as it is also influenced by the philosophical approach taken to standard-setting and whether it is based on the prescription of a detailed set of rules or on the basis of principles.

We also note that US GAAP has been developed over many years and compromises made in the process have resulted in some inconsistencies.

The structure and drafting of IASC standards needs improvement. Although a feature of IASC standards is the distinction between 'black letter' and commentary it is not unusual for requirements to be included in commentary. We believe that clarification of the drafting style would remove this potential source of confusion.
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. We believe that this is the role of the Standing Interpretations Committee. To date we consider that the SIC has been successful in discharging its role. The range of issues dealt with is evidence of its usefulness and contribution to the implementation of IASC standards. While guidance can assist preparers in this process the absence of a regulatory mechanism is a major deficiency of the present arrangements.
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?

Our members do not apply IASC standards per se. The Australian Accounting Standards Board has undertaken an international harmonisation program. As part of this program the Board has, as a general rule, selected the approach in IASC Standards which is consistent with US GAAP. However, in respect of revaluations the Board chose not to harmonise with IASC requirements and adopted a 'class of asset' rather than an 'individual asset' approach.
Is there significant variation in the way enterprises apply the current IASC standards? If so, in what areas does this occur?

See response to question 10.
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?

The Group of 100 believes that a central part of the infrastructure is a strong, well-resourced and respected regulator to monitor and enforce compliance with financial reporting requirements on a consistent and transparent basis. The actions of the regulator are also significant in ensuring that the auditor plays an independent role in ensuring compliance with the requirements and the credibility of the outputs of the process. The credibility of the whole financial reporting system is eroded if the regulator has neither the resources, will or support to do its job.

The Group of 100 supports the restructure of the IASC as a means of developing a truly international standard-setter whose output is generally accepted by preparers and users of financial statements. We believe that the proposed structure of the IASC will deliver the characteristics of a high quality standard-setter. While all of these features are not necessarily present under the present IASC structure this does not, of itself, mean that the quality of existing standards is impaired.

The most serious concern is that present regulators have responsibilities within national boundaries and supranational regulatory mechanisms to deal with cross-border issues do not exist. The design and implementation of a regulatory mechanism is a major challenge for regulators.
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 are additional steps the IASC should take in this respect? If so what are they?

As indicated in our response to Question 9, we believe that the SIC has been effective in its role to date in providing useful guidance on a timely basis.
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?

No. Under its present arrangements the IASC has been successful in preparing the core group of standards as agreed with IOSCO. The restructure of the IASC is a natural development to adapt to a changing status and to respond to a different environment. As with national standard-setters, because restructuring occurs from time to time does not mean that the outcome of the existing processes is flawed.
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 do not have direct experience in complying with IASC standards per se. As indicated in the response to Question 10 where alternatives are permitted by IASC standards the Australian Accounting Standards Board has adopted the approach which is consistent with US GAAP. Differences in interpretation and application is not unique to IASC standards - this is also a feature of national standards and also occurs in a supranational environment, for example, interpretation of European Community Directives in different member countries. The risk of conflicting practices and interpretations would be minimised by the activities of the SIC, by the efforts of national regulators and a greater degree of co-operation between them.
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?

The ability of a regulator to take action against foreign companies and their auditors would depend on the terms and conditions upon which the foreign company participates in a national market. This does not necessarily depend on the degree of recognition of the body of standards which are applied by the foreign company.
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?

Amendment to Regulation S-X would appear to be an appropriate way of establishing the ground rules and conditions which attach to a foreign company seeking access to US capital markets.
What has been your experience with the quality and usefulness of the information included in US GAAP reconciliations? Please explain, from your viewpoint as a preparer, user, or auditor of non-US GAAP financial statements, whether the reconciliation process has enhanced the usefulness or reliability of the financial information and how you have used the information provided by the reconciliation. Please identify any consequences, including quantification of any decrease or increase in costs or benefits, that could result from reducing or eliminating the reconciliation requirement.

The principal motivation for international harmonisation for our members has been to seek access to capital on advantageous terms without the need to incur the costs associated with the duplication of record keeping in order to provide a US GAAP reconciliation. The removal of the need to do a reconciliation or minimising the number of reconciling items would be beneficial for our members who are US registrants. Under the existing regime it is our understanding that the US GAAP reconciliation provides useful information to permit users to assess foreign and domestic registrants on a comparable basis. However, we believe that this outcome can be achieved more efficiently through the convergence of requirements and the acceptance of IASC standards for cross-border purposes.
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?

No.
If the current reconciliaton requirements are reduced further, do you believe that reconciliation of a 'bottom line' figure would still be relevant (eg presenting net income and total equity in accordance with US GAAP)?

No.

If IASC standards are accepted for cross-border purposes a reconciliation should only be required in rare and exceptional circumstances, for example, where a different basis of measurement is used. To require reconciliation of net income and total equity would reduce the amount of disclosure without having any significant impact on the resources needed to prepare the reconciliation.
Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?

Yes.

An important part of the arrangements should be clearly specified and understood mechanisms to periodically review the quality of IASC standards, their comprehensiveness and the way in which foreign registrants comply with the requirements and the effects on national structures.

Yours sincerely

Bryce JH Denison
National President