Financial Reporting Council
Holborn Hall, 100 Gray's Inn Road, London WC1X 8AL Telephone 020· 7611· 9700 Fax 020·7404· 4497

Chairman: Sir Sydney Lipworth QC
Deputy Chairmen:   Sir John Kemp-Welch     Christopher Swinson     Sir Clive Thompson
Secretary: Ann Wilks

Mr Jonathan G. Katz,
Securities and Exchange Commission,
450 Fifth Street, N.W.,

17 May 2000

Dear Mr Katz,

SEC Concept Release: International Accounting Standards (File No.S7-04-00)

1. The Financial Reporting Council (FRC), the `Trustees' for financial reporting setting accounting standards and their application in the United Kingdom, welcomes the opportunity to comment on the SEC's Concept Release on International Accounting Standards.

2. The financial and business community recognise the urgent need for high quality global standards and ultimately for the convergence of all accounting standards. The FRC believes that International Accounting Standards (IASs) and the proposed new International Accounting Standards Committee (IASC) provide the best prospect of meeting this need. The governance structure now being proposed is appropriate and well supported. The nominating committee, which the SEC chairman chairs, is placing a strong emphasis on the quality of people to be involved in international accounting standard setting -both the trustees and in due course the board members whom the trustees are to select. Once these favourable conditions are in place, it is to be expected that the present proposals will deliver accounting standards in which users and preparers of accounts, together with those who regulate these matters on their behalf, can have every confidence. Indeed, IASs and the proposed new IASC structure offer the best opportunity that is likely to arise for some time to put in place a framework for global standard setting to the benefit of all those with an interest in financial reporting.

3. The FRC recognises the major contribution which the SEC has made towards achieving the goal of global accounting standards. The FRC, like the SEC, believes that a technically competent and independent board is the best way forward for authoritative global standard setting. The restructuring of IASC in which the SEC has played a major part and which is now reaching its final stage would secure this objective. The new structure would also take into account the various constituencies interested in accounting standards, in particular with the provision for a geographical spread in the selection of the Trustees, which is an important consideration that the FRC shares with the SEC.

4. The Chairman of the SEC has said that

"No-one can take issue with the need for markets to converge on a common set of accounting standards.....International standards should be comprehensive, comparable, transparent and rigorously interpreted and applied."

The FRC very much shares these views.

5. Turning to the Concept Release in more detail, we do not propose to respond on all the issues outlined in the your comprehensive document, the Concept Release. We will confine our comments to three issues that in our view are critical if worthwhile progress towards global accounting standard-setting is to be made.

First issue: standard-by-standard assessment

6. The Concept Release states, (section 3 Can the IASC standards be rigorously interpreted and applied?) that, "at this time, we do not anticipate adopting a process-oriented approach (like our approach to the FASB) to IASC standards. Instead we expect to continue a product-oriented approach, assessing each IASC standard after its completion."

7. The FRC is gravely concerned that such a policy, if adopted as a matter of course, will discourage acceptance of global standards and encourage those who may wish to make amendments to the standards. On the assumption that standards are produced to a high quality by a technically competent and independent board, a regular "product-oriented approach" would be decidedly unhelpful.

8. The proposed approach risks adding to the difficulties of securing in Europe a global approach to accounting standard-setting. The European Commission has made it known that it believes there is a need for it to have an endorsement/screening mechanism to review standards. The FRC has been anxious that this should not operate in such a way as to lead in effect to a separate set of IASs, modified for Europe. Any such further set of standards would present a major obstacle to the achievement of truly global standards. The quotation from the Concept Release at paragraph 6 above, however, appears to suggest that the SEC may be adopting a similar position. This will surely encourage the European Commission and probably others towards a policy of actively altering IASC standards. If this were to develop, the result could well be three or more versions of IASC standards - Europeanised versions, Americanised versions, `pure' IASC standards and amendments from any other country.

9. The SEC has been instrumental in bringing about a structure that is capable of delivering accounting standards that would meet its exacting requirements for such standards. While recognising that the new system will inevitably involve some element of risk, the FRC believes it is a risk well worth taking to help introduce truly global accounting standards. We would therefore strongly encourage the SEC to endorse IASs produced by the new Board and the new structure it has been so instrumental in bringing about.

10. There is a further reason why we suggest that the SEC should reconsider its plan to assess each IASC standard after its completion. Accounting standards are frequently controversial. The standard setting process should channel that controversy, weigh up the arguments on their merits and give an informed decision to settle the issue. It is for this reason that the technical competence and independence of the standard setter are so important, as the SEC itself has so often stressed. If a powerful regulator, however well intentioned - be it the SEC, the European Commission or some other body - subjects every international standard to after-the-event assessment and revision, it seems inevitable that the new standard-setting process, the authority of the IASC board and its hard won independence will all be undermined. Members of the board will hardly be able to avoid looking over their shoulders to find a solution acceptable to these powerful interests who would have the ability to nullify the effects of the standard. This is precisely the sort of situation the SEC and others have striven so hard to avoid.

Second issue: principles versus rules

11. "Comparability may be achieved with respect to less detailed standards through common interpretation and practice by companies and auditors who are familiar with the standards. Earlier standard-setting organizations in the United States, such as the Accounting Principles Board, followed this approach and developed less detailed standards. Our experience with that approach was not favourable, however, and led to the current organization and approach to standard setting".

12. In this comment the SEC touches on an issue that is likely to be the subject of an important debate at the outset of the new IASC board. The UK's experience in this regard seems to be relevant. Financial Reporting Standards (FRSs) developed by the ASB are significantly more detailed than the statements of standard accounting practice (SSAPs) issued by its predecessor and, unlike SSAPs (and indeed most IASs), are always accompanied by a reasoned analysis of the development of the standard, equivalent to the FASB's Basis for Conclusions. Nevertheless, standards are written to cover the vast majority of cases, rather than every conceivable point. The thrust of the standard is clear and preparers and auditors are charged to interpret the standard in the light of its clear objectives. Any preparer or auditor failing to do that would be brought before the Financial Reporting Review Panel who, if it was found that the accounts were defective, would require them to be reissued.

13. Where there is a lacuna in a standard the FRC would expect that the Accounting Standards Board, or its Urgent Issues Task Force (based on the FASB's EITF) would amend the standard in the former case or issue an interpretation in the latter. This has proved successful in ensuring that quality standards are applied in the United Kingdom without a "rule book approach".

14. Although legal ingenuity and developments in commercial practice create continual pressures for more elaborate accounting standards, it is important to react to these pressures in a measured way. Excessive reliance on rules brings its own dangers: first, the well-known phenomenon that the more precise the rule the easier it is to find a way round it; second, and perhaps more fundamental, the tendency of a plethora of rules to obscure the main purpose of a standard and cause even potential supporters to disengage from the process of making the standard work. Among preparers and auditors alike, there is a risk of generating a mentality of "Show me where it says I cannot do that".

15. The FRC recognises and indeed to some extent would share the implied concerns of the SEC about enforcement. The United Kingdom is presently the only EU country where accounting standards are enforced. In the view of the FRC, this is done satisfactorily on the basis of principle-based accounting standards as opposed to a rule-book. The FRC recognises that further action on enforcement is needed elsewhere, and we believe that the SEC, the UK's FSA and other members of IOSCO have a major task ahead on behalf of the global financial community in developing world-wide enforcement mechanisms to ensure that any standard issued by the new IASC is properly interpreted and applied. We do not, however, see that as a reason for introducing extremely detailed standards unless, exceptionally in particularly complex cases, there is a strong argument for doing so.

16. The FRC notes the SEC concerns regarding black and grey lettering in the IASC standards. British standards are also formulated on this basis. We understand the grey letter aspects simply to be explaining the black lettering in greater detail in much the same way as in the American standards the standard comes first and explanatory appendices follow. It is, of course, open to debate whether certain grey letter paragraphs should be part of the black letter standard but this argument is particular to individual standards. The FRC is here concerned to make the general point that standards drawn up in this way can provide a satisfactory framework for financial reporting.

Third issue: achieving quality

17. Our third point concerns an issue raised under section 2 of the Concept Release (Are the IASC standards of sufficiently high quality?). In discussing the quality of IASC standards the Concept Release states "in assessing the quality of IASC standards, we are applying these criteria [broadly consistency/ comparability/clarity] on a standard-by-standard basis, as well as to the IASC standards as a whole. In comment letters submitted to the IASC, the SEC staff have raised concerns including, but not limited to:" (then follows a short list of issues).

18. The FRC notes with some concern that many of these issues have been those on which major arguments have occurred in the present IASC board and the American position has not been accepted (and, in some cases, the British position has not been accepted either). The matters raised are contentious and may well need further debate. The position now being taken, however, could suggest, with damaging consequences for reaching agreement on international standards, that high quality is equated solely with American standards. Not surprisingly we would dispute this, especially in cases where the ASB has, for conceptual reasons, disagreed with the FASB's approach. While we know that that is not the SEC's intention, it would be helpful if the SEC were to reiterate its position that it would accept different answers from those of the FASB provided the new independent board had properly examined the arguments and concluded that the alternative view was the most appropriate.


19. The FRC has welcomed the SEC's initiative in issuing the Concept Release and is glad to have had the opportunity to comment on issues which, quite rightly and helpfully, the SEC has exposed for public comment. It believes that the concerns it has expressed relate to issues that carry a particularly high risk of setting back progress towards the acceptance of global standards. It therefore hopes the SEC will be able to give due weight to the comments in this letter.

20. The FRC believes that it is important for all international regulators to encourage a process whereby, as far as is practicable, the accounting standards for measurement used nationally and internationally should be identical so that profit, assets and liabilities appear as the same figure no matter in which jurisdiction the accounts were prepared. As mentioned above, the FRC believes the SEC has done much to bring that day closer. We appreciate that various jurisdictions may then wish to ask for additional disclosure requirements and believes this is perfectly acceptable given the various domestic markets and the need to ensure fairness between cross border issuers and domestic issuers.

21. The FRC looks forward to a new era of international and global standard setting and is grateful for the opportunity to comment on the SEC's timely publication. The FRC's aim, like that of the SEC, is to do everything it can to facilitate an accepted set of high quality global standards as soon as practicable.

Yours sincerely,

Chairman, Financial Reporting Council