SOLVAY
_____________________________________________________________
DIRECTION CENTRALE FINANCES & CORPORATE PLANNING

23.05.2000

Comment letter from Solvay S.A.
rue du Prince Albert, 33

B- 1050 Brussels, Belgium,

in response to SEC file number S7-04-00

Suggested answers to the SEC concept release:

Q1. 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?

Many companies are using IAS as the basis for both internal and external accounting and reporting. These standards have developed to the point where, with the implementation of IAS 39 and 40 next year, they will provide an excellent and very comprehensive accounting framework because they address all the main recognition, measurement and disclosure issues.
In recent years there were few instances where someone had to look beyond IAS: one area was on in-process R&D, and another the treatment of derivatives. With the revision of IAS 22 and the introduction of IAS 39, these issues are now covered. By approaching accounting issues in terms of principles and according to the notion "substance over form" IAS give a sound foundation for resolving specific problems.

Q2. Should we require use of US GAAP for specialized 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?

It would not be logical to accept IAS as a basis for financial statements and then require US GAAP for specific issues. This would tend to produce "hybrid" financial statements lacking conceptual consistency and being therefore less meaningful. USGaap is at present more advanced in solving accounting issues for specialised industries but these specialised rules are normally written exclusively in the US context. IASC will no doubt continue its work of addressing such issues as it does for insurance and extractive industries.

Q3. 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?

In our view, IAS now produce financial statements of high quality. Standards, and also certain options, must be applied consistently; they provide transparency and sufficient disclosures in which material information which is useful to the user is meaningfully presented. IAS are consistent with the underlying conceptual Framework, are clear (including being in generally understandable English) and unambiguous and result in comparable accounting by registrants.

Our view is that allowed alternatives should be removed as much as possible from IAS except those that allow an alignment with the US GAAP position.

Q4. Are the IASC standards of sufficiently high quality to be used without reconciliation to US GAAP in cross-border filings in the US? Why or why not? Please provide us with your experience in using, auditing or analyzing the application of such standards....

We find that IAS are certainly of sufficient high quality to be used without reconciliation to US GAAP in cross-border filings in the US. Two aspects need to be distinguished: the quality of IAS and IAS-based financial statements per se, and the comparability of such financial statements with US GAAP financial statements. Most differences between IAS and US Gaap are not important enough so that US investors would take a wrong decision in the absence of a reconciliation. Taking into account the fact that IAS includes alternatives which are a close fit to US GAAP a possible solution could be that the SEC specifies its "chosen" treatment (benchmark or allowed alternative) in IAS and requires from cross-border registrants using IAS an indication of the effects on income and equity of any material individual divergences resulting from using the other treatment (e.g. of expensing rather than capitalising interest when directly attributable to the acquisition, construction or production of a qualifying asset).

Q5. What are the important differences between US GAAP and the IASC standards? Will any of these affect the usefulness of a foreign issuer's financial information reporting package?

One needs to distinguish here between standards on recognition and measurement and standards on disclosure. With regard to the former, the main areas of difference in our experience are:
- Goodwill pre-1995 (under IAS, charge to equity was still possible);
- Acquired in-process R&D;
- JV entities;
- Capitalisation of interest;
- PP&E and Intangibles revaluation;
- Limitation of useful lives of intangibles.
For some of the IAS standards allowed alternatives authorize the US GAAP approach (e.g. capitalization of interest).
As far as disclosure requirements are concerned, IAS require information that is, in substance, of the same quality as US GAAP.

Q6. 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?

We do not think so. IAS are equally transparent and have detailed disclosures so that investors have sufficient ability to see behind financial statements to the underlying economic realities for forecasting future cash flows. We would refute a presumption that IAS financial statements are less transparent than US Gaap.

Q7. Based on your experience, are there specific aspects of any IASC standards that you believe result in better or poorer financial reporting ... than financial reporting prepared using US GAAP?

We don't believe that using IAS criteria instead of US GAAP results in better or worse reporting in any specific areas. However, it is an advantage that IAS is very strongly based on the principle of "substance over form" whereas US Gaap has many standards with very specific thresholds that quite often are abused. It is fair to say that in particular areas IAS result in better financial reporting. We also do believe that IAS concentration on material items improves financial reporting in enabling the investor to focus attention on the key information which he needs to have to make an investment decision.

Q8. 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?

General experience does lead to the conviction that the level of guidance in IAS is quite sufficient to result in consistent application in all material respects. In our understanding of the word "rigorous", the application can only be rigorous on the part of the preparer: the guidance is generally clear enough. Also, by concentrating more on principles, they leave less room for doubt on the treatment of transactions not specifically covered. We also think that IAS form a sound basis for auditing the accounts.

Q9. 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.

(1) SIC. (2) Technical advice and audit by worldwide firms. (3) Professional discussion groups such as working in certain countries or business associations such as the ERT (European Round Table of Industrialists).

Q10. 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?

As one fourth of our Group activity is located in the US or in areas influenced by US GAAP with managers trained in the US, our Group has been exposed to US GAAP.
We also have some experience with IAS in the contacts with our auditors.
Whether reporting under US GAAP or IAS, the same general problems will be debated.
Whereas US GAAP is very detailed and generally provides an answer to a specific problem, the IAS approach is less specific and leaves more room for interpretation and discussions with the auditors (substance over form).
However an answer in US GAAP can be hard to locate as it may be scattered among various documents.

Q11. Is there a 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 significant variations outside of that to be expected from the allowed alternatives. Even here practice is pretty uniform. Revaluation of PP&E and intangibles isn't commonly found, nor is the use of inventory valuation at LIFO.

Q12. After considering the issues discussed in (i) through (iv) ..., 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?

It is absolutely clear that the key must be the auditor who is the closest independent observer and has the technical expertise and sufficient insight into the transactions in question to be able to make informed judgements. Concomitant with this are the procedures to ensure that auditors fulfil their role properly, which is an aspect which we believe is best left to the profession to regulate. However, such procedures must be kept in proportion: costly double- and triple-checks all end up getting paid for by the customer.

In second place we would put the work of the SIC. As IAS are principle-based rather than a cookbook, the role of the SIC is vital for resolving interpretation questions. (It is a credit to the quality of the IAS that, of the 17 SIC so far approved, the majority deal with nothing more than points of detail).
The regulatory authorities come in third. Here again, procedures must be kept in proportion from a social and cost-effectiveness viewpoint.

Q13. What has been your experience 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. Have 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 believe that the SIC has performed, and continues to perform, its function well. As an example, the concrete, practical guidance in SIC-6 was of considerable help in the pre-Y2K phase, and SIC-1, 2 and 9 have apparently been helpful in stemming a few attempts at aggressive accounting. We see absolutely no reason at this time to modify this process.

Q14. Do you believe that we should condition the acceptance of the IASC standards on the ability of the IASC to restructure itself successfully based on the above characteristics? Why or why not?

Certainly not. The issue is whether IAS are acceptable as a basis for financial reporting in connection with US listings or not.

Q15. What are the specific practice guidelines and quality control standards accounting firms use to ensure full compliance with non-US 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 US? If so, what are they?

Please see Q12 above. This is primarily a question for the professional accounting firms. We must emphasise, however, that procedures which would result in substantial extra costs to the client and thus to the final customer/consumer will in no way encourage cross-border listings.

Q16. 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 US 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?

As for Q15.

Q17. 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 our experience, all international audit firms have IAS experts who are readily available for advice, problem solving and training.

Q18. Is there any 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 any major difficulties arising in this respect between different regulators who currently accept IAS-based financial statements. These regulators appear generally open to discuss issues arising on a practical, pragmatic basis, and one would trust that this would continue.
At the European level, the industry is lobbying in favor of the IAS standards to allow these to be used by the global players in replacement of the Accounting 4th and 7th Directives.

Q19. 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 think it would neither impair nor enhance your ability to take enforcement action within the USA.

Q20. We request comment with respect to ways to assure access to foreign working papers and testimony of auditors who are located outside the US. For example, should we amend Reg. S-X to require a representation by the auditor that, to the extent that it relied on auditors, working papers, or information outside the US, the auditor will make the working papers and testimony available through an agent appointed for service of process? If not, should we require lack of access to auditors' workpapers be disclosed to investors? Is there another mechanism for enhancing our access to audit working papers and witnesses outside the US?

We do not think that the use of US GAAP by a group of companies located outside of the US automatically gives the American Authorities the power to have access to information outside of their jurisdiction.
Therefore the question of access to foreign information is not linked to the standard applied and is irrelevant to the acceptance of IAS as a basis for financial statements.

Q21. 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 usefulness of the reconciliation is only limited to facilitate a comparison between financial statements prepared under US Gaap and those under IAS. Besides the cost in time and money for preparing and auditing the reconciliation, there is a risk of misunderstanding by readers of the financial statements being presented with two different true and fair results of the same company. As accounting standards are not the result of any intrinsic reality but of certain assumptions, it is far better to present in a consistent way only one net result and one equity amount for the same company (keeping in mind that IAS standards require a description of the valuation rules in the notes to the accounts).

Q22. 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

Stressing the fact that we recommend a single set of accounts without reconciliation, we suggest an approach whereby it is up to the issuer whether he wishes to provide indications of pertinent IAS/US GAAP differences according to the participants of the capital market he wants to reach. It would seem to make sense to tailor disclosure requirements to reflect the risks of the transaction and type of security involved: an investor will have somewhat different needs when considering an equity investment in a newly-listing company than when an established company makes a debt offering.

Q23. 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 US GAAP)?

If required a reconciliation at the bottom level would generate the same workload for the preparer, could be misinterpreted by the reader and would require lengthy explanation in the notes; in a few words, a bad solution.

Q24. Should any continuing need for reconciliation be assessed periodically, based on an assessment of the quality of the IASC standards?

IAS are already of sufficiently high quality to be acceptable for financial statements of foreign issuers, with the option for the issuer to disclose information on material IAS/US GAAP differences if he feels this desirable to help less sophisticated US investors not yet familiar with IAS.

Q25. 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 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?

All core standards with the exception of IAS 39 "Financial Instruments" and IAS 40 "Investment Property" will be required to apply for the financial year ending at December 31, 2000. We don't see the point of retroactive application you are suggesting. In addition, this would involve substantial extra costs for preparers without sufficient benefit to future-oriented investors.

Q26. 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 US 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?

No it does not (see Q12 on the professionalism of audit firms). The existence of a reconciliation requirement only results in extra work for the preparer and the auditor which means considerable extra cost.