Internal Market
Director General
    Brussels, 09.12.02
Internal Market DG/GL D(2002)

Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street NW
Washington DC 20549-0609
United States of America

Dear Mr. Katz,

Subject : File No. S7-42-02
Proposed rule: Disclosure in Management's Discussion and Analysis (MD&A) about off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments

We thank you for the opportunity to comment on the proposed rules on the above topic. We consider the following comments as part of a constructive regulatory dialogue between the United States and the European Union as the Sarbanes Oxley Act of 2002 (SOA) has also important effects on US-listed EU companies and EU auditors.

We have not sought to comment on the detail of the disclosure requirements, concentrating our response on general matters relevant to a European foreign registrant.

Disclosure is no substitute for proper accounting

The provision of additional relevant information to investors is to be supported.

However, we firmly believe that disclosure, particularly disclosure in the MD&A, is a supplement to, not a substitute for, proper accounting in the financial statements themselves. Accordingly, there is a primordial need for an appropriate accounting treatment of arrangements and transactions whose (whole or partial) purpose is to remove from an entity's balance sheet liabilities or assets. Such accounting must reflect the economic substance of the transactions and arrangements. This should follow a principles-based approach.

We therefore question the extent to which the proposed rule represents the right response to real (or at least perceived) deficiencies in US GAAP rules for the de-recognition of assets/liabilities and de-consolidation and a possible failure to account properly for the underlying substance of such transactions and arrangements. We are concerned that the proposed disclosures, falling as they do outside the `fairly presented' financial statements, do not address the underlying issues.

Whilst we support the development of further studies, such as those foreseen in Section 401(c) of the SOA into the accounting and disclosure, under US GAAP, of `off-balance sheet' arrangements, we consider that there is a need for a more thorough review of the accounting treatment applied in such areas.

We trust that, in addition to the obligations imposed upon it by the Act, the SEC will encourage FASB to undertake an urgent wide-scale review of the requirements of US GAAP in these areas, with a view to improving the relevant requirements. This could be taken up as part of the joint FASB/IASB convergence project.

Application to foreign issuers

We are concerned that there is scope for some confusion where a transaction or arrangement does not meet the `off balance sheet' definition on the basis of its foreign-GAAP treatment but would have met the definition on the basis of a US GAAP treatment (or vice versa).

On the basis of which GAAP should the definition be determined? How can the basis of such disclosures be made clear to a user of the financial statements and the MD&A?

We note that the MD&A disclosures are more generally based upon the foreign-GAAP financial statements and therefore consider that the designation of amounts as being `off-balance sheet' (and hence subject to the additional disclosure regime), should be based upon the foreign issuer's non-US GAAP financial statements. Where these are to be prepared under IFRS/IAS (which will be the case for the consolidated financial statements of listed EU companies in the European Union from 2005), we believe that the SEC should clarify exactly how the SOA requirement is to be interpreted. In our view, the application of IFRS/IAS should satisfactorily address the accounting and disclosure requirements in this area and hence also satisfy the objectives of the SOA in this respect.

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We trust that our comments will help the definition of further SEC rules to be in the best interest of US and also EU companies and auditors with transatlantic business links.

Yours sincerely,


Alexander SCHAUB