[Federal Register Volume 65, Number 36 (Wednesday, February 23, 2000)]
[Proposed Rules]
[Pages 8896-8915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4217]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230 and 240

[Release Nos. 33-7801, 34-42430; International Series No. 1215; File 
No. S7-04-00]
[RIN: 3235-AH65]


International Accounting Standards

AGENCY: Securities and Exchange Commission.

ACTION: Concept release; request for comment.

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SUMMARY: With the activities and interests of investors, lenders and 
companies becoming increasingly global, the Commission is increasing 
its involvement in a number of forums to develop a globally accepted, 
high quality financial reporting framework. Our efforts, at both a 
domestic and international level, consistently have been based on the 
view that the only way to achieve fair, liquid and efficient capital 
markets worldwide is by providing investors with information that is 
comparable, transparent and reliable. That is why we have pursued a 
dual objective of upholding the quality of financial reporting 
domestically, while encouraging convergence towards a high quality 
global financial reporting framework internationally. In this release, 
we are seeking comment on the necessary elements of such a framework, 
as well as on ways to achieve this objective. One aspect of this is 
seeking input to determine under what conditions we should accept 
financial statements of foreign private issuers that are prepared using 
the standards promulgated by the International Accounting Standards 
Committee.

DATES: Comments should be received on or before May 23, 2000.

ADDRESSES: Please send three copies of your comments to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
N.W., Washington, D.C. 20549-0609. You also may submit your comments 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. S7-04-00; you should 
include this file number in the subject line if e-mail is used. Comment 
letters can be inspected and copied in our public reference room at 450 
Fifth Street, N.W., Washington, D.C. 20549-0102. We will post 
electronically submitted comments on our Internet Web site at 
www.sec.gov.

FOR FURTHER INFORMATION CONTACT: Sandra Folsom Kinsey, Senior 
International Counsel, Division of Corporation Finance at (202) 942-
2990, or D.J. Gannon, Professional Accounting Fellow, Office of the 
Chief Accountant at (202) 942 4400.

SUPPLEMENTARY INFORMATION:

I. Introduction and Purpose of This Release

    Over the last two decades, the global financial landscape has 
undergone a significant transformation. These developments have been 
attributable, in part, to dramatic changes in the business and 
political climates, increasing global competition, the development of 
more market-based economies, and rapid technological improvements. At 
the same time, the world's financial centers have grown increasingly 
interconnected.
    Corporations and borrowers look beyond their home country's borders 
for capital. An increasing number of foreign companies routinely raise 
or borrow capital in U.S. financial markets, and U.S. investors have 
shown great interest in investing in foreign enterprises. This 
globalization of the securities markets has challenged securities 
regulators around the world to adapt to meet the needs of market 
participants while maintaining the current high levels of investor 
protection and market integrity.
    Our efforts to develop a global financial reporting framework have 
been

[[Page 8897]]

guided by the cornerstone principle underlying our system of 
regulation--pursuing our mandate of investor protection by promoting 
informed investment decisions through full and fair disclosure. 
Financial markets and investors, regardless of geographic location, 
depend on high quality information in order to function effectively. 
Markets allocate capital best and maintain the confidence of the 
providers of capital when the participants can make judgments about the 
merits of investments and comparable investments and have confidence in 
the reliability of the information provided.
    Because of increasing cross-border capital flows, we and other 
securities regulators around the world have an interest in ensuring 
that high quality, comprehensive information is available to investors 
in all markets. We stated this view in 1988, when we issued a policy 
statement that noted that ``all securities regulators should work 
together diligently to create sound international regulatory frameworks 
that will enhance the vitality of capital markets.'' \1\ We have 
applied this approach in a number of instances, including our recent 
adoption of the International Disclosure Standards developed by the 
International Organization of Securities Commissions (IOSCO) for non-
financial statement information.\2\ Our decision to adopt the 
International Disclosure Standards was based on our conclusion that the 
standards were of high quality and that their adoption would provide 
information comparable to the amount and quality of information that 
U.S. investors receive today.
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    \1\ Regulation of International Securities Markets, Securities 
Act Release No. 6807 (November 14, 1988) [53 FR 46963].
    \2\ International Disclosure Standards, Exchange Act Release No. 
41936 (September 28, 1999) [64 FR 53900].
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    Currently, issuers wishing to access capital markets in different 
jurisdictions must comply with the requirements of each jurisdiction, 
which differ in many respects. We recognize that different listing and 
reporting requirements may increase the costs of accessing multiple 
capital markets and create inefficiencies in cross-border capital 
flows. Therefore, we are working with other securities regulators 
around the world to reduce these differences. To encourage the 
development of accounting standards to be considered for use in cross-
border filings, we have been working primarily through IOSCO, and 
focusing on the work of the International Accounting Standards 
Committee (IASC). Throughout this effort, we have been steadfast in 
advocating that capital markets operate most efficiently when investors 
have access to high quality financial information.
    However, ensuring that high quality financial information is 
provided to capital markets does not depend solely on the body of 
accounting standards used. An effective financial reporting structure 
begins with a reporting company's management, which is responsible for 
implementing and properly applying generally accepted accounting 
standards. Auditors then have the responsibility to test and opine on 
whether the financial statements are fairly presented in accordance 
with those accounting standards. If these responsibilities are not met, 
accounting standards, regardless of their quality, may not be properly 
applied, resulting in a lack of transparent, comparable, consistent 
financial information.
    Accordingly, while the accounting standards used must be high 
quality, they also must be supported by an infrastructure that ensures 
that the standards are rigorously interpreted and applied, and that 
issues and problematic practices are identified and resolved in a 
timely fashion. Elements of this infrastructure include:

 Effective, independent and high quality accounting and 
auditing standard setters;
 High quality auditing standards;
 Audit firms with effective quality controls worldwide;
 Profession-wide quality assurance; and
 Active regulatory oversight.

    In this release, we discuss a number of issues related to the 
infrastructure for high quality financial reporting. We solicit views 
on the elements necessary for developing a high quality, global 
financial reporting framework for use in cross-border filings. We 
believe these issues should be considered in the development of any 
proposals to modify current requirements for enterprises that report 
using IASC standards because our decisions should be based on the way 
the standards actually are interpreted and applied in practice.
    We recognize that each of the elements of the infrastructure may be 
at different stages of development and that decisions and progress on 
some of these infrastructure issues may be independent of the body of 
accounting standards used.

II. Elements of a High Quality Global Financial Reporting Structure

A. High Quality Accounting Standards

    High quality accounting standards are critical to the development 
of a high quality global financial reporting structure. Different 
accounting traditions have developed around the world in response to 
varying needs of users for whom the financial information is prepared. 
In some countries, for example, accounting standards have been shaped 
primarily by the needs of private creditors, while in other countries 
the needs of tax authorities or central planners have been the 
predominant influence. In the United States, accounting standards have 
been developed to meet the needs of participants in the capital 
markets.
    U.S. accounting standards provide a framework for reporting that 
seeks to deliver transparent, consistent, comparable, relevant and 
reliable financial information. Establishing and maintaining high 
quality accounting standards are critical to the U.S. approach to 
regulation of capital markets, which depends on providing high quality 
information to facilitate informed investment decisions.
    High quality accounting standards consist of a comprehensive set of 
neutral principles that require consistent, comparable, relevant and 
reliable information that is useful for investors, lenders and 
creditors, and others who make capital allocation decisions. High 
quality accounting standards are essential to the efficient functioning 
of a market economy because decisions about the allocation of capital 
rely heavily on credible and understandable financial information.
    When issuers prepare financial statements using more than one set 
of accounting standards, they may find it difficult to explain to 
investors the accuracy of both sets of financial statements if 
significantly different operating results, financial positions or cash 
flow classifications are reported under different standards for the 
same period. Questions about the credibility of an entity's financial 
reporting are likely where the differences highlight how one approach 
masks poor financial performance, lack of profitability, or 
deteriorating asset quality.
    The efficiency of cross-border listings would be increased for 
issuers if preparation of multiple sets of financial information was 
not required. However, the efficiency of capital allocation by 
investors would be reduced without consistent, comparable, relevant and 
reliable information regarding the financial condition and operating 
performance of potential investments. Therefore, consistent with our 
investor protection mandate, we are trying to increase the efficiency 
of cross-border capital flows by seeking to have high

[[Page 8898]]

quality, reliable information provided to capital market participants.

B. High Quality Auditing Standards

    The audit is an important element of the financial reporting 
structure because it subjects information in the financial statements 
to independent and objective scrutiny, increasing the reliability of 
those financial statements. Trustworthy and effective audits are 
essential to the efficient allocation of resources in a capital market 
environment, where investors are dependent on reliable information.
    Quality audits begin with high quality auditing standards. Recent 
events in the United States have highlighted the importance of high 
quality auditing standards and, at the same time, have raised questions 
about the effectiveness of today's audits and the audit process.\3\ We 
are concerned about whether the training, expertise and resources 
employed in today's audits are adequate.
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    \3\ We have asked the Public Oversight Board to study the 
effectiveness of audits. See ``The Numbers Game''--Remarks of 
Chairman Arthur Levitt at the N.Y.U. Center for Law and Business, 
New York, NY, September 28, 1998 and ``Remarks to the Panel on Audit 
Effectiveness of the Public Oversight Board'' by Chairman Arthur 
Levitt, New York, NY, October 7, 1999, both available on the SEC 
website at www.sec.gov>.
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    Audit requirements may not be sufficiently developed in some 
countries to provide the level of enhanced reliability that investors 
in U.S. capital markets expect. Nonetheless, audit firms should have a 
responsibility to adhere to the highest quality auditing practices--on 
a world-wide basis--to ensure that they are performing effective audits 
of global companies participating in the international capital markets. 
To that end, we believe all member or affiliated firms performing audit 
work on a global audit client should follow the same body of high 
quality auditing practices even if adherence to these higher practices 
is not required by local laws.\4\ Others have expressed similar 
concerns.\5\
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    \4\ See ``Quality Information: The Lifedblood of Our Markets'' 
remarks of Chairman Arthur Levitt at the Economics Club of New York, 
New York, NY, October 18, 1999, available on the SEC web site at 
www.sec.gov>.
    \5\ See ``World Bank Warns Big Give Over Global Audit 
Standards,'' Financial Times, October 19, 1998, page 1.
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C. Audit Firms With Effective Quality Controls

    Accounting and auditing standards, while necessary, cannot by 
themselves ensure high quality financial reporting. Audit firms with 
effective quality controls are a critical piece of the financial 
reporting infrastructure. Independent auditors must earn and maintain 
the confidence of the investing public by strict adherence to high 
quality standards of professional conduct that assure the public that 
auditors are truly independent and perform their responsibilities with 
integrity and objectivity. As the U.S. Supreme Court has stated: ``It 
is not enough that financial statements be accurate; the public must 
also perceive them as being accurate. Public faith in the reliability 
of a corporation's financial statements depends upon the public 
perception of the outside auditor as an independent professional * * 
*'' \6\ In addition, audit firms must ensure that their personnel 
comply with all relevant professional standards.
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    \6\ United States v. Arthur Young & Co., 465 U.S. 805, 819 
(1984).
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    The quality control policies and procedures applicable to a firm's 
accounting and auditing practice should include elements such as: \7\
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    \7\ See the discussion of the elements of quality control of an 
audit firm's practice in Statement of Quality Control standard 
section 20.07, published by the American Institute of Certified 
Public Accountants' (AICPA's) Auditing Standards Board.
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 Independence, integrity and objectivity;
 Personnel management, including proper training and 
supervision;
 Acceptance and continuance of clients and engagements;
 Engagement performance; and
 Monitoring.

    A firm's system of quality control should provide the firm and 
investors with reasonable assurance that the firm's partners and staff 
are complying with the applicable professional standards and the firm's 
standards of quality.
    Historically, audit firms have developed internal quality control 
systems based on their domestic operations. However, as clients of 
audit firms have shifted their focus to global operations, audit firms 
have followed suit and now operate on a world-wide basis. Therefore, 
quality controls within audit firms that rely on separate national 
systems may not be effective in a global operating environment. We are 
concerned that audit firms may not have developed and maintained 
adequate internal quality control systems at a global level.\8\
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    \8\ See for example, 34-40945, AAER-1098 
(PricewaterhouseCoopers) and letters from the SEC Chief Accountant 
to the AICPA SEC Practice Section dated November 30, 1998, and 
December 9, 1999 regarding the need for global quality internal 
controls over independence matters, available on the SEC website at 
www.sec.gov>. We have asked the Public Oversight Board to sponsor 
reviews at other accounting firms and to oversee development of 
enhnacements to quality controls and other professional standards to 
address this concern.
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D. Profession-Wide Quality Assurance

    The accounting profession should have a system to ensure quality in 
the performance of auditing engagements by its members. Necessary 
elements of the system include:

 Providing continuing education and training on recent 
developments;
 Providing an effective monitoring system to ensure that:
--Firms comply with applicable professional standards;
--Firms have reasonable systems of quality control;
--There is an in-depth, substantive and timely study of firms' quality 
controls, including reviews of selected engagements;
--Deficiencies and/or opportunities for improvements in quality 
controls are identified; and
--Results of monitoring are communicated adequately to the appropriate 
parties.
 Providing an effective and timely disciplinary process when 
individuals or firms have not complied with applicable firm or 
professional standards.
    In some jurisdictions the local accounting profession may have a 
system of quality assurance. However, structures focused on national 
organizations and geographic borders do not seem to be effective in an 
environment where firms are using a number of affiliates to audit 
enterprises in an increasingly integrated global environment.

E. Active Regulatory Oversight

    The U.S. financial reporting structure has a number of separate but 
interdependent elements, including active regulatory oversight of many 
of these elements, such as registrants' financial reporting, private 
sector standard-setting processes and self-regulatory activities 
undertaken by the accounting profession. Each of these elements is 
essential to the success of a high quality financial reporting 
framework. This oversight reinforces the development of high quality 
accounting and auditing standards and focuses them on the needs of 
investors. It provides unbiased third party scrutiny of self-regulatory 
activities. Regulatory oversight also reinforces the application of 
accounting standards by registrants and their auditors in a rigorous 
and consistent manner and assists in ensuring a high quality audit 
function.

[[Page 8899]]

III. Background on Efforts To Reduce Barriers to Cross-Border 
Capital Flows

A. Foreign Private Issuers--The Current Requirements

    The Securities Act of 1933 \9\ and the Securities Exchange Act of 
1934 \10\ establish the disclosure requirements for public companies in 
the United States. The form and content requirements for financial 
statements filed with the Commission are set forth in Regulation S-X. 
\11\ This framework establishes the initial and continuing disclosures 
that companies must make if they wish to offer securities in the United 
States or have their securities traded publicly on an exchange or 
quoted on the Nasdaq stock market. \12\
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    \9\ 15 U.S.C. 77a et seq. (Securities Act).
    \10\ 15 U.S.C. 78a et seq. (Exchange Act).
    \11\ 17 CFR 210.1-01 et seq.
    \12\ In addition to exchange and Nasdaq traded securities, which 
are required to be registered, the securities of many unregistered 
foreign issuers trade in the over-the-counter markets in the United 
States. Unregistered companies are not required to file periodic 
reports with the Commission or reconcile their financial statements 
to U.S. generally accepted accounting principles.
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    Our current financial statement requirements for foreign private 
issuers parallel those for U.S. domestic issuers, except that foreign 
private issuers may prepare financial statements in accordance with 
either U.S. generally accepted accounting principles (U.S. GAAP) or 
with another comprehensive body of accounting standards (including IASC 
standards). A foreign private issuer using accounting standards other 
than U.S. GAAP must provide an audited reconciliation to U.S. GAAP.\13\
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    \13\ Items 17(c) and 18(c) of Form 20-F permit a foreign private 
issuer to provide financial statements prepared in accordance with 
another comprehensive basis of accounting, provided that the issuer 
also provides a reconciliation of net income and balance sheet items 
to U.S. GAAP. Domestic issuers are required to file financial 
statements prepared in accordance with U.S. GAAP. Rule 4-01(a)(2) of 
Regulation S-X, 17 CFR 210.4-01(a)(2). All financial statements must 
be audited in accordance with U.S. generally accepted auditing 
standards (Rule 2-02(b) of Regulation S-X, 17 CFR 210.2-02(b)) by an 
auditor satisfying the U.S.. independence requirements (Rule 2-01 of 
Regulation S-X, 17 CFR 210.2-01.
    We are not considering modifying the requirement that financial 
statements filed with the Commission be audited in accordance with 
U.S generally accepted auditing standards. We note, however, that 
IOSCO currently is exploring furtehr work on improving auditing 
requirments. Current auditing practices in the United States are 
under review by the Panel on Audit Effectiveness, sponsored by the 
AICPA Public Oversight Board. We also are not considering modifying 
the requirement that auditors comply with U.S. independence 
requirments.
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    There are some exceptions to this reconciliation requirement. For 
example, we have amended our requirements for financial statements of 
foreign private issuers to permit use of certain IASC standards without 
reconciliation to U.S. GAAP. \14\ These are:
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    \14\ See Items 17 and 18 of Form 20-F for a description of the 
relief from reconciliatin provided to financial statements prepared 
using IASC standards or standards that are consistent with IASC 
standards. 17 CFR 249.220f.

 Use of International Accounting Standard (IAS) 7, Cash Flow 
Statements (as amended in 1992) for the preparation of a statement of 
cash flows;
 Acceptance of portions of IAS 22, Business Combinations (as 
amended in 1993), regarding the method of accounting for a business 
combination and the determination of the amortization period for 
goodwill and negative goodwill; and
 Acceptance of portions of IAS 21, The Effects of Changes in 
Foreign Exchange Rates (as amended in 1993), regarding translation of 
amounts stated in a currency of an entity in a hyperinflationary 
economy.
    By requiring a U.S. GAAP reconciliation, with the exceptions noted 
above, we do not seek to establish a higher or lower disclosure 
standard for foreign companies than for domestic companies. Rather, the 
objective of this approach is to protect the interests of U.S. 
investors by requiring that all companies accessing U.S. public markets 
provide high quality financial reporting that satisfies the 
informational needs of investors, without requiring use of U.S. 
standards in the presentation of that information.\15\
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    \15\ See Grace Pownall and Katherine Shipper, ``Implications of 
Accounting Research for the SEC's Consideration of International 
Accounting Standards for U.S. Securities Offerings'' in Accounting 
Horizons, September 1999. Among other things, this paper describes 
selected academic research that addresses the unsefulness to U.S. 
investors of non-U.S. GAAP reports and U.S. GAAP reconciliations. 
Pownall and Schipper point to research that suggest that higher net 
income often is reported under the current IASC standards than under 
U.S. GAAP. This paper also cites research that suggests that 
financial statements prepared using IASC standards are not seen as 
substitutes for U.S. GAAP performance measures by U.S. investors.
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    The U.S. GAAP reconciliation requirement requires foreign issuers 
to supplement their home country financial statements. The total number 
of foreign reporting companies increased from 434 in 1990 to 
approximately 1,200 currently.

B. Towards Convergence of Accounting Standards in a Global Environment

    In the past, different views of the role of financial reporting 
made it difficult to encourage convergence of accounting standards. 
Now, however, there appears to be a growing international consensus 
that financial reporting should provide high quality financial 
information that is comparable, consistent and transparent, in order to 
serve the needs of investors. Over the last few years, we have 
witnessed an increasing convergence of accounting practices around the 
world. A number of factors have contributed to this convergence. First, 
large multinational corporations have begun to apply their home country 
standards, which may permit more than one approach to an accounting 
issue, in a manner consistent with other bodies of standards such as 
IASC standards or U.S. GAAP. Second, the IASC has been encouraged to 
develop standards that provide transparent reporting and can be applied 
in a consistent and comparable fashion worldwide. Finally, securities 
regulators and national accounting standard-setters are increasingly 
seeking approaches in their standard-setting processes that are 
consistent with those of other standard-setters.\16\ Some national 
standard-setters are participating in multinational projects, such as 
those on accounting for business combinations, in order to draw on a 
broader range of comment about an issue.
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    \16\ See, for example, the ``FASB's Plan for International 
Activities,'' February 1997, that includes ``Continu[ing] to 
consider foreign national and IASC standards in FASB project[s]'' 
and ``Cooperat[ing] directly with other standard-setting 
organizations to resolve specific issues and to work toward reducing 
differences in accounting standards between nations.'' Additionally, 
the FASB has undertaken joint projects with other standard setters, 
for example, on segments and earnings per share. Also, standard 
setters from the United States, Canada, Australia, New Zealand and 
the United Kingdom have worked with the IASC through the ``G-4+1'' 
group to debate current agenda items and coordinate standard setting 
efforts.
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    If convergence of disclosure and accounting standards contributes 
to an increase in the number of foreign companies that publicly offer 
or list securities in the U.S. capital markets, investors in the United 
States would benefit from increased investment opportunities and U.S. 
exchanges would benefit from attracting a greater number of foreign 
listings. Although the U.S. markets have benefited greatly from the 
high quality financial reporting that U.S. GAAP requires, current 
disparities in accounting practices may be a reason foreign companies 
do not list their securities on U.S. exchanges. As Congress has 
recognized,

    [E]stablishment of a high quality comprehensive set of generally 
accepted international accounting standards would greatly facilitate 
international financing activities and, most importantly, would

[[Page 8900]]

enhance the ability of foreign corporations to access and list in 
the United States markets.\17\
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    \17\ National Securities Market Improvements Act of 1996.

    These concerns are offset by significant benefits realized by 
companies reporting under U.S. GAAP, as a result of improvements in the 
quality of information available to both management and shareholders as 
a result of reporting under U.S. GAAP.\18\ It is important that 
convergence does not sacrifice key elements of high quality financial 
reporting that U.S. investors enjoy currently. Investors benefit when 
they have the ability to compare the performance of similar companies 
regardless of where those companies are domiciled or the country or 
region in which they operate.
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    \18\ See Louis Lowenstein, ``Financial Transparency and 
Corporate Governance: You Manage What You Measure,'' Columbia Law 
Review, Volume 98, No. 5 (June 1996).
    ``* * * Senior officers of Ciba Geigy Limited and The Holderbank 
Group report a long list of managerial gains from improved financial 
disclosure [footnote omitted]. Divisions now report on a consistent 
basis, there is a more rational allocation of costs, and expenses 
are no longer charged to surplus. In short, they have found it 
easier to manage the company * * *'' (p. 1357).
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    Over the years, we have realized that foreign companies make their 
decisions about whether to offer or list securities in the United 
States for a variety of economic, financial, political, cultural and 
other reasons. Many of these reasons are unrelated to U.S. regulatory 
requirements.\19\ However, some foreign companies cite, among other 
reasons, a reluctance to adopt U.S. accounting practices as a reason 
for not listing in the United States. These companies have indicated 
that they have forgone listing in the United States rather than follow 
accounting standards that they have not helped formulate. Therefore, 
accepting financial statements prepared using IASC standards without 
requiring a reconciliation to U.S. GAAP could be an inducement to 
cross-border offerings and listings in the United States.
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    \19\ James A. Fanto and Roberta S. Karmel, ``A Report on the 
Attitudes of Foreign Companies Regarding a U.S. Listing,'' Stanford 
Journal of Law, Business and Finance, Summer 1997, Vol 3 No. 1 pg. 
51-83.
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    On the other hand, other factors could continue to deter foreign 
access to the U.S. markets. For example, some foreign companies have 
expressed concern with the litigation exposure and certain public 
disclosure requirements that may accompany entrance into the U.S. 
markets.\20\ Foreign companies also may be subject to domestic pressure 
to maintain primary listings on home country stock exchanges.
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    \20\ See Fanto and Karmel, id.
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C. Development of the Core Standards Project

    After studying issues relating to international equity flows, IOSCO 
noted that development of a single disclosure document for use in 
cross-border offerings and listings would be facilitated by the 
development of internationally accepted accounting standards. Rather 
than attempt to develop those standards itself, IOSCO focused on the 
efforts of the IASC. In 1993, IOSCO identified for the IASC what IOSCO 
believed to be the necessary components of a core set of standards that 
would comprise a comprehensive body of accounting principles for 
enterprises making cross-border securities offerings. IOSCO later 
identified a number of issues relating to the then-current IASC 
standards. The IASC then prepared a work plan designed to address the 
most significant issues identified by IOSCO--the ``core standards'' 
work program. In 1995, IOSCO and the IASC announced agreement on this 
work program, and IOSCO stated that if the resulting core standards 
were acceptable to IOSCO's Technical Committee, that group would 
recommend endorsement of the IASC standards. The focus of IOSCO's 
involvement in the core standards project is on use of IASC standards 
by large, multinational companies for cross-border capital-raising and 
listing.\21\
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    \21\ See the discussion, ``Development of the Core Standards 
Project,'' in Appendix C.
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IV. Major Issues To Be Addressed in Our Assessment of the IASC 
Standards

A. Criteria for Assessment of the IASC Standards

    In an April 1996 statement regarding the IASC core standards 
project, we indicated that, once the IASC completed its project, we 
would consider allowing use of the resulting standards in cross-border 
filings by foreign issuers offering securities in the United 
States.\22\ The three criteria set forth in that statement remain the 
criteria that will guide our assessment of the IASC standards. We 
request your views on whether the IASC standards:
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    \22\ This statement is available in the appendix to the SEC's 
Report to Congress on Promoting The Global Preeminence of American 
Securities Markets (October 1997).
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    1. Constitute a comprehensive, generally accepted basis of 
accounting;
    2. Are of high quality; and
    3. Can be rigorously interpreted and applied.
    In responding to the requests for comment set forth below, please 
be specific in your response, explaining in detail your experience, if 
any, in applying IASC standards, and the factors you considered in 
forming your opinion. Please consider both our mandate for investor 
protection and the expected effect on market liquidity, competition, 
efficiency and capital formation.
    IASC standards are published and copyrighted by the IASC, and we 
can not reproduce those standards as part of this release. However, 
copies of the standards have been placed in our public reference rooms. 
The IASC also has summaries of each standard available on its website 
at www.iasc.org.uk>. A listing of the IASC standards and their 
effective dates is included as Appendix B. For your convenience, a 
listing of questions 1-26 is included as Appendix A.
1. Are the Core Standards Sufficiently Comprehensive?
    The goal of the core standards project was to address the necessary 
components of a reasonably complete set of accounting standards that 
would comprise a comprehensive body of principles for enterprises 
undertaking cross-border offerings and listings. In developing the work 
program for the core standards project, IOSCO specified the minimum 
components of a set of ``core standards'' and identified issues to be 
addressed by the IASC. \23\ For topics outside the core standards, such 
as industry-specific accounting standards, it was agreed that IOSCO 
members either would accept ``home country'' treatment or require 
specific ``host country'' treatment or equivalent disclosure.
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    \23\ See Appendix C for a discussion of the development of the 
core standards work program.
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    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?
    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?
    Q. 3  Are there any additional topics that need to be addressed in 
order to

[[Page 8901]]

provide a comprehensive set of standards?
2. Are the IASC Standards of Sufficiently High Quality? Why or Why Not?
    When we refer to the need for high quality accounting standards, we 
mean that the standards must result in relevant, reliable information 
that is useful for investors, lenders, creditors and others who make 
capital allocation decisions. To that end, the standards must (i) 
result in a consistent application that will allow investors to make a 
meaningful comparison of performance across time periods and among 
companies; (ii) provide for transparency, so that the nature and the 
accounting treatment of the underlying transactions are apparent to the 
user; and (iii) provide full disclosure, which includes information 
that supplements the basic financial statements, puts the presented 
information in context and facilitates an understanding of the 
accounting practices applied. Such standards should:

 Be consistent with an underlying accounting conceptual 
framework;
 Result in comparable accounting by registrants for similar 
transactions, by avoiding or minimizing alternative accounting 
treatments;
 Require consistent accounting policies from one period to the 
next; and
 Be clear and unambiguous.

    In assessing the quality of the IASC standards, we are applying 
these criteria 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 has raised concerns including, but not limited to:

 The ability to override an IAS where application of the IAS 
would not result in a ``true and fair view'' (see IAS 1);
 The option to revalue property, plant and equipment to fair 
value (see IAS 16);
 Transition provisions that permit unrecognized minimum pension 
and employee benefit obligations (see IAS 19);
 The amortization of negative goodwill to offset restructuring 
costs (see IAS 22);
 Unlimited useful lives for goodwill and other intangibles (see 
IAS 22 and IAS 38);
 The capitalization of costs related to the development of 
internally generated intangible assets (see IAS 38);
 The remeasurement of impaired assets at an amount other than 
fair value (see IAS 36); and
 Principles for derecognition of financial assets, and a 
modified form of basis adjustment for cash flow hedges, including 
hedges of anticipated transactions and firm commitments (see IAS 39).

    You may wish to review the SEC staff and IOSCO comment letters for 
a further discussion of these and other issues.\24\ We, of course, 
welcome comments on other issues posed by specific approaches taken in 
the IASC standards, regardless of whether they were raised in IOSCO or 
SEC staff comment letters.
---------------------------------------------------------------------------

    \24\ Comment letters from the SEC staff and IOSCO's Working 
Party No. 1 are available in our public reference room. The staff of 
the Financial Accounting Standards Board (FASB), which also 
responded to many of the IASC's invitations to comment, has made its 
comment letters available on its website at www.fasb.org>. Other 
U.S. organizations with an interest in standard setting, such as 
AICPA, the Financial Executives Institute's Committee on Corporate 
Reporting and the Institute of Management Accountants (IMA), also 
have commented on many of the core standards.
---------------------------------------------------------------------------

    Indeed, we are seeking advice on any technical issues arising with 
respect to the IASC standards. In general, we are seeking to determine 
whether preparers, auditors and users of financial statements have 
identified particular issues based on their experience with the IASC 
standards and whether they have developed strategies for addressing 
those issues. We also would benefit from the public's views regarding 
whether any of the standards represent a significant improvement over 
U.S. accounting practices.\25\
---------------------------------------------------------------------------

    \25\ The Chief Accountant of the Commission published a call for 
academic research on key international accounting and auditing 
issues in a letter to the American Accounting Association dated 
August 15, 1999. This letter is available on the SEC website at 
www.sec.gov/news/extra/aaacall.htm>.
---------------------------------------------------------------------------

    A critical issue in assessing the quality of the IASC standards 
will be whether they would produce the same level of transparency and 
comparability that generally is provided to U.S. investors under U.S. 
GAAP. The focus of the staff's comments to the IASC has not been on the 
differences between the proposed standards and U.S. GAAP; rather, the 
staff focused on the quality of the proposed standards. An analysis of 
the differences, however, could serve as a useful tool for highlighting 
what differing information might be provided in financial statements 
prepared using IASC standards compared with U.S. GAAP financial 
statements.\26\ If the differences between the IASC standards and U.S. 
GAAP are significant, the financial position and operating results 
reported under the IASC standards may be difficult to compare with 
results reported under U.S. GAAP. The ability to make such a comparison 
is important for an investor making capital allocation decisions 
between U.S. and non-U.S. enterprises, especially within the same 
industry.
---------------------------------------------------------------------------

    \26\ In this respect, FASB has produced and periodically updated 
an analysis of the differences between FASB standards and those of 
the IASC. This comparison, which has been updated for all the 
components of the core standards project, is available from the 
FASB. See the FASB website at www.fasb.org> for more information. 
The FASB's summary of this comparison is included as Appendix D to 
this document because the FASB's comparison study is not available 
on its website.

    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.\27\
---------------------------------------------------------------------------

    \27\ For an additional discussion of the characteristics of high 
quality standards, see the FASB paper, Quality of Accounting 
Standards, in the appendices to the ``International Accounting 
Standard Setting: A Vision for the Future--Report of the FASB'' at 
www.fasb.org>.
---------------------------------------------------------------------------

    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?
    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 or disclosure requirements?
    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 or disclosure) than financial 
reporting prepared using U.S. GAAP? If so, what are the specific 
aspects and reason(s) for your conclusion?
3. Can the IASC Standards Be Rigorously Interpreted and Applied?
    (a) The experience to date. High quality financial reporting cannot 
be guaranteed solely by developing accounting standards with the 
strongest theoretical bases; financial reporting may be weak if 
conceptually sound standards are not rigorously interpreted and 
applied. If accounting standards are

[[Page 8902]]

to satisfy the objective of having similar transactions and events 
accounted for in similar ways, preparers must recognize their 
responsibility to apply these standards in a way that is faithful to 
both the requirements and intent of the standards, and auditors and 
regulators around the world must insist on rigorous interpretation and 
application of those standards. Otherwise, the comparability and 
transparency that are the objectives of common standards will be 
eroded.
    In this respect, it is difficult to evaluate the effectiveness of 
certain of the IASC standards at this stage. First, there is little 
direct use of IASC standards in developed capital markets. Second, even 
where IASC standards are used directly in those markets, a number of 
the new or revised standards may not have been implemented yet.\28\ For 
that reason, financial statements currently prepared using IASC 
standards may not reflect the improvements achieved by the IASC in the 
core standards project. Therefore, preparers, users and regulators may 
not have significant implementation experience with respect to those 
standards to assist us in our evaluation of the quality of the 
standards as they are applied.
---------------------------------------------------------------------------

    \28\ Fifteen of the 31 core standards are new or have been 
revised significantly as part of the core standards project, and 
most of these standards have required adoption dates in 1999, 2000 
or 2001.
---------------------------------------------------------------------------

    In order for any body of standards to be able to be rigorously 
interpreted and applied, there must be a sufficient level of 
implementation guidance. The IASC standards frequently provide less 
implementation guidance than U.S. GAAP. Instead, they concentrate on 
statements of principles, an approach that is similar to some national 
standards outside the United States. Also, the IASC has formatted its 
standards by using bold (``black'') lettering to emphasize basic 
requirements of the standards while placing explanatory text in normal 
(``gray'') lettering. We believe that the requirements of an IASC 
standard are not limited to the black lettered sections and that 
compliance with both black and gray letter sections of IASC standards 
should be regarded as necessary. Additionally, the IASC has published a 
basis for conclusions for only two of its standards. The basis for 
conclusion in U.S. standards often is useful in promoting consistent 
understanding of the standard setter's reasoning and conclusions.
    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 favorable, however, and led 
to the current organization and approach to standard-setting under the 
FASB.\29\
---------------------------------------------------------------------------

    \29\ See the report of the Wheat Commission, ``Establishing 
Financial Accounting Standards, a Report of the Study on 
Establishment of Accounting Principles,'' American Institute of 
Certified Public Accountants, p. 38 (March 1972).

    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?
    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.
    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?
    Q. 11  Is there significant variation in the way enterprises apply 
the current IASC standards? If so, in what areas does this occur?

    (b) The need for a financial reporting infrastructure. Effective 
financial reporting begins with management, which is responsible for 
implementing and applying properly a comprehensive body of accounting 
principles. Rigorous and consistent application of accounting standards 
also depends on implementation efforts of the standard-setter, auditors 
and regulators. There are concerns that current IASC standards may not 
be rigorously and consistently applied. For example, a recent study 
authored by the former IASC secretary-general identifies non-compliance 
with IASC standards by a number of the 125 companies surveyed. It also 
cites examples of auditors who failed to identify properly a lack of 
compliance with IASC requirements in their reports on an issuer's 
financial statements.\30\
---------------------------------------------------------------------------

    \30\ See ``The FT International Accounting Standards Survey 
1999, an assessment of the use of IAS's by companies, national 
standard setting bodies, regulators and stock exchanges,'' by David 
Cairns, published by The Financial Times, London, 1999.
---------------------------------------------------------------------------

    In addition, the SEC staff has noted inconsistent applications of 
IAS 22, Business Combinations. The staff has received a number of 
requests to accept characterizations of business combinations as 
``unitings of interests'' despite IAS 22's clear intention that uniting 
of interest accounting be used only in rare and limited circumstances. 
In addition, the SEC staff, based on its review of filings involving 
foreign private issuers using IASC standards, has identified a number 
of situations involving not only inconsistent application of the 
standards but also misapplication of the standards.\31\ In these 
circumstances, the SEC staff has required adjustments to the financial 
statements in order to comply with IASC standards.
---------------------------------------------------------------------------

    \31\ See ``International Reporting Issues,'' Remarks by Donald 
J. Gannon at the 27th Annual National AICPA Conference on Current 
SEC Developments, December 8, 1999, and ``Financial Reporting Issues 
Critical to European SEC Registrants/Users of US GAAP,'' Remarks by 
Lynn E. Turner at the European FASB-SEC Financial Reporting 
Conference, Frankfurt, Germany, April 8, 1999 (available on the SEC 
website at www.sec.gov>).
    See also David Cairns, ``Exceptions to the Rule,'' Accountancy 
International, p. 84 (November 1999) and ``Compliance Must Be 
Enforced,'' Accountancy International, p. 64 (September 1998).
---------------------------------------------------------------------------

    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?

    (i) The interpretive role of the standard-setter. In order for a 
set of accounting standards to be fully operational, the standard-
setter must support reasonably consistent application of its standards. 
A standard-setter's responsibility for ensuring consistent application 
of its standards includes providing an effective mechanism for 
identifying and addressing interpretive questions in an expeditious 
fashion.
    The IASC began addressing interpretive issues in 1997 with the 
creation of its Standing Interpretations Committee (SIC) to provide 
resolution of interpretive issues arising in the application of the 
IASC standards that are likely to receive divergent or unacceptable 
treatment in the absence of authoritative guidance.

    Q. 13  What has your experience been with the effectiveness of the 
SIC in

[[Page 8903]]

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 any additional steps the 
IASC should take in this respect? If so, what are they?

    (ii) The restructuring of the IASC. The IASC has published a 
restructuring plan which is expected to result in an independent Board 
whose members are selected based on technical expertise, with oversight 
provided by an independent set of Trustees. The restructuring also is 
expected to integrate the roles of the IASC and those of national 
standard-setters.\32\
---------------------------------------------------------------------------

    \32\ See the report of the IASC's Strategy Working Party, 
``Recommendations on Reshaping IASC for the Future,'' November 1999, 
available on the IASC website at www.iasc.org.uk>.
---------------------------------------------------------------------------

    At this time, we do not anticipate adopting a process-oriented 
approach (like our approach to the FASB \33\) to IASC standards. 
Instead, we expect to continue a product-oriented approach, assessing 
each IASC standard after its completion. Nonetheless, the quality of 
the standard-setter has relevance to our consideration of the IASC 
standards, particularly with respect to implementation and 
interpretation questions. Since many of the IASC standards are new or 
relatively new, application issues may arise that require the response 
of an effective and high quality standard setter. Additionally, the 
quality of the standard-setter has critical implications for the 
development and acceptance of future standards.\34\
---------------------------------------------------------------------------

    \33\ We have stated that ``* * * principles, standards and 
practices promulgated by the FASB * * * will be considered by the 
Commission as having substantial authoritative support. * * *'' See 
SEC Accounting Series Releases No. 4 and 150, codified in section 
100 of the SEC's Financial Reporting Policies (FRR 101).
    \34\ See the comments of the SEC Chief Accountant regarding the 
IASC's restructuring plans, ``Statement of SEC Chief Accountant Lynn 
E. Turner on IASC Board Decision to Support Restructuring Plan,'' 
SEC Press release no. 99-152, dated November 17, 1999, available on 
the SEC website at www.sec.gov>. You also may wish to read SEC staff 
comment letters dated May 14, 1999 and September 21, 1999 on 
Strategy Working Party proposals. All of the comments received by 
the IASC on its Strategy Working Party proposals are available on 
the IASC website at www.iasc.org.uk>.
---------------------------------------------------------------------------

    An effective high quality standard-setter is characterized by:

 An independent decision-making body;
 An active advisory function;
 A sound due process;
 An effective interpretive function;
 Independent oversight representing the public interest; and
 Adequate funding and staffing.

    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?

    (iii) The role of the auditor in the application of the standards. 
High quality accounting standards and an effective interpretive process 
are not the only requirements for effective financial reporting. 
Without competent, independent audit firms and high quality auditing 
procedures to support the application of accounting standards, there is 
no assurance that the accounting standards will be applied 
appropriately and consistently. As discussed in the introduction to 
this release, increasing globalization of business and integration of 
capital markets raise challenging questions of how to provide oversight 
of audit professionals on a world-wide basis to ensure consistent high 
quality and ethical audit and accounting practices.
    In the United States, implementation and application of U.S. GAAP 
are supported through professional quality control practices and 
professional and governmental (state and federal) oversight and 
enforcement activities. National technical offices of U.S. accounting 
firms serve an important role in ensuring an appropriate and consistent 
interpretation and application of U.S. GAAP and U.S. auditing 
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?
    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? \35\ Why or why 
not? If not, should there be disclosure that the audit firm is not 
subject to such standards?
---------------------------------------------------------------------------

    \35\ See SECPS Section 1000.08 ``Organizational Structure and 
Function of the SEC Practice Section,'' ``Requirements of Members,'' 
American Institute of Certified Public Accountants.

In many jurisdictions, including the United States, accountants and 
auditors are trained and tested in their domestic accounting standards, 
but do not receive training in IASC standards. For that reason, 
accountants and auditors around the world will need to develop 
expertise with IASC standards to support rigorous interpretation and 
---------------------------------------------------------------------------
application of these 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?

    (iv) The role of the regulator in the interpretation and 
enforcement of accounting standards. While the Commission has the 
authority to establish accounting standards,\36\ historically we have 
looked to the private sector for leadership in establishing and 
improving accounting standards to be used by public companies.\37\ As a 
result, the Commission has recognized the FASB as the private sector 
body whose standards it considers to have substantial authoritative 
support. This partnership with the private sector facilitates input 
into the accounting standard-setting process from all stakeholders in 
U.S. capital markets, including financial statement preparers, auditors 
and users, as well as regulators. Our willingness to look to the 
private sector, however, has been with the understanding that we will, 
as necessary, supplement, override or otherwise amend private sector 
accounting standards.
---------------------------------------------------------------------------

    \36\ See, e.g., Sections 7 and 19(a) and Schedule A of the 
Securities Act; Sections 3(b), 12(b) and 13(b) of the Exchange Act; 
and Sections 8, 30(e), 31 and 38(a) of the Investment Company Act of 
1940.
    \37\ See Accounting Series Release (ASR) 4 (April 25, 1938) and 
ASR 150 (December 20, 1973).
---------------------------------------------------------------------------

    The SEC staff is involved with the application of accounting 
standards on a daily basis through its review and comment process. This 
review process, administered by the Division of Corporation Finance, 
allows the staff to review and comment on a company's application of 
GAAP and related SEC disclosure requirements. The SEC staff would have 
the same significant

[[Page 8904]]

interpretive and enforcement role in the application of the IASC 
standards when those standards are used to prepare financial statements 
included in SEC filings.\38\ To perform that role, our staff would need 
to develop expertise regarding the IASC standards.\39\
---------------------------------------------------------------------------

    \38\ We are not considering introducing mutual recognition of 
other jurisdictions' oversight of financial statements prepared in 
accordance with IASC standards.
    \39\ We already have begun a staff training program in 
anticipation of an increasing number of foreign registrants using 
the IASC standards in preparing their primary financial statements.
---------------------------------------------------------------------------

    However, other jurisdictions accepting IASC standards may develop 
conflicting interpretations or may accept applications of IASC 
standards that would not be acceptable in the United States and other 
jurisdictions, in part, because of lack of expertise, resources, or 
even the authority to question a company's application of accounting 
standards. We are seeking to identify ways to reduce the development of 
diverging interpretations of IASC 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?

    In considering changes in our current financial reporting 
requirements, we will consider the effects of possible changes on the 
ability of our enforcement program to provide an effective deterrent 
against financial reporting violations by foreign issuers, their 
corporate officials and their auditors.

    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?

    To facilitate its investigations of possible securities law 
violations, the SEC staff may need to obtain access to a non-U.S. 
auditor's working papers, as well as testimony, in connection with 
audit work done outside the United States.\40\ In some prior 
investigations, we have obtained access to information through the 
voluntary cooperation of the company or its foreign auditors. We also 
have the potential of using domestic compulsory mechanisms or 
enforcement tools such as memoranda of understanding and other 
arrangements with non-U.S. regulators. However, these approaches for 
obtaining information about an auditor's work can cause delays in 
investigations, and may still not permit obtaining access to working 
papers and testimony that are needed to assess information the issuer 
has provided to its auditors and to investigate the adequacy of the 
work supporting the auditor's report. The circumstances in which we 
need this information have grown, due to the expanded multinational 
activities of U.S. companies and the increasing number of foreign 
issuers that are listed on U.S. exchanges. Greater acceptance of the 
IASC standards may increase further the instances in which an issuer's 
auditor is not based in the United States.
---------------------------------------------------------------------------

    \40\ For example, for non-U.S. work that supports a U.S. audit 
report or with respect to audit reports issued by non-U.S. audit 
firms for U.S. filings.

    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' workpapers be 
disclosed to investors? Is there another mechanism for enhancing our 
access to audit working papers and witnesses outside the United States?

B. Possible Approaches to Recognition of the IASC Standards for Cross-
Border Offerings and Listings

    As discussed, IOSCO and Commission recognition of the IASC 
standards will depend on the outcome of the current assessment work. 
The assessment work has two aspects: (1) Considering the quality of 
each of the IASC standards individually; and (2) evaluating whether the 
body of standards operates effectively as a whole.
    The goal of the core standards project has been to develop a high 
quality set of generally accepted international accounting standards 
that ultimately would reduce or eliminate the need for reconciliation 
to national standards. Any Commission action could take several forms, 
including, for example:
 Maintaining the current reconciliation requirements in all 
respects.
 Removing some of the current reconciliation requirements for 
selected IASC standards and extending that recognition to additional 
IASC standards as warranted based on future review of each standard. 
Under this approach, when alternative treatments are specified (such as 
benchmarks and allowed alternatives), we may specify one treatment as 
acceptable, while retaining the reconciliation requirement to those 
financial statements that employ the unacceptable treatment. For 
example, we might require reconciliation if a company applies the 
allowed alternative treatment of periodically writing-up long-lived 
assets to estimated fair value.\41\ Other items for which 
reconciliation might be required include unrecorded pension liabilities 
and costs capitalized for internally generated intangible assets.
---------------------------------------------------------------------------

    \41\ IAS 16 (revised 1993) Paras. 36-51.
---------------------------------------------------------------------------

 Relying on the IASC standards for recognition and measurement 
principles, but requiring U.S. GAAP and SEC supplemental disclosure 
requirements for footnote disclosures and the level of detail for the 
line items in financial statements.
 Accepting financial statements prepared in accordance with the 
IASC standards without any requirement to reconcile to U.S. GAAP.

There may be other approaches, or combinations of approaches, that 
would be appropriate. In determining what approach to take we will 
consider outstanding substantive issues noted by IOSCO in its report, 
the underlying work assessing the IASC standards performed by the SEC 
staff and other members of IOSCO, as well as responses we receive to 
this release. In addition, the approach we adopt initially may change 
in light of future modifications of the IASC standards or further 
development of the related infrastructure elements.

    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.

[[Page 8905]]

    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 there any other appropriate bases for distinction?
    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)?
    Q. 24  Should any continuing need for reconciliation be assessed 
periodically, based on an assessment of the quality of the IASC 
standards?
    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?

    The current reconciliation requirements are designed to make 
financial statements prepared under non-U.S. GAAP more comparable to 
those prepared under U.S. GAAP. Additionally, there may be indirect 
benefits realized from those requirements. For example, some 
multinational accounting firms have stated that the reconciliation 
process has served as a quality control mechanism with respect to audit 
work performed by their local offices with respect to foreign 
companies. On the other hand, the SEC staff, based on its review of 
filings involving foreign private issuers using non-U.S. GAAP, has 
noted a number of situations involving the inclusion of reconciling 
items that appear to be the result of non-compliance with home country 
GAAP rather than a difference between the home country (or IASC) basis 
of accounting and U.S. GAAP. As such, there should not be a reconciling 
item. This may be indicative of not enough focus on the accuracy of the 
primary financial 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?

V. Conclusion

    Following receipt and review of comments, we will determine whether 
rulemaking or other further action is appropriate. In addition to 
responding to the specific questions we have presented in this release, 
we encourage commenters to provide any information to supplement the 
information and assumptions contained in this release regarding the 
role of accounting standards in the capital-raising process, the 
information needs of investors and capital markets, and the other 
matters discussed. We also invite commenters to provide views and data 
as to the costs and benefits associated with the possible changes 
discussed in this release in comparison to the costs and benefits of 
the existing regulatory framework. In order for us to assess the impact 
of changes that could affect capital formation, market efficiency and 
the protection of investors, we solicit comment from the point of view 
of a variety of groups, including, without limitation, foreign and 
domestic issuers, underwriters, broker-dealers, analysts, investors, 
accountants and attorneys involved in the registration process and 
other interested parties.

    Dated: February 16, 2000.
    By the Commission.
Jonathan G. Katz,
Secretary.

Appendix A.--Listing of Questions in the Concept Release

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?
    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?
    Q. 3  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?

    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.
    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?
    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 or disclosure 
requirements?
    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 or disclosure) than 
financial reporting prepared using U.S. GAAP? If so, what are the 
specific aspects and reason(s) for your conclusion?

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?
    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.
    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?
    Q. 11  Is there significant variation in the way enterprises 
apply the current IASC standards? If so, in what areas does this 
occur?

The Need for a Financial Reporting Infrastructure

    Q. 12  After considering the issues discussed in (i) through 
(iv) below, what do

[[Page 8906]]

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 Interpretive 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 interpretive 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?
    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 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?
    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? Why or why not? If not, should there be disclosure that the 
audit firm is not subject to such 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?

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?
    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?
    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' workpapers be disclosed to investors? Is there another 
mechanism for enhancing our access to audit working papers?

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.
    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 there any other appropriate bases for distinction?
    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)?
    Q. 24  Should any continuing need for reconciliation be assessed 
periodically, based on an assessment of the quality of the IASC 
standards?
    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?
    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?

Appendix B.--List of Core Standards and Each Standard's Effective Date

------------------------------------------------------------------------
               IAS and title                        Effective date
------------------------------------------------------------------------
1 Presentation of Financial Statements       1 Jan 99
 (revised).
2  Inventories.............................  1 Jan 95
4  Depreciation Accounting.................  \1\1 Jan 77
7  Cash Flow Statements....................  1 Jan 94
8  Net Profit or Loss for the Period,        1 Jan 95
 Fundamental Errors and Changes in
 Accounting Policies.
10  Events After the Balance Sheet Date      1 Jan 00
 (revised).
11  Construction Contracts.................  1 Jan 95
12  Income Taxes (revised).................  1 Jan 98
14  Segment Reporting (revised)............  1 Jul 98
16  Property, Plant and Equipment (revised)  1 Jul 99
17  Leases (revised).......................  1 Jan 99
18  Revenue................................  1 Jan 95
19  Employee Benefits (revised)............  1 Jan 99
20  Accounting for Government Grants and     1 Jan 84
 Disclosure of Government Assistance.
21  The Effects of Changes in Foreign        1 Jan 95
 Exchange Rates.
22  Business Combinations (revised)........  1 Jul 99
23  Borrowing Costs........................  1 Jan 95
24  Related Party Disclosures..............  1 Jan 86
25  Investment Properties\2\...............  1 Jan 87
27  Consolidated Financial Statements and    1 Jan 90
 Accounting for Investments in Subsidiaries.
28  Accounting for Investments in            1 Jan 90
 Associates.
29  Financial Reporting in                   1 Jan 90
 Hyperinflationary Economies.
31  Financial Reporting of Interests in      1 Jan 92
 Joint Ventures.
32  Financial Instruments: Disclosure and    1 Jan 96
 Presentation.
33  Earnings Per Share.....................  1 Jan 99
34  Interim Financial Reporting............  1 Jan 99
35  Discontinuing Operations...............  1 Jan 99
36  Impairment of Assets...................  1 Jul 99
37  Provisions, Contingent Liabilities and   1 Jul 99
 Contingent Assets.
38  Intangible Assets......................  1 Jul 99
39  Financial Instruments: Recognition and   1 Jan 01
 Measurement.
------------------------------------------------------------------------
\1\ Will be withdrawn once IAS 38 becomes effective.

[[Page 8907]]

 
\2\ Revisions to this standard are being debated currently. E64,
  Investment Properties, has been issued for comment. The IASC expects
  to finalize this standard in March 2000.

Appendix C.--The Core Standards Project

A. The IASC and IOSCO

    The International Accounting Standards Committee (IASC) is a 
private sector body whose membership includes all the professional 
accountancy bodies that are members of the International Federation 
of Accountants (IFAC). IFAC has more than 140 members from over 100 
countries. The IASC has the dual objectives of (i) formulating 
international accounting standards and promoting their acceptance 
and observance; and (ii) working generally for improvement and 
harmonization of accounting standards.
    Currently,\42\ the business of the IASC is conducted by a Board 
with 16 voting delegations \43\ and five non-voting observer 
delegations with the privilege of the floor.\44\ Each delegation 
includes up to three members who share a single vote. Delegation 
members normally are drawn from the accountancy profession and 
preparer community; representatives of national standard-setters may 
be included in a delegation, often as the technical advisor. The 
Board currently meets approximately four times a year for about a 
week to receive reports from its staff and steering committees and 
to discuss and approve exposure drafts and final standards for 
publication.
---------------------------------------------------------------------------

    \42\ The IASC's Board has approved a plan for restructuring, 
subject to ratification by its membership. See the report of the 
IASC Strategy Working Party, ``Recommendations on Reshaping IASC for 
the Future,'' November 1999, available at the IASC website 
iasc.org.uk.
    \43\ The 16 voting delegations are: Australia, Canada, France, 
Germany, India (shares with Sri Lanka), Japan, Malaysia, Mexico, 
Netherlands, Nordic Federation of Public Accountants (the delegation 
to the IASC Board includes representatives from Denmark, Norway and 
Sweden; Finland and Iceland also are member countries), South Africa 
(shares with Zimbabwe), the United Kingdom, and the United States, 
the International Coordinating Committee of Financial Analysts' 
Association, the International Association of Financial Executives 
Institute, and the Federation of Swiss Holding Companies.
    \44\ The European Commission, the International Organization of 
Securities' Commission, the U.S. Financial Accounting Standards 
Board, the Chinese Institute of Certified Public Accountants, and 
the IFAC Public Sector Committee.
---------------------------------------------------------------------------

    Board delegates serve on a part-time, volunteer basis. The IASC 
has a small full-time staff based in London. This staff provides a 
manager for most IASC projects; project staffing, in the form of 
Steering Committees, is provided by volunteers who represent a mix 
of Board member and non-Board member IFAC organizations. IOSCO (the 
International Organization of Securities Commissions) and the 
European Commission are non-voting observers for most Steering 
Committees.\45\
---------------------------------------------------------------------------

    \45\ For more information, see the IASC website at 
www.iasc.org.uk.
---------------------------------------------------------------------------

    IOSCO is an association of securities regulatory organizations. 
It has approximately 135 ordinary, associate and affiliate members, 
including twelve based in the United States. Two key IOSCO 
committees following this project are the Technical Committee and 
its Working Party No. 1 on Multinational Disclosure and Accounting. 
The Technical Committee is composed of 16 regulatory agencies \46\ 
that regulate some of the world's largest, more developed and 
internationalized markets. Its objective is to review major 
regulatory issues related to international securities and futures 
transactions and to coordinate practical responses to these 
concerns. Both the Commission and the Commodity Futures Trading 
Commission are members of this committee. We are represented by a 
member of the Commission.
---------------------------------------------------------------------------

    \46\ The jurisdictions on the Technical Committee are: 
Australia, Belgium, the Canadian provinces of Ontario and Quebec, 
France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, 
Spain, Sweden, Switzerland, the United Kingdom and the United 
States.
---------------------------------------------------------------------------

    Working Party No. 1 is one of several working groups that report 
to the Technical Committee. It has members from sixteen 
jurisdictions and is chaired by a Commission staff member. 
Commission staff members from the Division of Corporation Finance 
and the Office of the Chief Accountant are members of the Working 
Party.\47\
---------------------------------------------------------------------------

    \47\ For more information, see the IOSCO website at 
www.iosco.org.
---------------------------------------------------------------------------

    As a member of IOSCO, the Commission has been a significant 
participant in efforts to harmonize regulatory requirements for 
cross-border offerings and listings. Most recently, IOSCO approved 
and recommended that its members adopt a set of non-financial 
statement disclosure standards for the purposes of cross-border 
offerings and listings.\48\ We have amended our foreign private 
issuer disclosure requirements to implement these IOSCO disclosure 
standards.\49\
---------------------------------------------------------------------------

    \48\ Final Communique of the 23rd Annual Conference of the 
International Organization of Securities Commissions (September 18, 
1998).
    \49\ International Disclosure Standards, Exchange Act Release 
No. 41936 (September 28, 1999). [64 FR 53900].
---------------------------------------------------------------------------

B. Development of the Core Standards Project \50\

    In 1989, IOSCO prepared a report entitled, ``International 
Equity Offers.'' \51\ That report noted that cross-border offerings 
would be greatly facilitated by the development of internationally 
accepted accounting standards. Rather than attempt to develop those 
standards itself, IOSCO focused on the efforts of the IASC.
---------------------------------------------------------------------------

    \50\ For a more detailed discussion of the background of the 
core standards project, see the Report to Congress on Promoting 
Global Preeminence of American Securities Markets, prepared by the 
SEC pursuant to Section 509 of the National Securities Improvements 
Act of 1996 (October 1997) (Report to Congress). The Report to 
Congress is available through the Commission's website at 
www.sec.gov.
    \51\ A summary of this report may be obtained from IOSCO. See 
the IOSCO website at www.iosco.org.
---------------------------------------------------------------------------

    In 1993, IOSCO wrote to the IASC detailing the necessary 
components of a reasonably complete set of standards to create a 
comprehensive body of principles for enterprises undertaking cross-
border securities offerings. In 1993, the IASC completed a project 
to improve the comparability and usefulness of financial statements 
prepared in accordance with its standards. Prior to this project, a 
number of IASC standards codified existing practice in multiple 
jurisdictions, permitting several alternative (and at times 
inconsistent) treatments for a single type of transaction. As a 
result of this improvement project, many alternatives were 
eliminated, although, in a few areas, the IASC standard retained 
multiple approaches, with one designated as a ``benchmark'' 
treatment and the other as an ``allowed alternative.''
    In 1994, IOSCO completed a review of the revised IASC standards 
and identified a number of issues that would have to be addressed, 
as well as standards that the IASC would have to improve, before 
IOSCO could consider recommending IASC standards for use in cross-
border listings and offerings. IOSCO divided the issues into three 
categories:
    1. Issues that required a solution prior to consideration by 
IOSCO of an endorsement of the IASC standards;
    2. Issues that would not require resolution before IOSCO could 
consider endorsement, although individual jurisdictions might 
specify treatments that they would require if those issues were not 
addressed satisfactorily; and
    3. Areas where improvements could be made, but that the IASC did 
not need to address prior to consideration of the IASC standards by 
IOSCO.
    In July 1995, IOSCO and the IASC agreed that the proposed ``core 
standards work program'' would, if completed successfully, address 
all the issues that required a resolution before IOSCO would 
consider endorsement.\52\ IOSCO stated that, if the resulting IASC 
standards are acceptable to its Technical Committee, that group 
would recommend endorsement of those standards for cross-border 
capital raising and listing purposes.
---------------------------------------------------------------------------

    \52\ The core standards work program exclude specialized 
industry standards, such as the banking, insurance, or motion 
picture industries. Specialized industry accounting issues are 
expected to be treated as suspense issues.
---------------------------------------------------------------------------

C. Overview of the Work Program

    The IASC's work program identified 12 areas that required new or 
substantially revised standards. As of January 2000, the IASC had 
published seven new standards and ten revised standards addressing 
those areas. One standard remains under consideration.\53\ Since the 
IASC standards are copyrighted, we have not reproduced them as part 
of this release. However, summaries of the IASC standards, as well 
as information about obtaining the full text of these standards, are 
available from the IASC website at www.iasc.org.uk. Additionally,

[[Page 8908]]

copies of the IASC standards have been placed in our public 
reference room in the public file for this release.
---------------------------------------------------------------------------

    \53\ The IASC still has under consideration one topic that is 
part of the core standards--investment properties. The IASC expects 
to complete this project in March 2000. The Working Party determined 
that although this element of the core standards project remains 
uncompleted, IOSCO's assessment process could begin, with a view to 
updating its analysis once the final standard on this topic is 
issued.
---------------------------------------------------------------------------

    IOSCO, through Working Party No. 1, is a non-voting observer at 
meetings of the IASC Board, its Steering Committees, and its 
Standing Interpretations Committee. The Working Party has attempted 
to reply to each document the IASC published for comment. The 
Working Party comment letters alerted the IASC to concerns of the 
Working Party or its members while the issues were under discussion.
    Some members of the Working Party also commented individually on 
proposed standards. In addition to contributing to Working Party 
comment letters, the Commission staff issued comment letters that 
provided detailed technical comments on substantially all of the 
IASC's published documents.\54\ In developing comment letters, the 
staff focused on the type of information that would be provided to 
investors. The letters sought to identify areas where comparability 
and transparency might be compromised, and where other significant 
investor protection issues existed. The staff did not focus its 
analysis on eliminating differences from U.S. GAAP. In fact, in 
several instances the staff encouraged the IASC to benefit from U.S. 
experience with a particular component of U.S. GAAP and adopt a 
different and improved approach.
---------------------------------------------------------------------------

    \54\ Comment letters of the SEC staff and IOSCO Working Party 
No. 1 are available for inspection and copying in our public 
reference room.
---------------------------------------------------------------------------

D. The Assessment Process

    The pace of the IASC work program has required that, immediately 
following the adoption of a final standard, the Working Party and 
Commission staff shift their attention to other pending standards. 
As a result, the Working Party and Commission staff did not stop to 
evaluate each completed standard and assess the extent to which it 
addressed the concerns raised in the comment letters. This approach 
also was consistent with the understanding between the IASC and 
IOSCO that the Working Party would assess the completed standards, 
individually and as a group, once the IASC completed all of the core 
standards. That assessment of the core standards is now underway, 
and is focusing not only on the extent to which the completed 
standards address the IOSCO concerns, but also on whether the IASC's 
standards work together to form an operational basis of accounting.
    Following its review and assessment of the core standards, the 
Working Party will make a report to IOSCO's Technical Committee that 
will describe outstanding substantive issues with the IASC standards 
and suggest ways to address these issues. The Technical Committee 
then is expected to develop and circulate to IOSCO's membership a 
resolution regarding the IASC standards.
    Resolutions of both the Technical Committee and IOSCO as a whole 
are non-binding on its member organizations. Accordingly, were the 
Technical Committee to recommend to IOSCO's members that they accept 
financial statements prepared using IASC standards, each member 
would have to determine whether and how to implement that 
recommendation at a domestic level.
    If, as a result of its assessment of the completed core 
standards, we conclude that changes to our current requirements for 
foreign private issuers are appropriate, we will issue a rule 
proposal for public comment. This may include modifications of the 
financial statement requirements for registration and reporting 
forms utilized by foreign private issuers, such as Forms F-1 and 20-
F.

Appendix D.--Summary of the FASB's IASC/US GAAP Comparison Project

    This document is an excerpt from the FASB's ``The IASC-U.S. 
Comparison Project: A Report on the Similarities and Differences 
between IASC Standards and U.S. GAAP,'' copyrighted by the Financial 
Accounting Standards Board, Norwalk, Connecticut, USA, 1999.
    Please note that the attached document was produced by the 
Financial Accounting Standards Board and is not a Commission or SEC 
staff document. The reproduction of this document here is for the 
convenience of readers of this Concept Release only. Our inclusion 
of this document does not indicate that it reflects our views or the 
views of the SEC staff.

CHAPTER 2--SUMMARY OF OBSERVATIONS

Introduction

    In keeping with the objectives of the project, the comparative 
analyses presented in Chapters 3-30 of this report provide an 
information base to facilitate decision making about IASC standards 
by investors, analysts, standard setters, regulators, and others. 
Each comparative analysis was undertaken independently. However, 
based on the types of differences identified by the individual 
authors, there are some general observations that can be made about 
the potential comparability of information reported in financial 
statements between an enterprise using IASC standards and one using 
U.S. GAAP. Those observations are the subject of this chapter.
    The discussion of observations that follows generally centers on 
the extent to which the similarities and differences identified by 
the authors of the comparative analyses could affect the 
comparability of actual reported financial information. That is, the 
discussion focuses on those similarities and differences deemed most 
likely to be significant to financial statement users comparing the 
financial statements of enterprises following IASC standards and 
those following U.S. GAAP. There are some limitations to that 
approach. Primarily, the basis for the project was limited to the 
comparison of accounting standards; it did not seek to observe the 
actual application and enforcement of those standards. How standards 
are interpreted and applied and the extent to which they are 
enforced can have a significant impact on reported financial 
information. Evaluating the effects of actual application and 
enforcement of accounting standards was beyond the scope of the 
project. It is not yet possible to observe those effects because 
many of the IASC standards and some U.S. standards that are the 
subject of the chapters that follow have yet to be used in preparing 
financial statements.
    This chapter is presented in three sections. The first provides 
some background for understanding how differences in accounting 
standards can be important for assessing financial statement 
comparability. The second section provides some general observations 
about the most significant types of differences observed by the 
authors of the comparative analysis chapters and provides examples 
to illustrate those types of differences. The last section 
summarizes the key points of this chapter.

A Word About Differences

    The IASC-U.S. comparison project set out to identify 
similarities and differences between IASC standards and U.S. GAAP 
(primarily FASB standards) predisposed to the view that the shortest 
route to understanding comparability would be to zero in on 
differences. Therefore, this report, by its very nature, focuses on 
differences as a basis for comparison. Similarities tend to be 
identified and described in a general manner, while differences are 
discussed in more detail.
    IASC standards are different from FASB standards. That 
conclusion is not new, nor is it unique to this report. It is 
neither the objective nor the intent of the IASC to develop 
standards identical to FASB standards. IASC standards and FASB 
standards seek to serve different environments (international versus 
national), respond to different mandates, have different technical 
support levels, and result from different standard-setting 
structures and processes.\55\ Differences between those two sets of 
standards, therefore, are inevitable and not necessarily 
inappropriate. However, if financial statements based on IASC 
standards are to be considered appropriate for cross-border access 
to the world's capital markets (including those in the United 
States), it is essential that IASC standards meet the demands of 
those capital markets for high-quality financial information.
---------------------------------------------------------------------------

    \55\ As noted in Chapter 1 of this report [The IASC-U.S. 
Comparison Project: A Report on the Similarities and Differences 
between IASC Standards and U.S. GAAP], the IASC published a 
discussion paper, Shaping IASC for the Future, in December, 1998. 
That discussion paper proposes changes to the IASC's objectives, 
standard-setting structure, and due process.
---------------------------------------------------------------------------

    In undertaking the project, the FASB staff sought to obtain 
greater understanding of the specific nature of IASC standards. At 
the time that the project began (in 1995), detailed information 
about the level of comparability of reported financial results 
between financial statements prepared based on IASC standards and 
those prepared based on U.S. GAAP was available to relatively few 
individuals. In large part due to increased awareness resulting from 
publicity surrounding the IASC's core standards project, research on 
the issues related to international comparability has increased. 
However, conclusions about the acceptability of IASC standards for 
cross-border securities listings and other purposes are mixed and 
often are supported by fragmentary evidence.

[[Page 8909]]

    Some studies that compare IASC standards with U.S. GAAP have 
asserted that the two sets of standards are broadly similar or that 
use of IASC standards can lead to results similar to those that 
would have been obtained had U.S. GAAP been used. As some of the 
comparative analyses in this report show, some of the IASC standards 
and their U.S. GAAP counterparts do have a similar underlying 
approach to accounting in certain areas and it may be possible to 
arrive at similar results under both standards. However, the 
existence of alternatives, even within standards that are very 
similar, can create the potential for very different reported 
results. The comparative analysis of IAS 23, Borrowing Costs, 
provides an example. The allowed alternative treatment in IAS 23 
requires capitalization of borrowing costs incurred in the 
acquisition, construction, or production of certain assets. That is 
very similar to the U.S. GAAP requirement. However, IAS 23's 
benchmark treatment requires that borrowing costs be expensed. That 
is very different from the allowed alternative treatment (and, 
consequently, from U.S. GAAP). The existence of both a benchmark and 
allowed alternative treatment has the potential to result in 
noncomparability both between IASC-based and U.S. GAAP-based 
financial statements and among financial statements prepared under 
IASC standards.
    Other studies have concluded that IASC standards are too broad 
and general to ensure that similar accounting methods are applied in 
similar circumstances or that similar results are consistently 
achieved. While the guidance provided by IASC standards often is 
more general than that found in U.S. GAAP, IASC standards may be 
more rigorous than the national standards of some countries and, in 
some circumstances, may be equally or more effective than U.S. GAAP. 
For example, both IAS 2, Inventories, and U.S. GAAP provide broad, 
general guidance on cost-flow assumptions in estimating inventory 
cost. However, IAS 2 provides more-extensive guidance than does U.S. 
GAAP on the topic of accounting for inventories of service 
providers.
    On the other hand, an absence of implementation guidance can 
lead to differences in applying standards that are broadly similar. 
For example, IAS 33, Earnings per Share, and its U.S. GAAP 
counterpart, FASB Statement No. 128, Earnings per Share, resulted 
from a cooperative standard-setting effort between the IASC and the 
FASB. The two standards are very similar. However, Statement 128 
provides more-specific implementation guidance for some of the 
calculations required for determining earnings per share, for 
example, for determining the impact of different types of 
contingencies related to contingently issuable shares. There may be 
differences in earnings-per-share calculations between enterprises 
following IAS 33 and those following Statement 128 because, in the 
absence of implementation guidance, enterprises following IAS 33 are 
not required to determine the impact of contingently issued shares 
on the same basis as that described in Statement 128 and would not 
be prohibited from using alternative bases for making that 
determination.
    Finally, not all questions about comparability relate to the 
comparability of financial statements prepared using different sets 
of accounting standards. Few studies have focused on comparability 
among the financial statements of enterprises following IASC 
standards. For example, there is little (if any) research that 
provides evidence of whether the IASC-based financial statements 
provided by an enterprise from France are comparable to the 
financial statements provided by a similar enterprise from Japan 
that also is following IASC standards. That type of comparison was 
beyond the scope of this report. Notwithstanding similarities with 
or differences from U.S. GAAP, because IASC standards will be 
applied in different national environments--each with its own set of 
national accounting standards or conceptual framework--IASC 
standards must be capable of being consistently interpreted and 
applied in order to meet the objective of international 
comparability among those enterprises that use IASC standards.
    Thus, it would be misleading to make sweeping generalizations or 
blanket assertions about the relative quality of IASC standards 
based solely on the similarities and differences between two sets of 
accounting standards. The mere existence of differences between 
accounting standards is not a sufficient measure of the quality or 
merit of any particular accounting standard relative to the other. 
The true test of an accounting standard is whether it satisfies the 
demand for information in the environment in which it is intended to 
be used. What is required, therefore, is a fuller understanding of 
the nature of similarities and differences in the information 
provided in the financial statements as a result of applying the two 
sets of accounting principles. The FASB staff believes that the 
comparative analyses in this report will provide useful information 
to help interested parties evaluate the current state of IASC-U.S. 
GAAP comparability and draw their own conclusions.

Types of Differences

    The comparative analyses in the following chapters identify a 
wide range of differences between IASC standards and U.S. GAAP and 
attempt to assess the impact of those differences on the 
comparability of the respective financial statements prepared using 
each set of standards. Not all differences between standards will be 
meaningful to financial statement users trying to compare investment 
opportunities. Some believe that differences in methodologies for 
deriving financial information and where in the financial statements 
it is presented (which are important considerations for standard 
setters in developing accounting requirements) are less important 
than whether the resulting financial information provided is 
essentially the same. For example, two standard setters may have 
different underlying conceptual bases for concluding on a particular 
recognition or measurement requirement, but the financial 
information that results from applying either standard could be the 
same. Financial statement users may not find the difference in 
concepts troublesome in that case.
    From the perspective of financial statement users, other types 
of differences may be seen as more problematic because they are 
likely to result in differences between the information reported for 
a given reporting period in financial statements of enterprises 
following IASC standards and the information reported by those 
following U.S. GAAP that would be difficult to compensate for in 
making comparisons. For example, the types of differences of 
greatest significance in comparing financial statements are likely 
to fall within the following categories: \56\
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    \56\ There also are less-significant differences between IASC 
standards and U.S. GAAP that contribute to noncomparability, for 
example, differences in definitions of line items and in 
presentation requirements. While those differences are identified in 
the chapters that follow, the discussion in this chapter is limited 
to examples in the categories of differences identified because they 
are likely to be the most significant from a financial statement 
user's perspective.
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    1. Recognition differences. Differences in recognition criteria 
and guidance for initial or subsequent recognition of the same 
financial statement item can lead to differences in:
     Whether that particular item is recognized at all.
     How recognition of that item affects the financial 
statements (for example, capitalization of an item on the balance 
sheet versus expensing that item as incurred in the income 
statement).
     When (that is, in what reporting period) the item is 
initially recognized.
    2. Measurement differences. Different approaches to initial or 
subsequent measurement can lead to differences in the amounts 
recognized for the same item in financial statements. For example, 
one standard might require that an item be subsequently measured at 
amortized cost, while its counterpart might require the same type of 
item to be revalued to current cost or fair value in each reporting 
period.
    3. Alternatives. Differences can arise when one standard permits 
a choice between two or more alternative methods of accounting for a 
similar transaction, but its counterpart requires use of a single 
method. For example, one standard might permit an item to be either 
capitalized or expensed as incurred, but its counterpart might 
require the same item to be expensed as incurred. When alternatives 
are permitted, that can also lead to differences between the 
financial statements of two enterprises following the same set of 
standards.
    4. Lack of requirements or guidance. Differences also can arise 
when one standard does not provide requirements or guidance for a 
particular topic or class of transactions within an accounting area 
covered by its counterpart. For example, one standard might provide 
specific guidance for recognition and measurement of government 
grants, while its counterpart might lack guidance covering that 
area.
    5. Other differences. There are some other specific differences 
between IASC standards and U.S. GAAP that affect the basis for 
presentation of information contained in the financial statements. 
Examples of areas in which those differences occur are the

[[Page 8910]]

presentation of financial statements, segment reporting, business 
combinations, consolidation policy, and certain transition 
provisions.
    The significance of the types of differences in the categories 
described above in any particular case would depend on a number of 
factors. For example, even if the recognition and measurement 
requirements of two standards that cover the same item are very 
different, those differences might not be significant to a financial 
statement user if the enterprises being compared rarely, if ever, 
engage in transactions giving rise to that item. To illustrate, for 
purposes of comparing IASC-based and U.S. GAAP-based financial 
statements, a financial statement user likely would be more 
concerned about differences in the recognition and measurement of 
construction contracts when comparing the financial statements of 
two shipbuilding enterprises, one based on IASC standards and one 
based on U.S. GAAP, than when comparing the financial statements of 
two financial institutions, one based on IASC standards and one 
based on U.S. GAAP.
    On the other hand, differences in recognition and measurement 
requirements related to transactions or events that are common to 
most enterprises could create pervasive differences in the line 
items and amounts reported by enterprises following IASC standards 
and those following U.S. GAAP for one or more reporting periods. For 
example, differences in revenue recognition or income tax accounting 
are likely to impact comparisons of the financial statements of the 
vast majority of enterprises. Unless additional information is 
provided elsewhere in the financial statements to enhance 
comparability, differences generally contribute to increased 
uncertainty for financial statement users in assessing and making 
investment decisions.
    Comparisons may be affected for a single reporting period or 
over a number of reporting periods. With the exception of the few 
instances in which an item may be required to be recognized under 
one set of standards but never recognized under the other, the 
effects of many of the differences described above and illustrated 
in the next section will eventually vanish. That is, if, for 
example, one standard requires a cost to be expensed whereas the 
other requires the same cost to be amortized over a specified 
period, comparability in the reporting periods in which the cost is 
initially recognized and subsequently amortized will be hindered. 
However, once the cost is fully amortized, the effect on the 
financial statements of the difference in accounting for that cost 
will disappear. As a result, a particular difference in requirements 
might create more than one type of difference in reported results. 
For example, different recognition criteria might not only result in 
differences in how an item is recognized (for example, whether as an 
expense or an asset), but also might impact the period or periods in 
which that item is recognized. For that reason, actual differences 
identified in the comparative analysis may overlap in the five 
categories of differences described above. The next section of this 
chapter highlights some examples of the more significant differences 
in those five categories from the perspective of assessing 
comparability of financial information that would be provided under 
IASC-based and U.S. GAAP-based financial statements that cover the 
same reporting period.

1. Recognition Differences

    As noted above, different recognition requirements between an 
IASC standard and its U.S. GAAP counterpart can create differences 
in whether, how, and when an item is reported in financial 
statements. The following examples illustrate those differences.

Recognized or Unrecognized

    Some types of recognition differences would require an item to 
be recognized under one standard, but the same item would be 
required to go unrecognized under its counterpart standard. One 
example of that type of difference between IASC standards and U.S. 
GAAP is the recognition requirements for leases. In the United 
States, the issue of whether to recognize a leased item as an asset 
of the lessee or keep it off-balance-sheet with periodic rental 
charges flowing through the income statement has been fiercely 
debated and generally centers on different perceptions of the 
substance of the lease transaction, that is, when to conclude that 
the lessor transfers the risks and rewards of ownership of the 
leased asset to the lessee as a result of the lease agreement. 
Because of the controversy over that issue and partly because there 
is a propensity in the United States to structure lease transactions 
so as to avoid capitalization, U.S. GAAP provides a great deal of 
detailed guidance for accounting for lease transactions.
    In comparing IAS 17, Leases, and FASB Statement No. 13, 
Accounting for Leases, many similarities can be identified. Both 
standards define leases similarly, and both require that a leased 
item be recognized as an asset on the lessee's balance sheet for 
leases under which substantially all the risks and rewards incident 
to ownership of the leased asset are transferred to the lessee (that 
is, for leases classified as capital leases (Statement 13) or 
finance leases (IAS 17)). No asset is recognized by the lessee if 
the lease is classified as an operating lease. However, IAS 17's 
implementation guidance for determining lease classification is less 
detailed than the corresponding Statement 13 guidance. For example, 
Statement 13 provides specific quantitative criteria to be met in 
determining whether a leased item should be capitalized. IAS 17 
relies instead on management's assessment of the ``substance'' of 
the lease transaction.
    It is difficult to predict how often leased items that would be 
capitalized under Statement 13 would also be capitalized under IAS 
17. Statement 13's ``bright line'' approach removes some of the 
judgment that otherwise would be necessary to determine the 
substance of the lease transaction (that is, whether it is a capital 
lease or an operating lease). However, it also permits lease 
transactions to be structured to meet (or to avoid meeting) the 
specified criteria. IAS 17's approach provides more room for 
judgment in determining the substance of the lease transaction, and 
it is difficult to know if all enterprises applying IAS 17 would 
interpret ``substance'' similarly. However, the IAS 17 approach may 
result in balance sheet recognition of a lease that is in substance 
a capital lease but that does not meet the criteria in Statement 13. 
Whether or not the same item is recognized or unrecognized can 
create obvious comparability problems for financial statement users, 
especially when trying to evaluate an enterprise's capital 
structure, determine financial ratios, and measure its performance.
    In the comparative analyses that follow, there are relatively 
few areas in which the same item would be required to be recognized 
under one standard but would be required to be unrecognized under 
its counterpart. However, the following are some examples.
    Income taxes. Differences between IAS 12, Income Taxes, and FASB 
Statement No. 109, Accounting for Income Taxes, can lead to an item 
being recognized under one standard but not the other. For example:
     Statement 109 prohibits and IAS 12 requires recognition 
of deferred taxes for temporary differences related to (a) foreign 
currency nonmonetary assets when the reporting currency is the 
functional currency and (b) intercompany transfers of inventory or 
other assets remaining within the consolidated group.
    Employee benefits. Differences between IAS 19, Employee 
Benefits, and related U.S. GAAP can lead to an item being recognized 
under one set of standards but not the other. For example:
     Expense for equity compensation benefits (such as 
employee stock options) is not recognized under IAS 19. U.S. GAAP 
requires recognition of an expense for certain types of equity 
compensation benefits.

Same Item, Different Accounting Treatment

    A more common type of difference identified in the comparative 
analyses is that in which the two standards specifically require the 
same item to be treated differently. The following example 
illustrates that type of difference.
    Under U.S. GAAP, all internally generated research and 
development costs are required to be expensed as incurred. Under IAS 
38, Intangible Assets, all costs identified as research costs are to 
be expensed; however, costs identified as development costs are to 
be capitalized if they meet specified criteria. Thus, the financial 
statements of an enterprise with development costs following IASC 
standards would not be comparable to those of an identical 
enterprise following U.S. GAAP. Using IASC standards, the enterprise 
would report higher income in the year that development costs are 
incurred and lower income in subsequent years than it would if it 
accounted for the same costs under U.S. GAAP. Comparability of cash 
flows also would be permanently impacted because cash flows related 
to development costs under U.S. GAAP generally would be reported as 
operating cash flows, whereas under IASC standards those cash flows 
would be reported as cash flows related to investing activities. 
IASC-based financial statements would be comparable to U.S. GAAP-
based financial statements only if all

[[Page 8911]]

costs for those expenditures are identified as research costs or if 
no development costs qualify for capitalization.
    All other things being equal, capitalizing an item rather than 
expensing it as incurred can have a long-term impact on financial 
statement comparison and analysis of both the balance sheet and 
income statement. Financial results for identical enterprises will 
differ each year until a capitalized item is completely amortized. 
Further, the resulting differences in classification of reported 
cash flows will never reverse. Unless adequate information is 
provided to equate two otherwise identical enterprises or to track 
expensed items over time, it may be difficult to adjust for those 
differences.
    Examples of areas in which there is a possibility of 
encountering different recognition treatments of the same item 
depending on whether IASC standards or U.S. GAAP is applied include 
the following areas identified in the comparative analyses.
    Depreciation or amortization. IASC standards and U.S. GAAP 
differ in the treatment of adjustments to depreciation and 
amortization amounts that result from a change in depreciation or 
amortization method:
     Under IASC standards, the impact of a change in 
depreciation or amortization method is recognized as an adjustment 
to depreciation or amortization expense in current and prospective 
periods affected by the change. U.S. GAAP generally requires 
recognition in the current period of the cumulative effect of that 
type of change.
    Construction contracts. Differences between IAS 11, Construction 
Contracts, and U.S. GAAP can result in different financial statement 
recognition for similar items:
     Differences in requirements to combine or segregate 
construction contracts can lead to differences in profit recognition 
for construction contracts depending on whether IAS 11 or U.S. GAAP 
is followed.
     IAS 11 requires the use of the percentage-of-completion 
method to recognize contract revenue and expenses if the outcome can 
be estimated reliably; otherwise, IAS 11 requires the use of the 
zero-profit method. U.S. GAAP requires, in certain situations, the 
use of the completed-contract method of accounting for contracts.
    Leases. Recognition of profit or loss on certain sale-leaseback 
transactions can differ depending on whether IASC standards or U.S. 
GAAP is followed:
     Statement 13 generally requires profit or loss deferral 
on a sale-leaseback transaction that is classified as an operating 
lease. IAS 17, on the other hand, requires immediate profit or loss 
recognition for a sale-leaseback transaction classified as an 
operating lease if the sale transaction is established at fair 
value.
    Employee benefits. Recognition differences can lead to 
noncomparability for certain types of employee benefits:
     IAS 19 requires prior service cost related to retirees 
and active vested employees to be expensed, whereas U.S. GAAP 
requires that prior service cost be amortized over the expected 
service life of existing employees.
     Under IAS 19, a liability for a benefit obligation 
would be recognized for certain multiemployer plans that would not 
qualify for similar recognition under U.S. GAAP. Rather, the 
employer's contribution to those multiemployer plans would be 
recognized under U.S. GAAP as an expense in the period that the 
related employee services are rendered.
    Business combinations. Treatment of certain items acquired in a 
business combination accounted for as a purchase can have a 
significant impact on the comparability of IASC-based and U.S. GAAP-
based financial statements:
     In-process research and development acquired in a 
business combination is capitalized under IAS 22, Business 
Combinations, (either separately or as part of goodwill). Under U.S. 
GAAP, the amount of the purchase price allocated to in-process 
research and development acquired in a business combination is 
expensed.
    Borrowing costs. Although an alternative similar to U.S. GAAP is 
available under IAS 23, the effects of applying the benchmark 
treatment for accounting for borrowing costs would be quite 
different from the effects of applying U.S. GAAP:
     Enterprises following the benchmark treatment under IAS 
23 would expense borrowing costs incurred related to the 
acquisition, construction, or production of an asset. Under U.S. 
GAAP, capitalization of those costs is required for qualifying 
assets.
    Financial instruments. Differences between IAS standards and 
related U.S. GAAP can lead to different accounting treatments for 
the same financial instruments:
     IAS 32, Financial Instruments: Disclosure and 
Presentation, requires that mandatorily redeemable preferred stock 
be classified as a liability with its dividends recognized as 
expenses in the income statement. Under U.S. GAAP, mandatorily 
redeemable preferred stock is classified as neither a liability nor 
equity, and dividends are deducted from net income in arriving at 
income available to common stockholders.
     IAS 32 requires that the issuer of a financial 
instrument that contains both a liability and an equity element 
(such as convertible debt) classify the instrument's component parts 
separately. U.S. GAAP prohibits separate presentation of the 
liability and equity components of convertible debt unless warrants 
are detachable.
     The U.S. GAAP distinction between sales and secured 
borrowings is different from that in IAS 39. As a result, more asset 
transfers would qualify for sale accounting treatment under IAS 39 
than would qualify for sale accounting treatment under U.S. GAAP.

Timing Differences

    Even if two standards require the same item to be recognized and 
the same accounting treatment, different recognition criteria can 
result in recognition of the same item in a different reporting 
period. For example, IAS 12 requires recognition of the effects of a 
change in tax laws or rates when the change is ``substantively 
enacted.'' Thus, recognition may precede actual enactment by a 
period of several months. Statement 109 requires recognition upon 
actual enactment, which, in the United States, is the date that the 
president signs the tax law.
    Timing of recognition may differ between IASC standards and U.S. 
GAAP for other items as well. Some examples follow.
    Business combinations. There are differences between IASC 
standards and U.S. GAAP for negative goodwill, goodwill, and 
acquired intangible assets that will affect the timing of 
recognition:
     The timing of income statement recognition of negative 
goodwill may differ as a result of different methods for amortizing 
negative goodwill specified in IAS 22 and APB Opinion No. 16, 
Business Combinations.
     The periods over which amortization expense related to 
goodwill and intangible assets is recognized may differ between IASC 
standards and U.S. GAAP.
    Discontinuing operations. Presentation and recognition and 
measurement requirements differ between IAS 35, Discontinuing 
Operations, and related U.S. GAAP:
     Timing of segregation of discontinuing operations from 
continuing operations may differ depending on whether IAS 35 or U.S. 
GAAP is followed.
     Timing of recognition of gain or loss on discontinuance 
and income or loss from activities of the discontinuing operation 
may differ depending on whether IAS 35 or U.S. GAAP is followed.
    Provisions and contingencies. Recognition requirements under IAS 
37, Provisions, Contingent Liabilities and Contingent Assets, differ 
from requirements in U.S. GAAP:
     Timing of recognition of provisions under IAS 37 may 
differ from the timing of recognition of liabilities and contingent 
losses under FASB Statement No. 5, Accounting for Contingencies.
     The timing of recognition of liabilities associated 
with a restructuring may differ due to different recognition 
thresholds.
    Impairment. Differences in approach between IAS 36, Impairment 
of Assets, and FASB Statement No. 121, Accounting for the Impairment 
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, 
can lead to differences in timing of recognition for impairment 
losses:
     Timing of recognition of impairment losses may differ 
due to different recognition thresholds.
    Interim financial reporting. Because of different approaches to 
preparing interim financial information, certain items may be 
recognized in different periods and at different amounts depending 
on whether IAS 34, Interim Financial Reporting, or U.S. GAAP is 
followed:
     The U.S. GAAP requirements related to timing of 
recognition of certain accruals made for interim reporting purposes 
differ from the requirements of IAS 34, including requirements 
related to purchase price variances and volume or corporate cost 
variances expected to be absorbed by year-end and accrual or 
deferral of costs clearly expected to benefit two or more periods.

2. Measurement Differences

    Differences in whether and when an item is recognized in the 
financial statements are not the only differences that can raise 
comparability issues. How items are valued, especially subsequent to 
initial recognition, can impede straightforward comparison.

[[Page 8912]]

Subsequent Measurement

    One example of a measurement difference relates to the 
requirements for subsequent measurement of impaired assets. IAS 36 
and Statement 121 take significantly different approaches to 
reversals of impairment losses. IAS 36 requires impairment losses to 
be reversed on assets (excluding goodwill) when certain impairment 
indicators reverse, provided that the estimates used to determine 
those assets' net selling prices and values in use have changed. IAS 
36 requires impairment losses on goodwill to be reversed if certain 
other conditions are met. In contrast, Statement 121 prohibits 
reversal of impairment losses in all circumstances for assets held 
and used. Thus, the carrying amounts of certain assets may differ 
depending on whether IASC standards or U.S. GAAP is followed.
    Other examples of possible differences in measurement between 
IASC standards and U.S. GAAP are identified below.
    Leases. Different measurement guidance in IAS 17 and U.S. GAAP 
can lead to different amounts reported for lease transactions:
     There are differences between IAS 17 and U.S. GAAP 
related to the calculation of minimum lease payments and the rate 
used to discount minimum lease payments.
    Employee benefits. Although similar in many ways, some aspects 
of measurement of employee benefits differ between IAS 19 and U.S. 
GAAP:
     In measuring the employer's benefit obligation, IAS 19 
permits an enterprise to anticipate changes in future postemployment 
benefits based on its expectations of changes in the law that would 
impact variables such as state medical or social security benefits. 
U.S. GAAP expressly prohibits anticipating changes in the law that 
would affect those variables.
     U.S. GAAP requires recognition of a minimum liability 
on the balance sheet equal to at least the unfunded accumulated 
pension benefit obligation. IAS 19 does not.
    Provisions. Comparability of amounts recognized for certain 
types of liabilities can be impacted by differences between IASC 
standards and U.S. GAAP:
     IAS 37 provides a variety of recognition criteria for 
different items that may enter into the measurement of a provision. 
Consequently, the amounts of provisions may vary among enterprises 
that apply IAS 37 and between those enterprises and those that apply 
U.S. GAAP.
    Discontinuing operations. A fundamentally different approach to 
measurement of discontinuing operations can make comparisons of 
IASC-based and U.S. GAAP-based financial statements difficult:
     Under IAS 35, the actual operating results of a 
discontinuing operation are reported as part of discontinuing 
operations when incurred. Under APB Opinion No. 30, Reporting the 
Results of Operations--Reporting the Effects of Disposal of a 
Segment of a Business, and Extraordinary, Unusual and Infrequently 
Occurring Events and Transactions, the estimated operating results 
of a discontinuing operation are included in the measurement for the 
expected gain or loss on disposal.
    Impairment. Judgment is required in applying both the U.S. 
standard and IASC standard on impairment. However, specific 
measurement differences will contribute to the potential for 
noncomparability:
     IAS 36 requires an impairment loss to be measured as 
the amount by which an asset's carrying amount exceeds its 
impairment recognition trigger (the higher of net selling price or 
value-in-use), whereas Statement 121 requires an impairment loss to 
be measured as the amount by which an asset's carrying amount 
exceeds its fair value.
    Borrowing costs. Measurement differences can affect the 
comparability of items even when similar recognition principles 
apply:
     Enterprises choosing to capitalize borrowing costs 
under the allowed alternative in IAS 23 (which is similar to the 
requirement to capitalize those costs under U.S. GAAP) might measure 
those costs differently than enterprises following U.S. GAAP if they 
include foreign currency exchange gains and losses related to those 
costs.
    Interim financial reporting. Different measurement principles 
for inventories can affect amounts reported in interim periods:
     U.S. GAAP does not require recognition in interim 
periods of inventory losses from market declines that reasonably can 
be expected to be restored in the fiscal year. IAS 34 does.
    Financial instruments. There are differences in the measurement 
requirements between IAS 39, Financial Instruments: Recognition and 
Measurement, and related U.S. GAAP for the same financial 
instruments:
     IASC standards provide for classification as trading, 
available-for-sale, or held-to-maturity for all types of financial 
assets. U.S. GAAP applies those classifications only to securities. 
As a result, measurement of some financial assets would differ 
depending on whether IASC standards or U.S. GAAP was followed.
     IAS 39 requires that hedging gains and losses from cash 
flow hedges of firm commitments and of forecasted transactions be 
included as part of the initial measurement of the cost basis of the 
related hedged item (basis adjustment). U.S. GAAP does not permit 
basis adjustment for cash flow hedges. Instead, it requires that 
hedging gains and losses on cash flow hedges be recorded in other 
comprehensive income when they occur and reclassified into earnings 
over the period that the hedged item affects earnings.
     Certain commodity contracts for which an enterprise 
normally takes delivery would be initially and subsequently measured 
at historical cost under IAS 39, with any gain or loss recognized as 
part of the cost of the goods acquired when the contract is settled. 
Under U.S. GAAP, those contracts would be measured at fair value 
unless no market mechanism exists to net settle the contract.

3. Alternatives

    Comparability between IASC-based and U.S. GAAP-based financial 
statements may be hindered if one standard explicitly permits a 
choice among alternative approaches for a particular topic and the 
other (1) requires a single approach that is somewhat like one of 
the alternatives or (2) also permits a similar choice of approaches. 
Such alternatives may relate to recognition, measurement, display, 
or disclosure requirements. Free choice alternatives not only create 
problems in comparing financial statements based on different 
standards, but also in comparing financial statements based on the 
same set of standards.
    In some cases, the IASC standard permits a choice and U.S. GAAP 
does not. For example, under IAS 16, Property, Plant and Equipment, 
an enterprise can choose to measure its property, plant, and 
equipment following either the benchmark treatment, that is, to 
carry those assets at cost (less accumulated depreciation and 
accumulated impairment losses), or the allowed alternative 
treatment, that is, to periodically revalue its property, plant, and 
equipment to fair value (less subsequent accumulated depreciation 
and subsequent accumulated impairment losses). Revaluation increases 
under the allowed alternative treatment are credited directly to 
equity as revaluation surpluses unless they reverse a revaluation 
decrease that was previously recognized as an expense, in which case 
they are credited to income. Revaluation decreases are first charged 
against any surpluses for the same asset, then they are recognized 
as expenses. Upon disposal of a revalued asset, the amount 
recognized in the income statement under IAS 16 as gain or loss on 
disposal differs from that which would be recognized for a similar 
asset that was accounted for at historical cost. IAS 16 also permits 
a choice for presentation of revalued assets: gross assets and 
accumulated depreciation can be proportionately restated to equal 
the revalued amount or the gross assets and accumulated depreciation 
accounts can be eliminated and the net revalued amount presented.
    U.S. GAAP requires accounting similar to IAS 16's benchmark 
treatment and does not permit revaluation accounting for fixed 
assets. The financial statements of an enterprise choosing to 
revalue its assets under the IASC standard would not be readily 
comparable to those of an enterprise following U.S. GAAP, nor would 
they be comparable to the financial statements of an enterprise 
following IASC standards that chose not to revalue its assets. The 
impact of revaluation on the financial statements may not be obvious 
or easy to trace, depending on how often assets are revalued, how 
they are grouped for revaluation, and what choices are made for 
their presentation in the balance sheet. Nor can financial 
statements prepared under U.S. GAAP be easily adjusted to compare 
with revalued amounts for property, plant, or equipment in IASC-
based financial statements. For financial statement users making 
comparisons, there may be uncertainty related to the determination 
of revalued amounts, the validity of certain asset ratios, and the 
ability to evaluate performance.
    In other cases, U.S. GAAP permits a choice of alternative 
approaches and the IASC standard does not. For example, IAS 11 and 
AICPA Statement of Position 81-1, Accounting for Performance of 
Construction-Type and Certain Production-Type Contracts, both 
address the topic of how a construction contractor calculates the 
components of

[[Page 8913]]

income earned. SOP 81-1 explicitly permits a choice between two 
approaches: a revenue-cost approach and a gross-profit approach. IAS 
11 requires the revenue-cost approach.
    Sometimes both sets of standards permit a similar range of 
alternatives on a particular topic. For example, IAS 2 and ARB No. 
43, Chapter 4, ``Inventory Pricing,'' permit a similar range of 
accounting choices in measuring the cost of inventory. Those choices 
include the use of the retail or standard cost method in estimating 
the cost of inventory and the use of specific identification; first-
in, first-out; average cost; or last-in, first-out in reporting the 
flow of cost. Identical accounting among enterprises applying the 
IASC standard or among enterprises applying U.S. GAAP or between 
those applying the IASC standard and those applying U.S. GAAP will 
be achieved only by coincidence.
    Examples of other areas identified in the comparative analyses 
that illustrate the provision of alternatives within IASC standards, 
U.S. GAAP, or both include the examples identified below.
    Cash flow statements. Although the two standards are mostly 
similar, there are some areas in which the requirements of IAS 7, 
Cash Flow Statements, and those of FASB Statement No. 95, Statement 
of Cash Flows, differ:
     IAS 7 permits a choice of classifying (1) dividends and 
interest paid or received as operating cash flows or (2) interest or 
dividends paid as financing cash flows and interest or dividends 
received as investing cash flows. Statement 95 requires that the 
interest paid and dividends received be classified as operating cash 
flows and that dividends paid be classified as financing cash flows.
    Correction of an error and accounting changes. Differences in 
the permitted alternatives to accounting for error corrections and 
accounting changes can impact the comparability of IASC-based and 
U.S. GAAP-based financial statements:
     In accounting for a fundamental error, an enterprise 
following the benchmark treatment in IAS 8, Net Profit or Loss for 
the Period, Fundamental Errors and Changes in Accounting Policies, 
would correct the error by an adjustment to the opening balance of 
retained earnings for the earliest period presented. However, under 
IAS 8's allowed alternative, fundamental errors are corrected by 
inclusion in net income and by supplemental disclosure. U.S. GAAP 
requirements for correction of an error are identical to IAS 8's 
benchmark treatment.
     The IAS 8 benchmark treatment for accounting changes 
requires restatement of prior periods. However, IAS 8 also permits 
the application of either the cumulative-effect method or the 
prospective method if the amounts needed to restate prior periods 
are not ``reasonably determinable.'' \57\ Under U.S. GAAP, the 
general rule is to use the cumulative-effect method for changes in 
accounting principle, although restatement of prior periods is 
required for certain changes. In specific circumstances, U.S. GAAP 
allows changes in accounting principle to be handled prospectively. 
Given those differences, comparability of net income and retained 
earnings amounts could differ significantly between financial 
statements prepared under IAS 8 and those prepared under U.S. GAAP.
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    \57\ In the absence of specified transition provisions, an 
enterprise following IASC standards must follow the guidance in IAS 
8. For first-time application of IASC standards, an enterprise would 
also look to the guidance provided in SIC Interpretation 8, First-
Time Application of IASs as the Primary Basis of Accounting.
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    Foreign currency translation. Alternatives provided under IAS 
21, The Effects of Changes in Foreign Exchange Rates, differ from 
the requirements in FASB Statement No. 52, Foreign Currency 
Translation:
     IAS 21 permits two methods of accounting for exchange 
losses on a liability for the recent acquisition of an asset 
invoiced in a foreign currency: (1) charge those exchange losses to 
expense or (2) add the exchange losses to the cost of the asset when 
the related liability cannot be settled and there is no practical 
means of hedging. Statement 52 requires that those exchange losses 
be expensed in all cases.
     IAS 21 also permits alternatives in translating 
goodwill and fair value adjustments to assets and liabilities that 
arise from purchase accounting for the acquisition of a foreign 
entity for which the foreign currency is the functional currency. 
Under IAS 21, use of either the current exchange rate or the 
historical exchange rate is permitted. When the foreign currency is 
the functional currency, Statement 52 requires use of the current 
exchange rate to translate all balance sheet items, including 
goodwill and fair value adjustments.
    Borrowing costs. Depending on the alternative accounting 
treatment chosen under IAS 23, the accounting for those costs under 
IASC standards can differ significantly from their accounting under 
U.S. GAAP:
     IAS 23 allows enterprises to choose between two methods 
of accounting for borrowing costs. The benchmark treatment requires 
that enterprises expense all borrowing costs in the period in which 
they are incurred. The allowed alternative treatment requires 
capitalization of borrowing costs as part of the cost of an asset to 
the extent the borrowing costs are attributable to the acquisition, 
construction, or production of a qualifying asset. FASB Statement 
No. 34, Capitalization of Interest Cost, requires an approach 
similar to IAS 23's allowed alternative.
    Investments in associates. In the financial statements of an 
enterprise without subsidiaries, accounting for an investment that 
gives the investor significant influence can differ between IASC-
based financial statements and U.S. GAAP-based financial statements:
     IAS 28, Accounting for Investments in Associates, 
permits investments in associates to be measured using the equity 
method, cost, or fair value in the financial statements of entities 
without subsidiaries and requires disclosure of what would have been 
the effect had the equity method been applied. APB Opinion No. 18, 
The Equity Method of Accounting for Investments in Common Stock, 
requires the use of the equity method regardless of whether an 
entity has subsidiaries.
    Joint ventures. An enterprise following IASC standards has a 
choice in accounting for investments in joint ventures, whereas U.S. 
GAAP specifies a single method:
     IAS 31, Financial Reporting of Interests in Joint 
Ventures, permits use of either the equity method or proportionate 
consolidation method of accounting for interests in corporate joint 
ventures. Opinion 18 generally requires the use of the equity 
method.
    Intangible assets. Like the choice for subsequent measurement 
for property, plant, and equipment under IAS 16, enterprises 
following IAS 38 can choose to revalue certain intangible assets:
     IAS 38 provides two methods for subsequent measurement 
of an intangible asset. The first requires that an acquired or 
internally generated intangible asset be carried at amortized cost 
less any accumulated impairment loss. That method is similar to 
accounting required by U.S. GAAP. The second method allows an 
intangible asset that has an active market to be revalued at regular 
intervals. U.S. GAAP does not permit revaluation accounting for 
intangible assets.

4. Lack of Requirements or Guidance

    Comparability also is impacted when either the IASC standard or 
the closely related U.S. GAAP addresses an accounting area or class 
of transactions not explicitly addressed by the other. For example, 
U.S. GAAP provides guidance for a number of specialized industries 
and specialized transactions that are not specifically addressed in 
IASC standards. IASC standards currently lack guidance for the 
unique aspects of insurance and rate-regulated enterprises; not-for-
profit entities; the extractive (for example, oil and gas), health 
care, and entertainment industries; agricultural and forest 
products; and employee stock-compensation plans.\58\
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    \58\ The IASC currently has projects on its agenda to address 
accounting issues related to insurance enterprises and agriculture.
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    Although U.S. GAAP in total addresses more topics than IASC 
standards do, several IASC standards address topics that are not 
covered by U.S. GAAP. Many of those are topics in which IASC 
standards provide definitions of terms that are not explicitly 
defined in U.S. GAAP or that relate to display or disclosure 
requirements not specified in U.S. GAAP.\59\ There are some topics 
identified in IASC standards that provide recognition or measurement 
guidance not found in U.S. GAAP. For example, IAS 20, Accounting for 
Government Grants and Disclosure of Government Assistance, provides 
accounting standards for government grants and other forms of 
government assistance to business enterprises in a single standard. 
No U.S. standard comprehensively addresses that topic.
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    \59\ While those items may not be addressed explicitly in U.S. 
GAAP, in some cases the IASC guidance is similar to established 
practice in the United States.
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    Other examples of areas in which one standard provides guidance 
but the other does not follow.

[[Page 8914]]

    Inventories. IASC standards provide guidance in the areas of 
disclosure and accounting for the inventories of service providers. 
U.S. GAAP does not. U.S. GAAP provides specialized guidance on 
inventories related to the motion picture, software, and 
agricultural industries. IASC standards do not.
    Accounting changes. IASC standards do not provide recognition 
guidance for changes in reporting entities. U.S. GAAP does.
    Income taxes. U.S. GAAP provides guidance for aspects of income 
tax accounting related to (1) measurement of income taxes when there 
are different tax rates for distributed and undistributed income, 
(2) measurement of deferred income taxes in tax jurisdictions that 
have alternative minimum tax systems, and (3) accounting and 
disclosure of income taxes in the separately issued financial 
statements of an entity that is a member of a group that files a 
consolidated tax return. Those areas are not specifically addressed 
in IASC standards.

5. Other Differences

    Some other specific differences between IASC standards and U.S. 
GAAP affect the basis for presentation of information contained in 
the financial statements. Those differences occur in the areas of 
business combinations, consolidation policy, presentation of 
financial statements, segment reporting, and certain transition 
provisions. Each of those is an area in which a different approach 
to preparing financial information is possible, and that has 
implications for the recognition, measurement, display, or 
disclosure of an entire class of transactions or events, rather than 
a single line item. The differences between IASC and U.S. accounting 
standards in those areas can result in pervasive differences in the 
information contained in the financial statements that generally are 
difficult, sometimes impossible, to compensate for with other 
information. Those examples are discussed below.
    Business combinations. A business combination that is accounted 
for as a pooling of interests is reflected in subsequent financial 
statements by combining the financial statement items (including 
asset, liability, and equity items) of each enterprise, for the most 
part, at their existing carrying amounts. Under both IAS 22 and 
Opinion 16, if a business combination does not qualify as a pooling 
of interests, it must be accounted for under the purchase method. 
Under the purchase method, the subsequent financial statements of 
the acquirer will reflect the allocation of the purchase price (cost 
of acquisition) to the identifiable assets and liabilities acquired 
and any resulting goodwill (or negative goodwill) that arises from 
an excess of the cost of acquisition over the acquirer's interest in 
the fair value of the identifiable assets and liabilities acquired 
(or any excess of the acquirer's interest in the fair value of the 
identifiable assets and liabilities acquired over the cost of 
acquisition).
    Under IAS 22, inability to identify the acquirer in a business 
combination is the overriding condition that must be met to use the 
pooling-of-interests method. In contrast, U.S. GAAP requirements 
specify 12 conditions that must be met in order for an enterprise to 
use the pooling-of-interests method to account for a business 
combination. If the 12 conditions are met, the pooling-of-interests 
method is required. It is likely that fewer business combinations 
would qualify to use the pooling-of-interests method under IAS 22 
because an acquirer can be identified in most combinations. As a 
result, most business combinations would be accounted for by the 
purchase method under IAS 22.
    The effects of using the purchase method under IAS 22 for a 
business combination that would qualify for the pooling-of-interests 
method under Opinion 16 would prove extremely difficult, if not 
impossible, to identify from financial statements. Further, many of 
the differences in application of the two standards would have 
lasting effects, that is, comparability (of what are otherwise 
similar transactions) could be impaired for long periods of time as 
a result of the long-term or even permanent nature of many of the 
differences. (The same can be said for any comparison of financial 
statements in which one enterprise uses the purchase method of 
accounting and the other uses the pooling-of-interests method, 
whether IASC standards or U.S. GAAP is used.) The issue is 
compounded by the fact that much of the information that might be 
useful for assessing similarities and differences (for example, 
footnote disclosures containing purchase price information) would no 
longer be presented after a limited number of years. \60\
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    \60\ The FASB has a project on its agenda to reconsider the 
existing standards on accounting for business combinations. Changes 
to the existing requirements that will reduce differences between 
IASC standards and U.S. GAAP in the accounting for business 
combinations are likely to result from that project. For example, 
the FASB has reached a tentative conclusion to require use of the 
purchase method for all business combinations.
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    Consolidation policy. In general, consolidated financial 
statements combine, line item by line item, the assets, liabilities, 
equity, income, and expenses of a parent company and its 
subsidiaries with adjustments for certain items that relate to 
transactions and balances between component companies of the 
consolidated group. Under both IASC standards and U.S. GAAP, the 
basis for determining whether to include an entity as a subsidiary 
in the consolidated financial statements is control. However, 
whereas IAS 27, Consolidated Financial Statements and Accounting for 
Investments in Subsidiaries, defines control, U.S. pronouncements 
have focused on ownership of a majority voting interest. Thus, in 
the United States, preparation of consolidated financial statements 
primarily has been based on an ownership criterion--majority of the 
voting interest--rather than on some other criterion to assess the 
presence of control. It is likely that more entities would qualify 
for consolidation under IAS 27 because of the IASC's emphasis on 
control rather than on ownership of a majority voting interest. \61\ 
The presentation and content of informatin provided in the 
consolidated financial statements related to entities in which the 
parent company has an interest will differ significantly from that 
which would have been presented if the entities had not been 
consolidated.
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    \61\ The FASB has a project on its agenda to reconsider the 
existing standards on accounting for consolidations. The February 
1999 FASB Exposure Draft, Consolidated Financial Statements: Purpose 
and Policy, proposes a definition of control similar to that in IAS 
27 as the basis for consolidation.
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    Presentation of financial statements. IAS 1, Presentation of 
Financial Statements, provides guidance for determining whether it 
is necessary for an enterprise to depart from applying IASC 
standards in order to achieve fair presentation. If an enterprise 
determines that compliance with one or more IASC standards would 
result in the selection and application of an accounting policy that 
would result in misleading financial statements, it must depart from 
the IASC standard (or standards) and select an alternative 
accounting policy. Similar guidance is found in U.S. auditing 
standards. However, while the requirements for departure from 
standards may appear similar between the IASC approach and U.S. 
approach to achieving fair presentation, the application may differ 
due to conceptual differences between the two approaches.
    Under the IASC approach, fair presentation may be interpreted as 
a concept that overrides IASC standards because, in some 
circumstances, fair presentation can only be achieved by departure 
from IASC standards. The concept of fair presentation, therefore, is 
not confined by reference to a particular accounting standards 
framework. Those enterprises following IASC standards that determine 
that a departure from IASC standards is necessary may instead use a 
different standard, for example, a standard that is part of the set 
of national standards of its own country, if it is consistent with 
the IASC Framework for the Preparation and Presentation of Financial 
Statements. Under the U.S. approach, the notion of fair presentation 
exists only by reference to U.S. GAAP and is achieved by adhering to 
U.S. accounting standards and practices. As a result, in the United 
States, the departure itself is presumed misleading and inaccurate. 
That presumption must be overcome by demonstrating and disclosing 
the need for a departure. In practice, departures from U.S. GAAP are 
almost nonexistent. In other countries, departures from domestic 
GAAP requirements have been much more common. Thus, there is the 
possibility that the interpretation of fair presentation in the 
context of IASC standards versus fair presentation in the context of 
U.S. auditing standards would differ. The impact of that difference 
likely would vary on a case-by-case basis.
    Segment reporting. A significant difference between IAS 14, 
Segment Reporting, and FASB Statement No. 131, Disclosures about 
Segments of an Enterprise and Related Information, relates to the 
process the standards prescribe for identifying reportable segments. 
Under IAS 14, specific requirements governing the format and content 
of a reportable segment provide the basis upon which all reportable 
segments are identified. An enterprise must comply with

[[Page 8915]]

those requirements regardless of the form and content of information 
provided by an enterprise's internal financial reporting system 
(although IAS 14 presumes that the enterprise's internal reporting 
system ``normally'' would provide the information necessary to 
comply with IAS 14's requirements). In contrast, Statement 131 
adopts a management approach that relies on the form and content of 
information provided by an enterprise's internal reporting system 
for identifying reportable segments. The management approach 
requires an enterprise to report those segments whose operating 
results are regularly reviewed by the enterprise's chief operating 
decision maker. Segments reported under IAS 14 and Statement 131 
would be comparable if an enterprise chose to construct its internal 
information systems so as to comply with both standards. Otherwise, 
significant noncomparability can result between the primary segments 
identified under IAS 14 and the operating segments identified under 
Statement 131.
    Beyond identification of reportable segments, fundamental 
differences between the IAS 14 approach and the Statement 131 
approach have implications for the measurement of reported segment 
information, even if the segments identified under IAS 14 and 
Statement 131 are comparable. For example, IAS 14 requires that an 
enterprise report ``a measure of segment result'' for each segment 
using the same basis of measurement (that is, accounting policies) 
used in the consolidated financial statements. Statement 131 
requires disclosure of ``a measure of profit or loss.'' The measure 
of segment profit or loss disclosed in the financial statements is 
the measure reported to the chief operating decision maker, even if 
that measure is on a basis that differs from the basis used in the 
consolidated statements. As a result, it is unlikely that the 
measure of profit or loss disclosed for a particular segment by an 
enterprise following Statement 131 would be the same as the measure 
of segment result that would have been disclosed had the same 
enterprise followed IAS 14. As with identification of reportable 
segments, unless internal information systems are designed to comply 
with both standards, segment disclosures of enterprises following 
U.S. GAAP would differ significantly from those of enterprises 
following IASC standards. Further, more diversity also is likely 
among enterprises following Statement 131 than among those following 
IAS 14 because of the differences in approach.
    Transition provisions. Although not always likely to create 
permanent differences, transition provisions are one area that may 
cause some comparability difficulties when comparing financial 
statements both among enterprises following IASC standards and 
between those following IASC standards and those following U.S. 
GAAP. That is particularly true for the transition provisions that 
relate to the IASC standards that were revised as part of the core 
standards project because a number of them are not yet effective and 
the effects of transition have not yet been reported in financial 
statements. The effects of transition are to be expected for those 
enterprises applying an IASC standard for the first time; however, 
transition issues can also arise for those enterprises that followed 
IASC standards issued prior to the core standards project when they 
adopt the revised standards that cover the same area.
    For example, the transition provisions in IAS 22 (1998) require 
that IAS 22's new requirements be applied retrospectively. However, 
that requirement is more limited than it appears. That is because 
when IAS 22 was first revised in 1993, its transition provisions 
encouraged, but did not require, retrospective application 
(restatement). If not applied retrospectively, the balance of any 
preexisting goodwill was required to be accounted for in accordance 
with the revised standard from the date it was first effective. As a 
result of the transition provisions in the 1993 version of IAS 22, 
goodwill that arose on a business combination consummated prior to 
January 1, 1995, and that was written off against equity (as 
permitted by the original IAS 22 (1983)) would never be reinstated.
    There are other areas, such as leases and employee retirement 
benefits, in which transition provisions can have various effects on 
comparability. The problem is compounded by certain U.S. standards 
that also provide for long periods of transition accounting (for 
example, FASB Statement No. 87, Employers' Accounting for Pensions). 
The effect of different transition requirements can vary from one 
standard to another and may relate to timing, recognition, 
measurement, and disclosure. Thus, financial statement users should 
be aware of the potential for comparability issues related to 
transition and should refer to individual standards to gain a better 
understanding of specific differences.

Summary

    There are differences between the accounting requirements of 
IASC standards and those of U.S. GAAP. The examples provided above 
illustrate several differences in five broad categories: 
recognition, measurement, alternatives, lack of requirements or 
guidance, and other differences. The resulting differences in 
reported financial information can be very significant from both a 
conceptual standpoint and a practical standpoint. Issues related to 
whether to recognize and how to measure items in the financial 
statements are among the most fiercely debated by standard setters. 
For financial statement users, compensating for the types of 
differences illustrated above is likely to be difficult because the 
information necessary to reconcile them may not be available. Some 
of those differences may be temporary--for example, differences in 
the timing of recognition may be short-term--while others may be 
permanent--for example, differences in accounting for a business 
combination can have indefinite effects on financial statement 
comparability.
    There are less-significant types of differences between IASC 
standards and U.S. GAAP that are not discussed above that can make 
financial statement analysis and comparison complicated. For 
example, differences in presentation and display of similar items 
may require additional effort by financial statement users in making 
comparisons, and differences in definitions can lead to reported 
items that appear to be similar but may, in fact, be different. 
Those types of differences also are identified in the comparative 
analyses that follow.
    Identifying all of the reasons why IASC standards and U.S. GAAP 
differ would be impossible. However, some of the reasons for the 
differences can be traced to the characteristics of the standard 
setters themselves. Although both the IASC and the FASB are 
concerned with improving the quality of financial reporting and 
increasing international comparability, they focus on different 
financial reporting environments. With FASB's primarily domestic 
focus, FASB standards overall tend to be fairly detailed, responding 
to the complexities of the U.S. economic environment and a demand 
from sophisticated financial-statement users for reliable, high-
quality financial information. IASC standards, on the other hand, 
respond to a variety of national perspectives about what financial 
information is the most relevant and reliable for a particular 
topic.\62\ Consequently, the IASC develops standards without 
focusing on any particular economic environment, which may 
contribute to the tendency of IASC standards to be more general. 
That generality may be an inevitable characteristic of international 
standards, and additional guidance at the national level may 
continue to be necessary even in those nations that use IASC 
standards as national standards.
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    \62\ Because the development of IASC standards and U.S. GAAP 
results from different objectives and processes, a qualitative 
assessment of the positive or negative impact of differences depends 
on the context in which the standards are intended to be applied. 
For purposes of the project, the U.S. capital market was chosen as 
the appropriate context for assessing the differences between IASC 
standards and U.S. GAAP. A similar project undertaken in a different 
country likely would make its comparison in the context of that 
country's capital market.
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    The existence of differences between accounting standards and 
resulting reported financial information is less important than the 
extent to which the reported financial information meets the demands 
of its consumers, that is, the financial statement users, in the 
market in which the information is provided. That should be the 
basis for assessing the acceptability of IASC standards for use in 
cross-border securities listings in the United States. Nonetheless, 
the observations about differences between IASC standards and U.S. 
GAAP in this and the chapters that follow provide a starting point 
for making that assessment by comparing IASC standards to those that 
have been developed with the objective of meeting U.S. capital 
market needs.
    After a discussion of the methodology and significant 
considerations used in undertaking the project, the remaining 
chapters in this report provide comparative analyses of specific 
IASC standards and their related U.S. GAAP counterparts.

[FR Doc. 00-4217 Filed 2-22-00; 8:45 am]
BILLING CODE 8010-01-P