Financial Reporting IASC Round Table
John House
- Stig Enevoldsen, outgoing IASC chairman;
- Jochen Pape, German delegation and PwC partner;
- Kean Keller, French delegation and representative of APEFHC, the French Association for accounting standards harmonisation;
- David Damant, representing the International Council of Investment Associations;
- Karel van Hulle, EC head of financial information and company law;
- Malcolm Cheetham, Swiss delegation and Novartis head of group reporting;
- Chair: John House, Accountancy magazine correspondent.
Before it gets down to the business of setting standards, the International Accounting Standards Committee board usually kicks off its meetings by getting up to speed on the latest international developments. In June the board got to grips with two of the most significant developments in the lASC’s history.
In May, the International Organisation of Securities Commissions approved the lASC’s core set of stan.dards. And in the week before the board meeting of the European Commission announced that it plans to require all EU listed companies to use IASs by 2005. At face value these developments may have seemed like a godsend for the IASC, but both have a catch.
lOSCO’s approval of the core set of standards was conditional, advising that regulators should use their discretion on certain principles. The EC’s proposal includes setting up an endorsement mechanism that would screen all lASs for use in Europe.
Karel van Hulle told the board that the EC’s proposal to require all European listed companies to use IASs was «the best news the IASC could receive». But when we look at the EC’s proposal in the context of (a) lOSCO’s condi.tional approval of IAS, and (b) the US Securities and Exchange Commission’s concept release, is there a danger that we could see the development of a number of region.al variations of IAS?
Karel van Hulle: Anybody who reads our communication will see that we are proposing that the EU adopt global standards. We believe that if we can participate in the elaboration of these standards our views will have been taken into account before standards come through the endorsement mechanism.
We all heard Sir David Tweedie’s criticisms earlier in the week, and those criticisms were backed up by the Australians. Can I get the response from the Europeans?
Stig Enevoldsen: Basically it speaks for itself. It’s non – EU countries talking about the issue. It’s the Brits and Australians. Unlike most other standard – setters in Europe, Britain has not made the political decision to accept IASs. They have maintained their own way of accounting. For instance, British Airways is the only air.line in Europe that is not comparable with other airlines because it is not allowed to comply with IASs like all the rest. The other EU countries have shown the courage to move towards IASs. So now the UK should give up its reservations and move in the same direction.
Jochen Pape: I think the communication is not clear an we need some clarification. One of the endorsement mechanism’s inherent problems is the technical side – you get a group of technical experts together they w have different views.
I think it is important that they are informed about the IASC board process and will not look for their own technical preferences. That I believe is the danger. And secondly I do not understand how the political endorsement process will work. I think there needs to be clarification of how it will work.
Van Hulle: I think our communication is quite clear on the first point. And it clearly says that we will develop linkage with the IASC. The political level could be very helpful if what you suggest actually happens and the technicians get carried away. The political tone of the communication is quite clear – we want global standards. And if necessary the political people will say to the technicians: «Let’s not get carried away.» So in that sense a political element actually helps.
The political level is going to be a committee, and in my experience of EC work, if the technical people do good a job, I do not see why political people will interfere. But you need to have the political level for legal certainty. The business community wants to know they can stick to what comes out of the mechanism.
Enevoldsen: Are these people going to be political «politicians» or accounting «politicians»?
Van Hulle: No, it’s not going to be ministers; that’s not the way these things operate. It will be people from each member state who have certain responsibilities in the area of financial reporting who receive delegation from ministerial level.
Malcolm Cheetham: When the proposal is approved h the council of ministers in July and by parliament in late September, we should hear repeated what you’ve bee telling us. It should be confirmed that the technical endorsement level is an input mechanism but not a new standard – setting mechanism. I hope that you could do all you can to get those outputs.
Van Hulle: Well, we will certainly do that.
Enevoldsen: I think it’s quite an elegant solution in the way that it reconciles the legislative nature of European accounting law with the IASC as an international private sector body. The endorsement mechanism could also be used as a model for other jurisdictions wishing to adopt IAS.
So do you see the endorsement mechanism as a step on the road to implementing global standards? Is this a tem.porary measure to establish international standards, which at some point in the future will become unnecessary?
Enevoldsen: It’s always difficult to phase out legislative procedures. But in Denmark we have a legislative endorsement mechanism. Standards are put out by the private sector and have to be approved by the stock exchange. But very quickly it became a formality.
Pape: Karel, if the endorsement mechanism is not going to alter standards, why doesn’t the EC approach this in a different way? It would make more sense to accept IAS but have a mechanism that would intervene if a new standard is judged to be inappropriate.
Van Hulle: Jochen, that’s what the communication says. And that’s why it’s called an endorsement mechanism. You start from the principle that you endorse technical work and due process. If the IASC does not respect the due process system, then the endorsement might actual.ly stop the standard.
Can we pay some attention to the possibility of regional standards developing in the US or Asia?
David Damant: The International Council of Investment Associations, which is the delegation of which I’m a member, has looked at this in detail. It’s unrealistic to expect that countries and regions will not have an inter.face mechanism, or endorsement mechanism, in every part of the world. If you look at the US it exists already, with the SEC. In the UK there is a Review Panel.
But as several people have already said, the interven.tion on the technical level would probably be very limit.ed. SEC officials have said that there must be some sort of international regulation to enforce LAS. But in the absence of that, which would take some time to achieve, we’re going to have to have these local checks.
Cheetham: I think that regional variations will arise, not on the basis of whether a given standard is accepted or not, but in the interpretation of a given standard. And in that sense I do see a danger that stock exchanges will dif.fer on their interpretation of standards.
How will European compani-es, inside and outside of the EU, be affected by (a) lOSCO’s conditi-onal approval of IAS and (b) the EC’s proposal to adopt IAS?
Cheetham: Switzerland at the moment has the greatest number of large IAS – using companies. And there is a debate at the moment in Switzerland as to whether we should use IAS or whether we should go over to US GAAP.
After hearing about the endorsement proposal I know that my company and a number of other large Swiss companies would be more inclined to stay with IAS.
How is it going to affect companies such as BASF, which changed its consolidated accounts from IAS to US GAAP so it could list on the NYSE?
Pape: As far as companies in Germany are concerned, I would agree with what Malcolm said. Companies will stay with IAS unless they have short – term special inter.ests. Some companies are looking for acquisitions in the US where they would like to have financial statements that are easily transferable to the US capital markets.
Cheetham: Novartis completed its US listing a month ago and we had to go through the costly exercise of making a bridge to US GAAP. It introduced a lot of complications in acquisition accounting. It didn’t result in our share price moving at all, and I don’t see that it was of any real value to the business community. We’ve made this comment in our response to the SEC concept release.
Damant: The question of whether to use IAS or US GAAP is a short – term consideration. If the new IASC structure is successful, you can expect a fairly rapid convergence of the two systems. I cannot see a big new standard com.ing out now that is not identical, and in seven years it’s possible that there won’t be a dilemma.
Jean Keller: In France, we have had a conservative atti.tude towards IAS. There has also been some difficulty in implementing recent standards. So many companies using IAS in the past moved to national standards this year. But I think the EC communication will change that picture completely.
If the communication becomes reality, the decision will be easy, because we will have no choice. I think that most French companies will move to IAS in the next three to four years.
Enevoldsen: The EC’s proposal is going to create enor.mous change for the majority of companies in Europe, not just the international companies that are using IAS or US GAAP. So I don’t think we should underestimate what a tremendous step forward this is for European accounting.
It’s important to understand what will happen if we stay with the status quo. If we don’t get a strong capital market in Europe that is strongly regulated, capital will not be available at lower costs and we will not be able to compete with the US market. The big companies need sophisticated capital markets where they can not only get share capital but also sophisticated debt instruments.
And if we don’t develop a market that can compete with the US, then we will have a situation where we have one big American market and all the others will become peripheral.
Do you think that there is a need for a regulation to ensure that companies and auditors apply IAS correctly?
Cheelham: We are seeing that regulators are rapidly form.ing their own interpretations of standards because there is a vacuum. Some of the more complex standards are actually coming in this year. As I’ve said before, we need more guidance on some of these standards from the lASC’s Standing Interpretations Committee. If the IASC doesn’t give a clear direction then regulators will. And I would welcome the IASC’s guidance, whether it’s the SIC or another mechanism.
Van Hulle: The endorsement mechanism will help com.panies apply LAS. And that’s why we say in the communication that there should be a linkage with the SIC. The SIC cannot possibly deal with the complexity of the whole world. I’m hoping the endorsement mechanism will also operate with FESCO, the European regulators’ organisation, and the IASC to make sure that there are not 15 different types of IAS.
But enforcement on the other hand is a very difficult issue, because enforcement involves both interpretation of standards and auditing. And there’s also a question of what do you do if a company fails to respect the rules? The auditor might not pick it up. Or he does, but he doesn’t do anything. Then I think that it is important that the regulators should find a mechanism to ensure that companies know that if they don’t respect the rules then something is going to happen. Which at present is not the case in Europe.
Pape: I’m not sure that interpretation should fall to the endorsement mechanism. The SIC should have respon.sibility for this; it is already part of the IASC and has responsibility for interpreting IASs. I think the SIC should double its resources to cope with the demand for useful interpretations.
Van Hulle: I must disagree with that. There are thousands of issues that arise all the time and you cannot expect the SIC to cope with all these things. What is very important is that we want an efficient European capital market with comparable financial statements. The last thing we want is a move to a single set of standards that is applied in dif.ferent ways in different countries. We need to help com.panies. We need to help the profession and we need to help the regulators. We must look at this multitude of problems together.
Cheetham: So should the guidance come from the major accounting firms or from…
Van Hulle: … from the endorsement mechanism. The endorsement mechanism will comprise the preparers, the users, the standard – setters and the regulators. That’s the proper way to do it.
Cheetfiam: I think that it will help if the guidance has the lASC’s official blessing. I’m not sure that I would want the EU itself to be issuing the guidance.
Enevoldsen: We have to be open to what’s in the proposed mechanism to see how it will ensure that we don’t get a European IAS. But Karel is talking about giving guidance, helping implementation, and propping up regulators. It’s a difficult balance to strike. I agree with Jochen, we should look to the SIC for assistance on these matters. On the other hand there is a lot to do. So let’s find a way for Europeans to strike the balance that ensures that we’re all on the same path towards the same objective.
Damant: It’s important to put this into perspective. We have a situation now. But in three or four years we’ll have a different situation. The capital markets will realise that they’re not dealing with 75 different types of financial state.ments, they’re dealing with two. And at that point the inter.national investors will become intolerant of variations. So the countries that haven’t moved on will be left outside.
So what you’re saying is, that market forces will actually prevent regionalisation from taking place. Is this the gen.eral feeling around the table?
Damant: Despite what I said, there’s still the problem of interpretation. Even the most eager company might still be unclear on specific points. And these problems could be resolved by the SIC or the IASC.
Cheetham: As a company with operations in different jurisdictions, the last thing we want to be in is a techni.cal debate between the US regulator and a Japanese or European regulator. We need assurances that we will have a level playing field. We can’t wait for problems to resolve themselves over a number of years.
Damant: And I’d come back to my point that the capital markets at this point may not be too intolerant of com.panies which file IAS variations. But very quickly the degree of tolerance will decline. And this will be a warn.ing to those countries that still think they’re going to set national accounting standards. In three or four years’ time, countries that think they’re going to be setting national standards will realise they’ve gone down the wrong route.
Pape: I understand the communication refers just once to companies using US GAAP Are you assuming that in five years’ time IAS will be fully accepted in the US? Is that the kind of expectation you have?
Van Hulle: Well, to answer your first point, we don’t deal specifically with US GAAP because we don’t consider it to be different to national GAAP We hope that by 2005 every company in Europe, whether they are listed com.panies or not, will be either using IAS, or directives that have converged with IAS.
What will happen in the US between now and then will largely depend on what happens in Europe. What Stig is saying is that if an efficient capital market comes about in Europe, the Americans will look at IAS differ.ently. If we can establish a market of transparent infor.mation, where people can rely on reports prepared using IAS, then I think the Americans will look at these things differently. And if they don’t, then it will become an issue of political importance.
Enevoldsen: We have talked a lot about Europe today. But it’s a broader issue than that. In Asia, each individual country is setting national standards but moving in the direction of IASs, but application is in no way uniform. If we say we don’t like the individual standards or devia.tions in Europe, then there’s certainly a lot to do outside North America and Europe. There’s very diverse practice outside those two regions and there’s a lot for all of us to do in that respect.
Damant: And in that sense, the point I made about capital markets will have a very powerful effect. If the company’s big enough, whether it likes it or not, regard.less of where it lists, in three or four years’ time it’s going to be told, if you want capital you must apply IAS properly.
This article originally appeared in the Accountancy magazine. The author of this article John House can be reached by e – mail: jhouse@icaew.co.uk.