Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DCÿ 20549-0609

Dear Mr. Katz:

This letter is in response to the request for comment on the Securities and Exchange Commission (SEC) Concept Release, "International Accounting Standards," File No. S7-04-00 (the Concept Release).ÿ We commend the SEC for its ongoing efforts to uphold the quality of financial reporting domestically while encouraging the development of a high-quality global financial reporting framework, and we appreciate the opportunity to respond to the Concept Release.ÿ

The views expressed in this letter are supported jointly by the Financial Accounting Standards Board (FASB) and the Trustees of the Financial Accounting Foundation (FAF).[1] Because the FAF does not involve itself in standard-setting matters of a technical nature, this jointly issued letter expresses the FAF's and FASB's views only on nontechnical matters. The FASB is providing a separate comment letter that includes a more comprehensive response to other issues and to individual questions posed in the Concept Release. Although that comment letter reaches a conclusion about the conditions for acceptance of IASC standards similar to the conclusion in this letter, the FAF is not commenting on any views expressed in the FASB's separate comment letter.

The FAF and FASB are committed to the objective of increasing international comparability while maintaining the highest quality accounting standards in the United States.ÿ Our position on that topic is set forth in a report, International Accounting Standard Setting: A Vision for the Future, issued jointly by the FAF and the FASB (the FAF-FASB Vision report). ÿThere is a strong and growing demand for high-quality, internationally comparable financial information that capital providers find useful for decision making in global public capital markets.ÿ Ideally, that demand would be satisfied by use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.ÿ The FASB continues to work with the International Accounting Standards Committee (IASC) and with other standard setters in an effort to converge national and international standards while improving the quality of financial reporting worldwide.ÿ Our comments reflect our commitment to the objective and goals in the FAF-FASB Vision report.

Introduction

The Concept Release seeks input to determine under what conditions the SEC should accept in U.S. markets financial statements of foreign private issuers (foreign issuers) that are prepared based on standards promulgated by the IASC. We acknowledge that the IASC has made significant improvements to many of its standards as a result of its core standards project and that an increasing number of countries and international organizations have expressed support for use of the IASC core standards for cross-border filings. We also appreciate the salience of the SEC's consideration of the IASC core standards.ÿ The SEC's conclusions about the conditions for acceptance of those standards may affect, for example:

1.ÿÿÿÿÿ The extent to which those standards are used worldwide

2.ÿÿÿÿÿ The extent to which an appropriate infrastructure will develop to support their use

3.ÿÿÿÿÿ The nature of the restructured IASC's agenda priorities

4.ÿÿÿÿÿ The future agenda priorities of other standard setters that are working with the IASC to converge national and international standards to achieve the highest quality international solutions.[2]

There seems to be an unfortunate perception on the part of some that the future of the IASC as an organization is in some way contingent upon the SEC's conclusions about the acceptability of the core standards in their current form for use without reconciliation by foreign issuers listing in the United States. Regardless of the SEC's conclusions, we believe that more widespread use of IASC standards outside U.S. markets is desirable and that the IASC, once restructured, will play an increasingly important role in the evolving global financial reporting infrastructure. As we have publicly stated on many occasions, we support the restructuring of the IASC and believe the IASC will help in leading efforts to converge national and international accounting standards. Further, there will continue to be a prominent role for the IASC as emerging-market countries look to IASC standards as a basis for developing their own standards and as member states of the European Union increasingly consider IASC standards for use in European capital markets. The success of the restructured IASC will be vital to the continued development of a single set of high-quality international accounting standards and to the successful evolution of a high-quality global financial reporting infrastructure.ÿ

Although the future of the IASC is bright, conclusions about the acceptability of the IASC's core standards for use in U.S. markets must be reached in the present, amid a number of competing national and international perspectives and in an environment in which the elements of a global financial reporting framework are in various stages of development.ÿÿÿ The SEC's decision, while it may weigh heavily outside of the United States, must ultimately be in the best interests of U.S. investors participating in U.S. markets-consistent with the SEC's mandate to protect U.S. investors.ÿ Such a decision should be one that benefits U.S. investors by increasing their ability to compare investment opportunities and to make informed investment decisions.

Joint Conclusions of the FAF and the FASB

The Concept Release poses four alternatives to the level of acceptance of IASC standards, three of which would require elimination of some or all of the current requirements for foreign issuers using IASC standards to reconcile their financial statements to U.S. generally accepted accounting principles (GAAP).ÿ Our conclusion about the acceptability of IASC standards for use by foreign issuers in U.S. markets is that the current reconciliation requirements should be maintained, not eliminated.ÿ The factors we considered most significant in arriving at that conclusion are:

úÿÿÿÿÿÿÿ Convergence.ÿ As stated in the FAF-FASB Vision report, we are committed to (1) ensuring that international accounting standards are of the highest quality and (2) accelerating convergence of national and international standards to achieve the highest quality international solutions. The IASC shares a similar commitment.ÿ Current reconciliation requirements provide a focal point for the efforts of the IASC and the FASB and a mechanism for measuring progress toward meeting the goals of high quality and convergence.ÿ Removing the requirement that foreign issuers using IASC standardsÿ provide a reconciliation to U.S. GAAP could impede those efforts by removing a powerful incentive to work together toward greater comparability.ÿ

úÿÿÿÿÿÿÿ Comparability.ÿ Regardless of the relative quality of the two sets of standards, there are differences between IASC standards and U.S. GAAP and there are variations in the way IASC standards are applied around the world.ÿ Current reconciliation requirements are intended to help create comparability among foreign issuers using different accounting standards and comparability between foreign issuers that do not use U.S. GAAP as a basis for their financial reports and domestic issuers that use U.S. GAAP.ÿ We believe that a continued reconciliation requirement will assist in creating comparability and will reduce costs that would arise if reconciliation were abandoned.

úÿÿÿÿÿÿÿ The SEC's enforcement role. The early stage of development of a high-quality global financial reporting infrastructure (in particular the lack of a global enforcement mechanism for IASC standards) places a great deal of pressure on the SEC's enforcement role of ensuring comparability and transparency of financial information reported in the United States by foreign issuers using IASC standards. The pressure on the SEC to relax its enforcement role would increase if instead of requiring reconciliation, the SEC allowed variations in the way IASC standards are presently interpreted and applied outside the United States to influence its enforcement decisions.ÿ In contrast, failure to accede to these variations may ultimately place the SEC in the awkward position of establishing a "U.S.-only" version of IASC standards.

Each of those factors can ultimately lead to increased costs to financial statement users-that is, U.S. investors-attempting to compare the investment opportunities available in U.S. markets.ÿ Those factors are discussed in more detail below.

Convergence

It would be ironic if, in an attempt to accelerate the widespread use of IASC standards, their acceptance without reconciliation in the United States actually became an impediment to the process of converging national and international standards.ÿÿ For a number of reasons we are concerned that eliminating the requirements for foreign issuers to reconcile IASC standards to U.S. GAAP could potentially hinder the ability of national standard setters (like the FASB) and the IASC to converge their standards.ÿ The following concerns would arise ifÿ the SEC decided to relax the current reconciliation requirements for foreign issuers that use IASC standards-whether that conclusion extended to one or more standards (or aspects thereof) assessed on an individual basis or to the entire set of core standards assessed as a whole. In particular:

úÿÿÿÿÿÿÿ Absence of a reconciliation requirement can eliminate an important source for identifying and prioritizing areas on which to focus convergence efforts. Both the IASC and the FASB support the objective of developing a single set of high-quality global accounting standards. In the United States, reconciling items tend to arise from differences between the results that are reported based on the standards used by foreign issuers to prepare their financial statements and the results that would have been reported if the financial statements had been prepared based on U.S. GAAP.ÿ A requirement to reconcile helps to identify the primary areas of noncomparability on which national and international standard setters need to focus their convergence efforts in order to achieve the highest quality international solutions.

úÿÿÿÿÿÿÿ Absence of a reconciliation requirement can reduce incentives for the FASB and the IASC to converge their standards. One of the greatest perceived benefits of using a single set of accounting standards worldwide is the concurrent increase in the quality and the comparability of financial reporting.ÿ When two sets of standards are not comparable and there is no requirement to reconcile, the motivation to converge those standards to achieve a single high-quality international solution is likely to be reduced.ÿ Further, without a reconciliation requirement, important information about the quality of one solution relative to another may be lost or obscured. Reconciliation provides a means not only for identifying areas on which to focus convergence efforts, but also for identifying areas in which there are variances in the application or interpretation of standards, that is, areas in which the quality of standards potentially could be improved. In conjunction with the intensifying demand for a single set of high-quality global accounting standards, the reconciliation requirement provides a strong incentive for both the IASC and the FASB continually to evaluate the quality of their respective standards in their efforts to eliminate differences.

úÿÿÿÿÿÿÿ Absence of a reconciliation requirement can make it more difficult to measure the progress of convergence efforts. A reconciliation requirement is a source that can be used in monitoring and evaluating the success of convergence efforts.ÿ To the extent that convergence efforts are successful, there will be a natural decline in the amount and type of reconciling items that prevail when IASC standards are reconciled to U.S. GAAP.ÿ If convergence efforts are not successful, reconciling items may continue or new reconciling items may emerge.ÿ

If the SEC removes reconciliation requirements at this stage, before national standard setters and the IASC have had the opportunity to converge their standards, we fear that a significant motivation for convergence efforts would disappear and that achieving the goal of a single set of high-quality international standards will be pushed even farther into the future.ÿ The failure of the IASC to actively pursue convergence could lead to less support for the restructured IASC and could jeopardize the chances for its success in developing a high-quality global financial reporting infrastructure.

Comparability

Current SEC requirements permit use of IASC standards by foreign issuers as an alternative to using their home country standards in preparing their primary financial statements, provided that an audited reconciliation[3] to U.S. GAAP also is prepared.[4] The present reconciliation requirements provide U.S. investors with a basis for making comparisons among entities regardless of the accounting standards used in preparing the primary financial statements. A lack of comparability-whether it relates to comparing the financial statements of two IASC-based foreign issuers or to comparing IASC-based financial statements to U.S. GAAP-based financial statements-increases the costs and uncertainties related to making informed investment decisions.ÿ In particular:

úÿÿÿÿÿÿÿ Absence of a reconciliation requirement can increase costs to U.S. investors even if IASC standards and U.S. GAAP are judged to be of equivalent quality.ÿ International comparability is cited by many as a primary benefit to be gained by using a set of international accounting standards.ÿ Ideally, the unreconciled financial statements of a foreign issuer prepared based on IASC standards would be of equivalent quality with those of other foreign issuers using IASC standards and with the financial statements of foreign and domestic issuers reconciling to or using U.S. GAAP. However, even if the two sets of accounting standards were of equal quality, there would be differences between them that would create costs in comparing those financial statements.

úÿÿÿÿÿÿÿ Absence of a reconciliation requirement shifts the costs of producing comparable financial information from the preparers of that information to the users of that information and creates uncertainty.ÿ Without reconciliation, the burden of producing comparable information will fall on a group of users (that is, U.S. investors, creditors, and others) that will have to expend resources in order to make the data comparable.ÿ Additionally, differences between reported financial results for essentially similar transactions and events creates uncertainty about the relevance, reliability, and representational faithfulness of those results. Reconciliation to U.S. GAAP helps to create comparability between foreign and domestic issuers, which minimizes the costs to investors of comparing investment alternatives and making informed investment decisions and reduces uncertainty.ÿ

Comparability issues will remain until there is worldwide use of a single set of high-quality international accounting standards.ÿ As the restructured IASC and national standard setters work together to converge standards and develop high-quality international solutions, comparability will naturally increase and investors will reap benefits as they arise, without bearing the costs that would be introduced by eliminating current reconciliation requirements.

The SEC's Enforcement Role

In the FAF-FASB Vision report, we identified a number of elements that would be necessary to support an international accounting system in the future.ÿ Those elements are similar to many of the elements identified in the Concept Release as necessary to a high-quality global financial reporting infrastructure. We continue to believe that in order for a set of high-quality international accounting standards to be used successfully worldwide and the maximum benefits of their use to be comprehensively realized those standards must be supported by an adequate global financial reporting infrastructure.

We observe that many of the various elements of a global financial reporting infrastructure are still in the early stages of development or do not yet exist. In that situation, a conclusion must be reached about the acceptability of IASC-based financial statements for U.S. markets in terms of the current U.S. financial reporting infrastructure. That is, the SEC will necessarily have to evaluate whether methods and means are available in the various nations to ensure the appropriate application and enforcement of IASC standards.ÿ The current lack of enforcement mechanisms in other countries places burdens on the SEC to provide the means of ensuring that IASC standards are properly applied.

We recognize that the SEC has some jurisdiction through its review and comment process to regulate interpretation and application of IASC standards outside the United States when financial statements are prepared by foreign issuers for consumption in U.S. markets. The role that the SEC plays in enforcing accounting standards to ensure comparability and transparency is more proactive than the roles of market regulators in many countries-that is part of the reason that there are variations in the way that IASC standards are presently being interpreted and applied worldwide. To the extent that those circumstances continue, and in the absence of a global enforcement mechanism for IASC standards, we believe that the SEC likely will find itself filling the gap created by the lack of a global enforcement mechanism for IASC standards. That is, by virtue of maintaining its significant interpretive and enforcement role for U.S. markets, the SEC staff will have a significant impact on how IASC standards are interpreted and applied worldwide.ÿ

That situation seems inevitable whether or not the current reconciliation requirements continue.ÿ However, we believe that eliminating the requirements for foreign issuers to reconcile to U.S. GAAP for some or all of the IASC's core standards would exacerbate that situation. Many IASC standards include implicit and explicit alternatives or provide only general implementation guidance.ÿ As such, in the absence of reconciliation, the SEC staff would find itself in the position of deciding on a case-by-case basis which accounting methods in IASC standards are acceptable for financial reporting in the United States-a role that would place it in the position of creating standards on an ad hoc basis.ÿ We do not believe the SEC should be an ad hoc standard setter.ÿ Although the SEC has the legislative authority to assume the role of standard setter, its historical position has been to look to the private-sector to develop and interpret standards through extensive and open due process.

If the lack of reconciliation significantly increases the SEC's interpretive role through its enforcement responsibility, ultimately its interpretations could interfere with the development of a sound, independent international accounting standard-setting process and with the convergence of national and international standards.ÿ That result could come about if the SEC were to approach acceptance of unreconciled IASC standards on a case-by-case basis; that is, an approach that focuses on the acceptability of an accounting standard in the context of a filed financial statement.

A case-by-case approach would carry additional difficulties.ÿ If the SEC were to accept IASC standards without reconciliation and then interpret and accept IASC standards used in a filed document, that acceptance could relate only to the present standard and any applicable interpretations that existed at the time the SEC reached conclusions regarding the document.ÿ The SEC would then be enforcing those standards and interpretations and resolving issues related to alternatives and ambiguities in terms of what the SEC currently found acceptable for foreign issuers listing in the United States.ÿ That approach might place the restructured IASC in a difficult position as it attempts both to improve the quality of its standards and to facilitate the convergence of national and international accounting standards toward the highest quality international solutions. There is the possibility that the IASC would be disinclined to choose to amend or interpret a standard in a way that varies from what has been deemed acceptable for purposes of filing in the United States-even if a different solution would increase the quality and international comparability of reported financial information.

A case-by-case approach could also increase the danger that there would be two (or more) versions of IASC standards-those that are acceptable to the SEC and those that are acceptable in markets outside the United States.ÿ To the extent that the SEC's interpretation and enforcement of unreconciled IASC standards predominated, the SEC would, in effect, become a global standard setter.

Continued reconciliation requirements would allow the restructured IASC to maintain flexibility to interpret and amend its standards without potentially being influenced by the possibility that a particular solution would change a standard's status as acceptable without reconciliation in the United States.

The Overall Objective of the FAF and the FASB

We strongly support the efforts to develop a single set of high-quality accounting standards to be used worldwide within our overall objective of increasing international comparability while maintaining the highest quality accounting standards in the United States. There is much work left to be done in achieving that objective, including work on converging national and international standards and work on developing an adequate financial reporting infrastructure to support their use.ÿ Consequently, we conclude that at this time, elimination ofÿ the current requirements for foreign issuers using IASC standards to reconcile to U.S. GAAP would not move us closer to our goals.

In particular, the results of that conclusion would conflict in some respects with the FAF and the FASB's overall objective.ÿ For example, if the SEC concluded that an individual IASC standard was of a quality equal or superior to its U.S. GAAP counterpart but that standard differed from its U.S. GAAP counterpart, eliminating the requirement for a foreign issuer using that standard to reconcile to U.S. GAAP would decrease the comparability of financial information provided to U.S. investors. Decreased comparability would increase costs to those investors.

We also find it problematic to consider the use of IASC standards by foreign issuers in U.S. markets in the absence of key elements of a global financial reporting infrastructure.ÿ In that situation, there is no ideal solution.ÿ We note that even if the entire set of core standards were accepted without reconciliation, some reconciliation to U.S. GAAP still would be necessary in those cases in which an IASC standard did not address a particular type of transaction, for example, for specialized industry transactions.ÿ Thus, even if the decision were reached to eliminate reconciliation requirements for the IASC's core standards, some reconciliation would continue to be required for at least some foreign issuers that use IASC standards.ÿ

Closing Remarks

We reiterate our support for the IASC's past and future efforts to improve the quality of international accounting standards.ÿ Those standards are only one element of a global financial reporting infrastructure.ÿ Other elements of the global financial reporting infrastructure are not yet sufficiently developed to be relied upon for the rigorous interpretation and application of the IASC's core standards.ÿ Thus, the SEC will necessarily have to rely on the methods and means available within its own jurisdiction with regard to application and enforcement of the core standards, primarily the significant interpretive and enforcement role of the SEC staff.ÿ Maintaining current reconciliation requirements can help to avoid some of the possible implications stemming from the SEC's enforcement role on the future development of international accounting standards and on the convergence of national and international accounting standards.ÿ The current reconciliation requirements facilitate convergence of standards and help to maintain comparability between foreign and domestic issuers.

Those observations are based on the current status of the various elements identified by the SEC as necessary to a high-quality global financial reporting framework and the need for the SEC to continue to carry out its mandate of investor protection. The restructured IASC will be better positioned than its predecessor to lead the convergence of national and international accounting standards and to achieve high-quality international solutions that increase both the quality and the comparability of financial reporting worldwide.ÿ The success of the restructured IASC would be jeopardized if it did not focus on convergence or if its process of interpreting or amending standards was influenced by the SEC's acceptance of unreconciled accounting standards in U.S. markets.ÿ That outcome, which we are concerned could result from eliminating current reconciliation requirements, would impede the ability of national standard setters and the IASC to ensure that international accounting standards are of the highest possible quality and to accelerate convergence of national and international accounting standards.

At the present time, we believe that there is only one conclusion that we can support as an optimal solution to the issues raised in the Concept Release-the SEC should continue to require that foreign issuers that use IASC standards in preparing their primary financial statements also provide full reconciliation to U.S. GAAP. That conclusion is consistent with our vision for international accounting standard setting, in which the ideal outcome is worldwide use of a single set of high-quality accounting standards for both domestic and cross-border financial reporting.ÿ Continued progress toward that outcome will result from pursuing the overall objective of increasing international comparability while maintaining the highest quality accounting standards in the United States. In the meantime, reconciliation would help to minimize costs to financial statement users by helping to create comparability between investment alternatives presented based on different accounting standards.ÿ

We hope that our comments are helpful. We would be pleased to discuss any aspects of our comments at your convenience.

Sincerely,

ÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ

ÿ

Edmund Jenkinsÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Manuel Johnson ÿÿÿÿÿÿÿÿÿÿ
Chairmanÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿ Chairman and President