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Transcript of Ref: CESR/04- - The Gateway to the US Labor viewfrom 2pm till 6pm at the CESR premises (11-13 Avenue...

Ref: CESR/04-

The Committee of European Securities Regulators

Ref: CESR/05-230

Draft

Technical advice

on

equivalence of certain third country gaap

and on

description of certain third countries mechanisms of enforcement of financial information

CONSULTATION PAPER

April 2005

INDEX

INDEX

Paragraphs

EXECUTIVE SUMMARY

1

to

27

INTRODUCTION

A

General context

28

36

B

Regulatory EU background

37

44

C

Mandate of the European Commission to CESR on Equivalence

45

48

D

Organisation of CESR work

49

56

CHAPTER 1

EQUIVALENCE BETWEEN CANADIAN GAAP, JAPANESE GAAP, US GAAP AND IAS/IFRS

Section 1

General principles for GAAP Equivalence

57

117

A

Significant GAAP differences

61

74

B

Global and holistic assessment

75

78

C

Review of general principles

79

79

D

Remedies

80

108

E

Changes to third country GAAP after 1st January 2005

109

117

Section 2

Technical assessment of GAAP Equivalence

118

162

A

Canadian GAAP

120

131

B

Japanese GAAP

132

147

C

US GAAP

148

162

CHAPTER 2

DESCRIPTION OF ENFORCEMENT MECHANISMS IN CANADA, JAPAN, AND UNITED STATES

Section 1

General principles for description of enforcement mechanisms

163

171

Section 2

Description of enforcement mechanisms in Canada, Japan and USA

A

Canada (based on provisional response)

172

250

B

Japan

251

298

C

United States of America

299

357

Annex 1

Relevant Level 1 texts (Prospectus and Transparency Legislations)

Annex 2

Formal mandate to CESR for Technical Advice on the Equivalence between third country GAAP and IAS/IFRS

Annex 3

Final concept paper on equivalence of certain third country GAAP and on description of certain third countries' mechanism of enforcement of financial information (04-509C) (extracts)

Annex 4

List of international standards (IAS/IFRS) and interpretations (SIC/IFRIC) used in the assessment

Annex 5

Financial reporting standards enforceable in Canada, Japan and US

The present draft advice has been released on 28 April 2005 for public consultation. The public consultation will close on 28 May 2005. Responses to consultation should be sent via CESRs website (www.cesr-eu.org) in the section Consultation. In order to give interested parties an opportunity to express their opinion on this paper, CESR will hold a public hearing on 18 May from 2pm till 6pm at the CESR premises (11-13 Avenue de Friedland, 75008 Paris, France).

Executive summary

SUMMARY OF CESR ADVICE ON EQUIVALENCE

1. CESR has completed its assessment of the equivalence of Generally Accepted Accounting Principles (GAAP) in the US, Canada and Japan (together the third-countries) with International Financial Reporting Standards (IFRS) in accordance with the mandate of the European Commission.

2. CESRs advice is that these countries GAAPs, taken as a whole, are equivalent to IFRS, subject to the following:

That companies which have subsidiaries such as Special Purpose Entities (SPEs) which are not consolidated for third country GAAP purposes, but are required to be consolidated for the purposes of IFRS, report a pro-forma balance sheet and profit and loss account on their local GAAP basis, but including the unconsolidated subsidiaries .

That companies reporting under Japanese GAAP which have either accounted for mergers by the pooling of interest method and/or have consolidated subsidiaries on the basis of GAAPs which are not consistent with either IFRS or any of the third country GAAPs, report a pro-forma balance sheet and profit and loss account on the basis of IFRS covering business combinations and consistent accounting policies, respectively.

That Japan and the US adopt accounting policies for the expensing of stock options on a basis equivalent (i.e. not necessarily identical) to IFRS, for implementation on or before 1 January 2007. We understand that Japan is considering proposals to adopt such a standard according to this timetable and that the US has recently adopted such standard that will in most cases be applicable as from 2006.

That in respect of certain specified IFRS and if applicable, in addition to the above mentioned remedies, there be additional disclosures of sometimes a descriptive nature and sometimes a quantitative nature.

3. The need to apply these remedies on a company level should be judged by the issuers and their auditors on the basis of whether they are material to the financial position of the company and so would be significant for the purposes of investors.

4. CESR considers the rigorous application of remedies at a company level critical for the investor and recommends to the European Commission to determine a proper assurance level to be provided by the auditor to the financial statements.

5. CESR notes that the scope of its mandate is limited to advise on equivalence and to describe enforcement mechanisms in each of the third countries. CESR would, however, like to emphasise that an assessment of the standards alone will not be sufficient to determine equivalence, or to afford appropriate protection of investors. Filters in place for the interpretation and application for the standards, such as corporate governance, auditor oversight and appropriate enforcement mechanisms in the home country of the issuer (which may or may not be one of the third countries referred to above) together with similar filters at a company level, are essential. CESR conclusion on equivalence is therefore based on the assumption that the above-mentioned filters on country as well as company levels, including internal control, are in place and functioning.

6. CESR advises that there should be no remedy of reconciliation between Canadian GAAP, Japanese GAAP, US GAAP and IFRS. CESR considers that a combination of qualitative and quantitative disclosures give better information to investors on the issues it has identified through the technical assessment of equivalence of these three third countries GAAP.

7. It is important to emphasise that CESRs assessment of equivalence is based on real world outcomes of investor behaviour and is separate from other initiatives such as IASB convergence projects with the three countries considered and discussions, at a political level, concerning mutual recognition. However, CESR is aware that each of the third countries is considering its policies concerning SPEs and we would urge them to bring these to a conclusion as quickly as possible so that the need for any supplementary statements may be eliminated altogether. CESR also recognises the recently agreed convergence project between the IASB and the Accounting Standards Board of Japan, which builds on the considerable progress, made already in the accounting framework in Japan, and would recommend that accounting for business combinations and group consolidations be identified as early priorities. CESR is also aware that the Canadian accounting standard setter (AcSB) is also envisaging convergence with IFRS as part of a strategic plan that would allow a wider use of IFRS in Canada within the next five year.

8. On 22 April 2005, top officials of the European Commission and the US Securities and Exchange Commission (SEC) met in the context of the EU-US Financial Market Regulatory Dialogue and discussed a roadmap setting out the steps necessary for the US SCE to eliminate US GAAP reconciliation requirements for foreign issuers that make use of IFRS for reporting purposes in the US. The stated objective is to allow elimination of the reconciliation requirements as early as possible, but no later than 2009. CESR greets this announcement and supports the efforts of both the EC and the US SEC to seek convergence of regulatory approaches that are in the interest of all markets participants, and for fostering the convergence towards high-quality international accounting standards.

DETERMINATION OF EQUIVALENCE DESCRIPTION OF ENFORCEMENT MECHANISMS

9. CESRs outcome-based approach to the GAAP equivalence, as a form of direct comparison of standards, has been predicated on the basis that investors decision should be unaffected by the use of different accounting standards when assessing their buy, hold, sell investment decision. By analysing and evaluating financial information based on third country GAAP, investors should be able to make similar decisions irrespective of whether they are provided with financial statements based on IFRS or not. This outcome based definition of equivalence combined with how the market reacts to accounting differences are considered particularly relevant in the assessment of significance.

10. As explained in detail in a Concept Paper published earlier, the approach followed by CESR was to assess whether there are significant differences between third country GAAP and IFRS. Differences considered are those commonly found in practice or known to be significant as such by the financial and audit community in Europe and in third countries. This method for assessing comparison of GAAP can also be described as a direct comparison of standards and it avoids complications introduced by differences in how