CESR Final Technical Advice on Equivalence
CESR Final Technical Advice on Equivalence of Certain Third Country GAAP
On July 5, 2005, the Committee of European Securities Regulators (CESR) released its Final "Technical Advice on Equivalence of Certain Third Country GAAP and on Description of Certain Third Countries Mechanisms of Enforcement of Financial Information" (the "Final Technical Advice"). A related press release issued by CESR is available here.
CESR's Final Technical Advice, consistent with the earlier Draft Technical Advice, finds certain third country (Canadian, Japanese, and U.S.) Generally Accepted Accounting Principles (GAAP) "equivalent" to International Financial Reporting Standards (IFRS), "subject to" (except for) certain significant differences requiring disclosure.
The practical impact of CESR's recommendation is that, if adopted by the European Commission (EC) in the European Union (EU), non-EU based companies with listings in the EU may continue filing under the specified third country GAAP and still be found to meet the EU's previously issued Transparency Directive and Prospectus Directive requiring all non-EU companies with listings in the EU to file financial statements in IFRS beginning Jan. 1, 2007. However, such companies will need to provide "remedies" (disclosures) of significant differences from IFRS as set forth in the CESR Final Technical Advice. Differences from IFRS requiring certain disclosures include Qualified Special Purpose Entities (QSPE's), certain consolidation matters, and certain stock option expensing related matters. Other significant differences from IFRS are also identified, although CESR adds the list they provide is not necessarily exhaustive. However, CESR states additional differences are likely to be "exceptional" and they recommend an "early warning system" be conducted to identify if further convergence efforts conducted after January 1, 2005 will result in taking some of the identified "significant differences" off the list.
Some comment letters on the earlier Draft Technical Advice, including the comment letter filed by Financial Executives International's Committee on Corporate Reporting (CCR) and Globalization Oversight Committee (GOC) and others, noted concern that the Draft Technical Advice appeared to require a full reconciliation to IFRS, or maintaining two sets of books (one in IFRS) to meet CESR's recommended disclosure requirements. In response, the Final Technical Advice states, "the described remedies [disclosures] do not require management to keep two sets of accounts for EU reporting purposes (local GAAP and IFRS), nor do they require to provide a full reconciliation to IFRS," and that "there is no need for systematic analysis of all differences between third country GAAP and IFRS." However, companies with filings in the EU and their auditors - who also noted the limited (one month) comment period precluded full analysis of the impact of CESR's Draft Technical Advice - will want to review the Final Technical Advice to determine the extent of disclosures that will be required and to consider how they will capture the information necessary to make those disclosures.
FEI members can click here for a detailed summary of the CESR Final Technical Advice prepared by the Financial Executives Research Foundation (FERF). Nonmembers can request a copy by contacting Janet Guzman email@example.com , Director of Development, FERF.
Additional resources can also be found in the “Other Summaries From” box located in the right hand column of this webpage.
Prepared July 21, 2005 by Edith Orenstein (firstname.lastname@example.org), Manager of Research, Financial Executives Research Foundation (FERF). This summary does not represent FEI opinion, unless specifically noted above.
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