CESR Proposal Affects US GAAP Filers in EU

May 27, 2005 is the deadline for comments to be submitted to the Committee of European Securities Regulators (CESR) on their "Draft Technical Advice on Equivalence of Certain Third Country GAAP and on Description of Certain Third Countries Mechanisms of Enforcement of Financial Information" (the "CESR proposal"), which is available at www.cesr-eu.org (click on "Consultations" on left menu bar).

The CESR proposal recommends that the European Union (EU) continue to accept financial statements filed under U.S. GAAP (as well as Japanese GAAP and Canadian GAAP) by non-EU companies listing on EU stock exchanges, by finding those three types of GAAP "equivalent" to IFRS; however, certain additional information would be required. As such, comparable information would be provided to investors in the EU, where companies are required to file financial statements under International Financial Reporting Standards (IFRS) beginning in 2005. If the current proposal is not adopted (or if a revised proposal is not adopted addressing this issue), then non-EU companies filing under US GAAP (Japanese GAAP and Canadian GAAP) which list in the EU will need to file under IFRS beginning Jan. 1, 2007.

Although the CESR proposal stops short of requiring a reconciliation to IFRS per se, the current proposed requirement to provide "a combination of qualitative and quantitative disclosures [to] …address the significant differences …between the respective third countries' GAAP and IFRS" (as noted in CESR press release accompanying the proposal) may be viewed by some non-EU companies with shares listed in the EU as a significant incremental reporting burden. (Canada, Japan and the U.S. are at various levels of moving toward or considering moving toward convergence of their GAAP with IFRS, but significant differences remain.)

As the comment deadline looms on the CESR proposal, many are still studying it. A public roundtable was held on May 18, and as reported by Bloomberg News the same day, Magnus McNeill, the executive director of government affairs in the London office of Goldman Sachs testified that, `For some companies this is going to be quite close to running two sets of accounting systems.''

CESR will begin posting comment letters received after the close of the comment letter deadline (May 27) on the CESR website link listed above.

Summaries of the CESR proposal prepared by accounting firms are listed below:

PwC DataLine 2005-17 available here.

E&Y Summary May 18, 2005 available here.

Prepared May 25, 2005 by Edith G. Orenstein (eorenstein@fei.org), Manager of Research, Financial Executives Research Foundation (FERF). This summary does not represent FEI opinion, unless specifically noted above.