Over the past several years, a growing dialogue has developed about the future of financial reporting and the public company audit profession. In order to advance that dialogue, during the past year, we have engaged in discussions with stakeholders around the world on a number of issues critical to the longterm strength and stability of global capital markets.

In these talks, we have been struck by the breadth of support for International Financial Reporting Standards (IFRSs) as a single set of high-quality, accounting standards that ultimately can be used around the world. Stakeholders indicated their support for IFRS in part because it is more principles-based than US GAAP. There was, however, a lack of consensus on the key characteristics of principles-based standards.

• GAAP should be based on transactions and activities, rather than industries, and most existing industry-specific guidance should be eliminated.
• GAAP should provide for a single method of accounting for a given transaction or event and should not normally include accounting policy choices.
• The FASB should be the source of interpretations of US GAAP, not other parties.
• The SEC and others should acknowledge that principles-based standards may result in a reasonable amount of diversity in practice, and the SEC's compliance and enforcement activities should not require restatements that may not be material to users/investors, so long as the basic principles in US GAAP are followed. The SEC should promulgate guidance on materiality in this context.
• Prior period financial statements should only be restated for errors that are material to those prior periods.
• The SEC and PCAOB should provide more protections from lawsuits or SEC enforcement actions for companies and auditors exercising reasonable professional judgment.
• The SEC should require XBRL filings by the 500 largest domestic listed companies, followed by evaluation and a decision whether to extend this to all listed companies.
• The SEC should provide guidance on corporate websites that provide financial information to investors.

Our policy work on IFRS is currently focused on evaluating its potential role in the US capital markets. This is the logical culmination of work the Commission has been doing ever since we tackled the problem of the divergence of national accounting standards in 1981, by instituting the US GAAP reconciliation requirement in the first place. At the time, the Commission thought the reconciliation requirement was a temporary solution, while the real solution lay in reducing the divergence itself. We've carried the mantle of convergence ever since.

That's why our recent decision to accept IFRS financial statements in SEC filings was crafted in such a way as to support the efforts of the IASB, and many other nations, to establish IFRS as a single, global set of standards, and not so many national flavors.

Financial Instruments Working Group 17 January 2008 Agenda

• Background and aims of the meeting
• Discussion of the Draft Discussion Paper on Reducing Complexity in Reporting Financial Instruments:
  • Section 1: Problems related to measurement and the possible long-term solution
  • Section 2: A single measurement method for financial instruments and the boards' long-term measurement objectives
  • Section 3: Intermediate solutions to measurement and related problems
  • Key communication messages to accompany the draft DP on Reducing Complexity
• Discussion of the Draft Discussion Paper on Financial Instruments with Characteristics of Equity:
  • Draft Invitation to Comment

We believe that several of the proposed amendments are major amendments to IFRSs and should be exposed as separate documents because the proposed amendments either change or challenge important principles in IFRSs or have consequences beyond the situation the amendment is aiming to address....

In our opinion the following proposed amendments in the exposure draft could not be considered 'minor':

• the requirement of additional disclosures if an entity is not able/willing to apply IFRSs in full in IAS 1 Presentation of Financial Statements
• the proposed deletion of guidance for classification of leases of land in IAS 17 Leases
• the proposed replacement of the term 'fall due' in IAS 19 Employee Benefits
• the change in the accounting treatment for property under construction/development in IAS 40 Investment Property

Part of the IASB's strategy with respect to its short-term convergence agenda is to identify what the Board concludes to be the highest quality solution available from the current population of accounting standards and to move to that standard. We support this approach. However, in ED 9, the IASB has not demonstrated nor put forward conclusive evidence that the approach chosen, i.e. equity accounting, is the highest quality solution for interests in joint ventures, something which the Board acknowledges in its basis for conclusions to the proposed Standard.

As well as eliminating proportionate consolidation, ED 9 proposes a new approach, focussing on contractual rights and obligations rather than the legal form of arrangements. However, as ED 9 is poorly drafted and the IASB's objectives and its rationale for those objectives are not clearly articulated, the requirements and their application are unclear.