FEI: 19th Current Financial Reporting Issues Conference

1. FEI: 19th Current Financial Reporting Issues Conference The Global Economy & International Accounting Standards Developments Trevor S. Harris Managing Director, Morgan Stanley Dean Witter Professor of Accounting, Columbia Business School

2. Financial Statements: A Means or an End? Accounting Information as a Product?  Supply and Demand  Market Equilibrium

3. The Supply Side • Enforcement of property rights • Legal form • Sources of capital - information asymmetry • Standard setting institutions • Private enforcement - auditing • Public enforcement - security regulation • Education

4. The Demand Side • Competition for Capital  Allocation decisions • Competition in M&A Barriers to Entry, Price • Competition in Product Markets  Costs/Margins • Performance Measurement Economic  Focus • Macro Data  Global Fiscal Management • Global Regulation  Preventing Chaos

5. Competition for Capital • How level is the playing field today? • How Companies Actually Trade in U.S. Markets • Which Companies Actually Trade in U.S. Markets? • U.S. Investments in Non-U.S. Companies • What do analysts and investors want?

6. Types of ADR’s No SEC SEC Registration Registration No Capital Raising Level I Level 2 Capital Level 3 Raising Rule 144A ADR = American Depository Receipt

7. Does ADR Activity Mean U.S. GAAP? “Level I Depository Receipts are traded in the U.S. over-the-counter (“OTC”) market….The company does not have to comply with U.S. GAAP or full SEC disclosure.A Sponsored Level-I Depository Receipt Program allows a company to create a program to facilitate investment without changing its current reporting process. The Sponsored Level-I Depository Receipt market is the fastestgrowingsegment of the Depository Receipt market.Of the more than 1,800 Depository Receipt programs currently trading, the vast majority of the sponsored programs are level-I facilities….it is not unusual for a company with a Level-I program to obtain 5 percent to 15 percent of its shareholder base in Depository Receipt form.” Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review

8. 6/00 6/99 Firm $9.2 Janus $28.9 17.4 Fidelity 22.7 10.1 Capital 14.4 n/a Alliance 13.1 8.2 Brandes 12.0 86.9 Total of Top 10 131.8 280.0 Total 382.3 Holdings of ADRs: as at 6/00 Value of Holdings (bill) Source: J.P. Morgan ADR Website

9. Annual Dollar Volume of Listed DRs $ bill Year-End Projection Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review

10. Total Capital Raised in Public DR Offerings $ mil Year-End Projection Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review

11. % by Country Capital Raised in Public DR Offerings Source: Bank of New York, Depository Receipt 2000 Half-Year Market Review

12. Volume Price (YTD mil) 10/10 Top 5 ADR’s by Volume Company 4,119 15.37 Ericcson Nokia 2,663 37.68 Vodaphone Airtouch Plc. 783 42.06 B.P. Amoco 678 53.06 550 50.68 Telmex Source: J.P. Morgan ADR Website Source: J.P. Morgan ADR Website

13. Top 5 ADR: Winners and Losers Top 5 Gainers U.S.GAAP or Reconciliation Exchange Company Biacore International AB NO OTC NO OTC ILOG S.A. YES OTC Sanyo Electric Co. YES Elan Corp. NYSE NO 144A ProSieben Media AG Top 5 Losers U.S.GAAP or Company Exchange Reconciliation OTC NO Gold Fields of South Africa Ltd. Danka BusinessSystems, Plc. OTC NO Baan Company OTC NO NYSE YES Consorcio G Groupo Dina, S.A. Asia Pulp & Paper NYSE YES Source: J.P. Morgan ADR Website

14. Other Examples of Unregistered ADR’s • Nestle • Bayer • Roche • Nissan • Volkswagen

15. U.S. Investments in Non-U.S. Companies • American Depository receipts [ADRs] or Direct Trading in the Local Markets? “With the globalization of financial markets, most U.S. institutional investors are now finding it increasingly easy to operate directly in foreign markets….At the end of 1998 ADRs represented only 23% of the total US Iinvestment in European equities.” Source: Euromoney, Oct 1999, pg. 80

16. Current Alternative Paths Domestic GAAP YES YES U.S. GAAP Reconciliation Full IAS ?

17. What Do Analysts and Investors Want? • Financial Measures Economic Reality • Measures which facilitate prediction and comparisons • Enforcement by High-Quality Auditor and Regulator

18. Typical Measures in Use • P/E - Price/earnings • P/E/EPS Growth [PEG] • P/CE - price to cash earnings • P/B - price to book • EV/EBITDA - enterprise (firm) value to EBITDA • ROE - return on equity • DDM - dividend discount model • DCF - discounted cash flow • Residual Income Approaches….EVA, CFROI...

19. Reconciliation of Income to U.S. GAAP Nokia

20. Reconciliation of Equity to U.S. GAAP Nokia

21. Reconciliation of Income to U.S. GAAP Telefonica S.A.

22. Reconciliation of Equity to U.S. GAAP Telefonica S.A.

23. Local GAAP Telefonica S.A.

24. Local GAAP Telefonica S.A.

25. Local GAAP Telefonica S.A.

26. What are the Analysts Doing?

27. What are the Analysts Doing?

28. What Does the SEC Want? “International Standards….themselves must be high quality. By that I mean useful to investors in a way that provides transparency, consistency and comparability in the way companies report in a global capital market” Source:Arthur Levitt, “Quality Information: The Lifeblood of Our Markets” October 18, 1999.

29. Why Not U.S GAAP for All? • “No Taxation Without Representation” • Prescription vs. Relevance • Where is U.S. GAAP Heading? • Speed Versus Due Process • Who Actually Sets GAAP? • Can Supply Keep Up with Demand?

30. The Phantom Fleets: Number of Aircraft and Percent Carried Off the Balance Sheet, 1997. 27% American 30% Delta 22% NorthWest 41% SouthWest 42% UAL 29% British Airways 22% KLM Royal Dutch 20% Lufthansa 0% Ryanair Fleet Under Operating Leases 3% Pacific Cathay 15% Fleet Owned China Eastern 51% Source: Morgan Stanley Dean Witter Research Japan Airlines 5% Singapore Airlines 21% Qantas 600 0 100 200 300 400 500

31. Future Directions • Final Decision of SEC Acceptance is a Political One • What Will U.S. Companies Do? • What Will Happen to National Regulators? • Will Changing Demand Force A New System?