PracticeConsultingAnalysis – Accounting revolution hits Europe.

Analysis - Accounting revolution hits Europe.

The European Commission's proposal to force all businesses listed on European Union stock exchanges to adopt international accounting standards is likely to affect 7,000 companies and would signal a sea change in accounting throughout the EU, should the idea be accepted by EU ministers later this year.

At the moment, only 275 listed companies use IASs for their financial reporting, with only seven EU member states (Austria, Belgium, Germany, France, Finland, Italy, Luxembourg) specifically allowing listed companies to prepare their consolidated financial statements in accordance with its rules.

As expected, the commission is being bullish about the benefits of the switch to IASs. Internal market commissioner Frits Bolkestein says: ‘The use of one global accounting language will greatly benefit European companies. It will help them to compete on equal terms for global capital.

Investors and other stakeholders will, at last, be in a position to compare company performance against a common standard.

‘Listed companies should start preparing now for this change-over to a single set of financial reporting rules. Although some investment will be needed in terms of training, I am confident it will repay itself many times in the long run.’

That is all well and good, but how would the new system work? Importantly, and unusually, the commission is proposing professional specialists are directly involved in drawing up legislation that will make the 41 standards drawn up by the London-based International Accounting Standards Committee compulsory for EU-listed companies.

Its proposed regulation would establish a new EU mechanism that will assess the various standards and give them legal endorsement for use within the EU.

This would involve the establishment of an Accounting Regulatory Committee, chaired by the commission and composed of representatives of the member states, who will would adopt or reject a particular IAS, if it were proposed as an EU law by the commission.

The committee’s work would be prepared by a committee of experts (called the Accounting Technical Committee), which will be set up by a private-sector organisation, named EFRAG, (European Financial Reporting Advisory Group). This would involve the EU’s main players in financial reporting, including the accounting profession and national standard setters.

The accounting technical committee would provide technical expertise regarding the incorporation of IAS within the EU law. A commission paper says: ‘It will participate actively in the international accounting standard setting process and organise the coordination within the EU of views concerning IAS.’

If there are no political problems, this committee should be set up between April and June.

Looking at the Accounting Regulatory Committee, it will study commission reports identifying a particular international accounting standard, which examines its conformity with existing accounting directives and its suitability as a basis for financial reporting in Europe.

The committee will then have a month to deliver its opinion on the commission’s proposal, using the same qualified majority voting rules used by the EU Council of Ministers.

If the committee opposes the move, the commission has the right to ask the council to overrule it, with the European parliament being given the right to intervene, if it considers the commission has exceeded its powers.

Small and medium-sized companies, most of whom of course are unlisted, would not be forced to use IASs, unless they wished to do so and this option was allowed by their member state.

What will happen if an IAS is felt not to be suitable for application within the EU?

Brussels is confident there will be no legal hitches, claiming that it has already compared existing IASs with the EU’s accounting directives, concluding ‘very few discrepancies have been noted.’

The only problem the commission hints at is that 300 EU listed companies currently use US GAAP for financial reporting purposes, mostly to attract foreign or US capital and investors.

‘The commission hopes and expects that the US Securities and Exchange Commission will accept in the near future financial statements prepared by EU issuers without requiring a reconciliation to US GAAP,’ says the commission statement.

– The International Accounting Standards Committee’s website is at www.iasc.org.uk

– European Commission websites can be accessed via www.cec.org.uk.

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