Brussels, 14 June 2000
EU moves closer towards global financial reporting standards
The European Commission has outlined a strategy for future financial reporting in Europe in a Communication it has just adopted. The strategy is designed to help eliminate remaining barriers to cross-border trading in securities, in particular by recommending that there be one set of accounting standards so that company accounts throughout the European Union are more transparent and can be more easily compared. A single set of standards should make it easier to compare corporate performance, to raise capital and to enhance investor protection. The strategy is a key element in the creation of an integrated market in financial services that is the aim of the Financial Services Action Plan adopted in May 1999. The Lisbon Summit also explicitly insisted on the importance of the comparability of financial reporting to the creation of an efficient, deep and liquid securities market in Europe. The Commission believes that the adoption of International Accounting Standards (IAS) are the way forward. The Communication announces that the Commission will come forward with proposals before the end of 2000 which would require all EU companies listed on a regulated market to prepare consolidated accounts in accordance with International Accounting Standards. This requirement would enter into force at the latest from 2005 onwards. Member States would be allowed to extend this requirement to unlisted companies and for preparing individual accounts. Since transparency and comparability are of particular importance for financial institutions, this policy will also cover listed banks and insurance companies.
Internal Market Commissioner Frits Bolkestein said: "The costs of differences in financial reporting methods can be extremely onerous for investors and other stakeholders. Adoption of the proposals we have announced in this Communication should result in the removal of the fragmentation in financial reporting that prevails in Europe today. It signals Europe's firm intention to remove accounting differences as a step forward towards developing integrated, deep and liquid capital and financial services markets to improve capital raising efficiency while preserving investor protection."
Before the end of 2000 the Commission will present to the Council of Ministers and the European Parliament a legislative proposal to introduce the IAS requirement, which will enter into force at the latest in 2005. The requirement will become effective after a transition period not longer than three years from the final adoption of the Commission proposal. This transition period will help companies and the European accounting profession adapt to the change.
The thrust of the proposals is to achieve clear rules for comparable, transparent reporting, and for its rigorous interpretation and application. This must result in relevant, reliable information that is useful for investors and other stakeholders to make a meaningful comparison of performance among companies and take capital allocation decisions.
European investors need high quality information before deciding on which companies to allocate their financial resources. Similarly, European companies must be able to compete on an equal footing for financial resources available in the global capital markets.
In order to provide legal certainty on the standards that should be used in the EU, the legislative proposal would also establish an endorsement mechanism with a two-tier structure consisting of a technical level and a political level at EU level to confirm the standards that will have to be applied. The details on the legal status and decision-making procedures of this mechanism are being finalised and will be detailed in the Commission proposal. The Commission believes the EU should move closer to global accounting standards. Europe alone cannot write the rules for financial reporting in the global capital market; however it wishes to contribute to the elaboration of these rules from the earliest stage possible.
The Communication also notes that high quality accounting standards will not guarantee transparent financial reporting per se; rigorous and disciplined application is vital to the credibility of financial statements. The Communication stresses the need for proper enforcement of accounting standards. For this aim, high quality statutory audit is necessary as well as strengthened co-ordination among European securities regulators in order to establish equivalent, high level enforcement of financial reporting throughout the Union.
The proposals will complement the Commission's forthcoming measures to modernise the existing Directives on Prospectuses and to introduce a single passport for European issuers of securities. Access to EU securities markets would be secured through a common registration system based on comparable market information, including one set of international accounting standards.
The communication is available on the Commission's Europa website: http://ec.europa.eu/internal_market/en/index.htm