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A draft Communication  on Accounting Harmonisation: a  new Strategy vis-à-vis
International Harmonisation  has been adopted by  the European  Commission on
the initiative of  Single Market Commissioner Mario Monti.  The Communication
outlines a Commission  action plan to ensure European Union companies looking
to raise capital  on international markets do  not have to draw  up more than
one set of consolidated  accounts.  The action plan also aims  to improve the
comparability of  consolidated accounts  drawn up by  companies in  different
Member States.   The  Communication is due  to be  presented to the  Internal
Market Council on  23 November. It will  also be transmitted to  the European

"We  consider  companies should  only  be  required  to prepare  one  set  of
consolidated  accounts", commented  Commissioner  Monti.   "In line  with the
strategy outlined in  this Communication, we will examine the possibility for
EU  companies, with an international vocation,  to prepare their consolidated
accounts on the  basis of international  accounting standards.   However,  we
are determined to achieve this  objective without resorting to  additional EU
legislation.  Our  strategy is to  simplify and  improve financial  reporting
requirements  in  the   Single  Market,  not  to  create  new  administrative

"This decision", concluded M. Monti,  "shows our determination to  ensure the
right framework for EU  companies to be competitive on world markets while at
the same time cutting back on legal and administrative red tape".

Key objectives of  the new strategy proposed  by the Commission are  : easier
access for European  companies to international capital  markets and improved
comparability of consolidated  accounts prepared by those companies which are
important players within the Single Market.

The problem for  companies seeking stock  exchange listing outside the  EU is
that  the  accounts  which  they  prepare  on  the  basis  of  their national
legislation, which  follows from  the EU Accounting  Directives (notably  the
4th  and 7th  Company  Law Directives  on  annual and  consolidated accounts,
78/660/EEC and  83/349/EEC),  are not  accepted in  major securities  markets
outside Europe.   Instead,  EU-based companies  wishing to  raise capital  on
third country  markets  can  be  required  to  establish  different  sets  of
accounts in  order to meet different  financial reporting  requirements.  For
example, when  Daimler-Benz sought a listing on the  New York Stock Exchange,
it was  obliged to completely  reorganise its accounting  system in order  to
satisfy  the  requirements  imposed   by  the  US  Securities   and  Exchange

The production of  different sets of accounts  with different results  or the
reconciliation of accounts with the  indication of different amounts  for net
profit and  shareholders equity is misleading  and reduces  the confidence of
investors in the credibility of the accounting rules. In order to bridge  the
gap between  present financial reporting requirements in the EU and the needs
of  the international capital  markets, a new  strategy has  been proposed in
the Communication.

Rather than create  a European Accounting Standards  Board or a new  layer of
European accounting standards  on top of the existing  layers of national and
international standards, the  Communication proposes to associate the EU with
the   efforts  undertaken   by  IASC   (International   Accounting  Standards
Committee)  and IOSCO (International  Organisation of Securities Commissions)
towards a broader  international harmonisation of accounting standards.  As a
matter of priority,  the Commission will therefore examine, together with the
Member  States in  the context  of  the Contact  Committee on  the Accounting
Directives, the  conformity of  existing  International Accounting  Standards
(IAS)  with  the  EU's  Accounting  Directives.    Establishing   that  these
standards are  in conformity with the  Accounting Directives  is an essential
first step  if Member States  are to allow  their companies to prepare  their
accounts on  this basis.   If  this examination  reveals any  inconsistencies
between the  directives and  IAS, these will  be examined  on a case  by case

A  greater emphasis  on international  accounting standards  means  that more
attention  should  be  paid in  the  international  harmonisation  debate  to
European  interests.  It  is  therefore  essential  to  improve  coordination
between all bodies  which play a role  in accounting standard setting  in the
Member States.    Better  coordination  is  also  necessary  to  improve  the
comparability of  the accounts  of those  companies which are  not seeking  a
listing  on  international   capital  markets  but  which   are  nevertheless
important players within  the Single Market.  Lack  of comparability can give
rise  to   distortions  of  competition   and  hinder  potential   investors'
assessment of  a company.   In order to  achieve this  enhanced coordination,
the  Communication  proposes  to  improve  the  functioning  of  the  Contact
Committee set up under the 4th Company  Law Directive on the annual  accounts
of limited liability  companies.   The Contact Committee  should deal with  a
number of accounting issues  for which no immediate solution is found  in the
existing Accounting Directives.   Of course, this is only possible within the
limits  determined by  the Accounting Directives.  The Commission will decide
how  to make the best  use of the advice given  by the Committee, for example
to include  it in  an interpretative  Communication or  in a  Recommendation.
Effective  technical cooperation  in  the  Contact  Committee  will  make  it
possible to avoid legislation in most cases.

It  is  proposed  to  concentrate  the  work  of  the  Contact  Committee  on
consolidated accounts. A more general approach  including individual accounts
would be more likely to run into controversy, since these are  in many Member
States directly related to  reporting for tax purposes and  to the assessment
of the profit available for distribution. 

The  Commission believes  that  professionals  using and  preparing  accounts
should remain closely  associated with the work  of the EU in  the accounting
field.    The  Accounting  Advisory Forum,  which  was  set  up  in 1991  and
comprises  representatives  of  the  main  professions  using  and  preparing
accounts as  well as  of national  accounting standard  setting bodies,  will
therefore continue its role  as a consultative body.  The expertise available
in the  Forum will  be  associated with  the technical  work of  the  Contact

With its Communication,  the Commission wants to offer  a clear prospect that
companies seeking listings on the US and other world  markets will be able to
remain  within  the EU  accounting  framework  and  that  US GAAP  (Generally
Accepted  Accounting Principles),  over which they  and their governments can
exercise no influence, is not  the only option.  With this new  strategy, the
EU is not  abandoning the  field of accounting  harmonisation, but is  rather
strengthening its commitment and contribution to  the international standard-
setting process, which offers the most  efficient and rapid solution for  the
problem of companies operating  on a world-wide scale.  At the same time, the
improvement of  the level of financial  reporting of  European companies with
an international vocation  will certainly have a positive impact on financial
reporting  practices  of  other  European  companies.  It  is  expected  that
improved financial reporting  in consolidated accounts will  encourage small-
and medium-sized companies to improve their financial reporting, even  though
they do not prepare  consolidated accounts themselves. The  implementation of
this new strategy  will ultimately benefit both  users of accounts and  those
who prepare them.


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