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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 Parliament. "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 burdens". "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 Commission. 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 basis. 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 Committee. 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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