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Brussels, 14 June 2000

Update of the Accounting Strategy Frequently Asked Questions

(see also IP/00/606)

Why an update of the accounting strategy?

In its 1995 Communication on a new accounting strategy (see IP/95/1234), the Commission proposed that Member States would allow global players looking for capital on international capital markets to prepare their consolidated financial statements in accordance with IAS. Since then, seven Member States (Austria, Belgium, Germany, France, Finland, Italy, Luxembourg) have allowed listed companies to prepare their consolidated financial statements in accordance with either IAS (International Accounting Standards) or US GAAP (Generally Agreed Accounting Principles). Companies therefore use different standards at present, i.e. national standards based upon the EU Accounting Directives (4th and 7th Company Law Directives 78/660/EEC and 83/349/EEC), IAS or US GAAP. Financial statements are not comparable because of the use of different standards. It is therefore necessary to move towards one single set of accounting standards in order to build a unified capital and financial services market by 2005.

What are IAS?

IAS are the standards developed by the IASC (International Accounting Standards Committee), set up in the 1970s by the accountancy bodies of a number of industrialised countries. There are about 40 IAS and 20 Interpretations, covering some 1300 pages. The standards are investor oriented and are considerably more detailed than the Accounting Directives.

What is the IASC?

The International Accounting Standards Committee (IASC) has its Secretariat in London. The main decisions are taken by the Board, on which the Commission is represented in an observer capacity. In May 2000, the International Federation of Accountants (IFAC) approved a new structure for IASC. A Board of Trustees has been nominated, comprising seven Europeans, which will now select the members of the new Board. The new Board will start its operations in January 2001. Contrary to the present situation, the new Board will mainly comprise full time members. The Commission has in the past expressed some concern about the new structure not being representative. However, the Commission has decided to give the new Board a chance to prove that it can fulfil the role of a global standard setter. It will certainly be a body with very highly qualified experts.

Why adopt International Accounting Standards (IAS)?

The adoption of IAS for listed companies follows the preference declared by the Commission in its 1995 Communication. IAS are developed through international co-operation. They are very sophisticated and are broadly in line with the Accounting Directives.

What is US GAAP?

US GAAP are the Generally Accepted Accounting Principles in the US. They comprise a massive volume of standards, interpretations, opinions and bulletins and developed by the FASB (Financial Accounting Standards Board), the accounting profession (AICPA) and the SEC (Securities and Exchange Commission).

Why not allow US GAAP as an alternative?

Allowing the use of US GAAP would run against the fundamental objective of the strategy to move in the direction of one single set of global standards. US standards are certainly equivalent to IAS. However, they are developed without any input from outside the US. US GAAP is also very detailed, reflecting the litigious environment in the US which calls for more and more detailed regulation. US GAAP cannot be detached from the regulatory intervention by the SEC. EU companies applying US GAAP are automatically supervised by the SEC. Allowing the application of US GAAP within the European environment as an alternative to IAS would give an unwarranted advantage to US interests. US GAAP is also difficult to manage because it is a moving target. It is impossible to translate.

Why do we need an endorsement mechanism when IASC is delivering high quality work?

The establishment of an endorsement mechanism at EU level is necessary because it would not be wise to delegate accounting standard setting unconditionally and irrevocably to a private organisation over which the EU has no influence. In addition, it is important to create legal certainty by identifying the standards which listed companies will have to apply in the future. The endorsement mechanism will also examine whether the standards adopted by the IASC conform with EU public policy concerns. Because the endorsement mechanism will have an important pro-active role, it can be expected that the new standards adopted by IASC will also be acceptable in an EU environment.

How will the endorsement mechanism work in practice?

The endorsement mechanism will have a political and a technical level. The political level will do the official endorsement. It will include all Member States and probably operate on the basis of appropriate institutional arrangements under established rules for updating legislation by means of committees where the Member States are represented (so-called 'comitology'). The technical level will be made of highly qualified experts. These experts will be assisted by an infrastructure from the private sector. The Commission has asked the European accounting profession to help bringing about the co-ordination between those that use and prepare accounts in the EU as well as standard setters in order to ensure a proper input from all interested parties.

The endorsement mechanism will ensure that IAS can be applied in the EU environment. It will establish a continuous dialogue with the IASC and express possible concerns about emerging IAS at the earliest stage in the IASC's drafting process. The endorsement mechanism will confirm the dates by which new IAS apply within the EU. It may conclude that additional disclosures are necessary or certain options set out in a particular standard do not conform with the EU Accounting Directives. Objections to IAS would have to be substantiated and publicly recorded.

When will the endorsement mechanism start its work?

It is envisaged to set up the endorsement mechanism as quickly as possible. The legal instrument which the Commission will propose before the end of 2000 will include the main features of the endorsement mechanism. The Commission has asked the accounting profession to help bring about a co-ordination between EU accounting standard setters and users and preparers in order to provide the technical input as soon as possible. It is indeed important that there is appropriate EU input before new standards are adopted by the IASC.

What actions does the Commission plan to take in order to implement the new strategy?

The first action will take place in the Autumn when the Commission will introduce a legislative proposal requiring all listed EU companies to prepare their consolidated financial statements in accordance with IAS at the latest in 2005. It is expected that this proposal will be adopted by Council and Parliament at the latest in 2002. This would provide companies with a suitable transitional period to adapt their accounting systems to reporting on the basis of IAS. The proposal will also lay down the main features of the endorsement mechanism and will contain appropriate transitional measures which might help to speed up the conversion towards IAS and early take-up.

The second action will take place next year, when the Commission will present a proposal to amend the Accounting Directives in order to bring them into line with modern accounting developments. This amendment should allow EU companies to apply IAS without difficulties, except for those points where the endorsement mechanism might believe that the standard cannot be taken over in its entirety.

Why a requirement only in 2005?

At present, only 275 EU companies apply IAS. The goal is extending this number so as to cover all 7000 listed companies by 2005. This transition is necessary in order to allow the accounting profession and companies to prepare themselves. By 2005, the market situation will also have become clearer. IOSCO (the International Organisation of Securities Commissions) will continue to look into the acceptability of IAS for multinational securities listings. It is expected that some of the remaining obstacles will have been removed by then so that EU companies applying IAS would face fewer difficulties to enter the US capital market.

Why does the Commission insist so much on enforcement?

An equivalent level of enforcement is necessary to bring about an efficient capital market. Companies which apply IAS do not always fully comply with the standards. This needs to be corrected. First of all, common guidance is needed about the way in which the standards are to be applied. Secondly, the financial statements must be properly audited. Thirdly, external supervision is necessary in order to protect the investors. The Commission is examining with Member States how the present situation can be improved in these three areas. This requires close co-operation between accounting standard setters, the accounting profession and securities regulators within the EU.

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