EU vision of harmony hits a rocky road

Published on 26/08/2004 12:54

EUROPE is heading for another D-day. From January 1, 2005, international accounting standards rather than national rules will apply to the group accounts of all stock exchange-listed companies in the European Union.

The changeover should make life easier both for investors trying to make sense of company accounts and for the companies themselves.

With one set of accounting rules to apply, businesses will have a better chance of attracting international finance and multi-national groups will only have to produce one set of figures.

While the EU has already committed in principle to harmonisation, there is still doubt about whether international standards will be adopted in full, thanks to resistance on the part of some of the Continent’s biggest banks.

The banks are taking particular issue with IAS (international accounting standard) 39, the standard on financial instruments. Complex instruments such as options and futures can be used either to reduce risk or to make a profit. Under IAS 39, banks would have to record the value of these instruments at their market value, which by the nature of things is extremely volatile. This, the banks say, does not reflect the way these instruments are used to hedge against risk.

The counter-argument of the International Accounting Standards Board, the body that makes the rules, is that - like it or not - accounts should show the true value of a company’s assets and liabilities. Also, a number of UK banks have said they are quite happy to apply the standard.

Sir David Tweedie, the Scottish chartered accountant who chairs the IASB, is not known for giving in on a point of principle. In this case, however, he has come up against powerful vested interests - and his stance has even attracted the wrath of French president Jacques Chirac.

As a result, there is a real possibility the European Commission could opt out of the part of IAS 39 that the banking lobby finds unacceptable.

If this happens, the fear is that rather than truly international standards, Europe will operate under an "IAS-lite" set of standards which could over time even diverge from the rest of the world.

The European Commission was expected to make a statement on the issue on August 6. That didn’t happen and now the next critical date is September 8, when the committee tasked by the EU with considering accounting standards for the new, harmonised regime will meet again. Even then it is not certain what the Commission will decide or if it will have a final decision even by that date.

Perhaps surprisingly, after months of hard debate Sir David is comparatively relaxed. As he points out, even if the international standards adopted by the EU are incomplete, it is still a huge step forward for the EU’s 26 existing sets of accounting rules - that is, 25 countries plus the international standards already recognised by some countries - to be replaced by just one.

Whatever the EU’s decision, January 1 marks the culmination of a massive effort by the IASB to bring its standards up to date.

Once the EU signs up, the next task will be to bring United States GAAP (generally accepted accounting practice) and international standards together, adopting the best from each.

Meanwhile, how ready is the UK for the 2005 deadline? Our survey of finance directors in the September issue of CA Magazine shows for those companies affected, 42 per cent are "definitely on track" and 55 per cent are "probably on track".

They still have a lot to do, according to the survey.

The move to international standards will affect companies’ headline figures and those changes will need to be explained carefully to the markets. We can expect to see a lot more said and written on this over the next months.

• Robert Outram is Editor of CA Magazine, the journal of the Institute of Chartered Accountants of Scotland. The views expressed are his own.