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Saturday, 27th April 2024 |
| Common accounting standards move closer |
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It has become increasingly apparent that the EU Company Law directives, in particular the Fourth and Seventh Directives, have served Europe well but may not be fully responsive to current accounting and reporting needs. This is not surprising when one considers that the Fourth Directive dates back to 1978 and the Seventh Directive to 1983.
Moreover, there are some major differences in the way that the Fourth and Seventh Directives are applied across Europe, particularly at individual company level. This is attributable to two main reasons. Firstly from the interpretation put on the articles in the directive under the varying legal and accounting systems. One can broadly distinguish between the Irish and UK common law systems where a more independent accounting profession has had a major say in interpreting the accounting directives and the Roman legal system operative on continental Europe where the accounting rules are very much laid down in law.
Secondly the financial statements of Continental countries are more influenced by tax considerations because the accounting profit forms the basis of the taxable profit which contrasts with Ireland and the UK where the difference between the accounting and tax rules often give rise to significant deferred tax balances. Indeed a 1997 Federation des Experts Comptables Europeens (FEE) survey identified tax driven financial reporting in 10 out of the 15 EU member states. Thus Continental companies are more likely to book higher stock write-downs and depreciation charges in the individual company accounts and also to defer the recognition of exchange gains.
The increase in the level of cross border transactions in the last few years has put pressure on to harmonise financial reporting across Europe, particularly in relation to group accounts. Increasingly EU global players demanding access to capital markets see IASs as the basis for financial reporting when raising money on capital transactions and for cross border transactions.
The EU Commission and the ASB has taken an active roles in the harmonisation debate.
Two important developments took place in 1995 and 1996:-
1. In 1995, in response to pressure from global players the IASC and the International Organisation of Securities Commissions (IOSCO) agreed a programme for the development of a set of core accounting standards to be used in group accounts viz.:
l Discontinuing operations
l Earnings per share
l Employee benefits
l Financial instruments
l Impairment of assets
l Income tax
l Intangibles
l Interim financial reporting
l Leases,
l Presentation of financial statements
l Provisions and contingencies
l Segmental reporting
The IASC recently completed all of these projects.
2. In 1996, the EU Commission declared its support for the International Accounting Standards Committee (IASC) and abandoned any aspiration of developing a separate set of EU accounting standards.
Following these developments the EU Commission in 1997 undertook a comparison study between the EU Fourth and Seventh company law directives and the IASs. This concluded that there were few obstacles to the use by EU companies of IAS group accounting standards.
In Ireland and the UK, the ASB added the IASs project to its list and in certain instances accelerated its own timetable for exposing the underlying topics.
The debate for harmonised international accounting standards was welcomed on the Continent where an increasing number of countries prepared group accounts in accordance with international accounting standards but to comply with domestic reporting and filing requirements these companies continued to have to prepare group accounts in accordance with the Seventh Directive, as enacted locally. More recently, a number of European countries including France and Germany have however introduced legislation giving recognition to international accounting standards as a basis for satisfying domestic statutory and filing requirements.
The message is becoming clear. Once IOSCO ratifies the core set of 12 accounting standards, international accounting standards will increasingly be used as a basis of group financial reporting by EU multi-national companies, particularly those seeking to raise capital on EU and US capital markets. However whilst the standards clearly have the backing of most of IOSCO’s members it remains to be seen whether they will find full acceptance, particularly with the SEC in the US and with its equivalents in Canada and Japan.
Once accepted by IOSCO it is vital that IAS’s will command international respect. Companies using IASs should preparing their accounts in full compliance with the IAS’s or give full disclosure of any departures. Of particular concern is the extent to which the true and fair override may be used to justify departure from any of the IASC’s provisions or misused to circumvent the harsher elements of the IASC’s standards. The IASC’s Standing Interpretations Committee will assist in addressing significant questions of interpretation but in the absence of an equivalent of the UK Financial Reporting Review Panel there will be much reliance on auditors to police the application of the IASs and the disclosures. There is a pressing need to accelerate initiatives to standardise the statutory reporting across Europe and beyond to underpin the quality of financial information. The IASC has responded to this challenge by unveiling a £15m blueprint for a new more streamlined structure to accelerate harmonisation. It may however have to see off a challenge from the increasingly influential G4+1 accounting standards setters comprising the US, Canada, New Zealand Australia and Ireland/UK for control of the standard setting process.
The successful completion of the set of core group accounting standards needs to be followed through for other standards affecting individual company accounts. In addition there are other topics currently under joint consideration by the G4+1 international standard setters that could impact future reporting including:
l transforming the profit and loss account and statement of total recognised gains and losses/statement of comprehensive income into a single statement of financial performance comprising three parts: operating, financing and other to encompass all the changes in net assets (apart from dividends and other transactions with shareholders).;
l proposals to capitalise operating leases;
l initiatives to standardise the criteria for merger accounting or to ban it.
There are also moves to increase corporate governance standards and disclosure to improve boardroom responsibility and independence. The IAS’s group accounts harmonisation programme is unlikely to impact Irish and UK companies to a significant degree because the ASB has introduced standards which limit the differences between IASs and Irish and UK standards. There are however still a number of differences which are currently being debated including deferred tax and pensions. In the case of deferred tax the ASB will be pushing for full provisioning to align with the IASC’s standard, possibly allowing for discounting. In the case of pensions the ASB are striving for a market value approach. Both issues are likely to be
hotly contested.
The IASC/IOSCO project is seen as the critical first step in the harmonisation of EU accounting standards. The introduction of the euro and the integration of European capital markets will increase cross border transactions and the need for increased transparency of accounting. While the current joint efforts are concentrated on group accounts, IASs will be increasingly used by non listed entities including SMEs. The result will be cheaper access to capital markets and increased comparability. |
Denis Murphy is a director of audit with Ernst & Young.
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| Article appeared in the January 1999 issue.
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