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Countdown to EU integration - the final stages Back  
As the Financial Services Action Plan comes to an end, David Devlin reviews the stages left in creating a single European market for financial services, including the changeover to International Financial Reporting Standards, and the implementation of the Prospectus and Transparency Directives.
Creating a truly pan-European capital market able to attract investors and rank with America in terms of size and potential to support companies in Europe is a key objective of the European Union’s strategy. The goal is to equip Europe with the necessary regulatory framework to promote competition, while improving investor protection.

The compoonents necessary to achieve a single capital market were set out in the Financial Services Action Plan (FSAP), published by the European Commission (EC) in 1999. The FSAP comprises a five-year legislative process, ending this year.

Key elements of the FSAP that affect companies are summarised in a new booklet by PricewaterhouseCoopers, ‘Building the European Capital Market’. The booklet explains how the FSAP has led to a new approach to company law making, and describes some of the new institutions that have been established to deal with market regulation.

The most important of these new institutions is the Committee of European Securities Regulators (CESR). Its principal roles are to advise the Commission on regulation, and to issue standards and guidance the national securities regulators can then implement in each member state. In developing
its guidance, CESR consults widely with market practitioners.

These new European regulations will affect listed companies and we felt we should produce a simple guide to the key changes. In this article we focus on three of those areas of change: financial reporting and IFRS; corporate governance; and the capital market Directives on Prospectuses and Transparency.

IFRS countdown to 2005
The change to International Financial Reporting Standards (IFRS) is the most obvious feature of the FSAP most people in the financial community are aware of it, even though not everyone is prepared for it!

The EC’s IAS Regulation requires that all EU incorporated companies that are listed on EU regulated markets prepare their first full consolidated IFRS accounts for 2005. The Irish Government also intends to permit companies, which are not listed to use IFRS.

In order to be formally adopted for use in financial statements, IFRS standards have to go through a process of ‘endorsement’. A body called the ARC (Accounting Regulatory Committee) decides whether to endorse IFRS in the European Union.

The ARC still has to endorse the new ‘stable platform’ standards recently issued by IASB (IFRS 2,3,4,and 5) but the greatest controversy has been over whether to adopt IAS 39, the standard that deals with financial instruments. The IASB has made revisions to the standard, following comments from the European banking industry. The EC has indicated it would like to see this issue resolved as soon as possible otherwise the lack of certainty regarding adoption of IAS 39 will cause difficulty for companies in planning for transition to IFRS. While the IAS Regulation and the endorsement process specify the accounting standards to be used by EU listed companies, there also needs to be a process for ensuring that those standards are properly applied. This process is commonly referred to as ‘enforcement’.

CESR is the body that has been empowered by the EC to issue standards for the enforcement of IFRS. In 2003 CESR issued its first standard - 21 high-level principles, providing guidance for countries on the approach they should adopt. The principles set out how national enforcement should operate, including defining the enforcement authority; selection of accounts for review; and sanctions to be applied.

Enforcement standard Number 2 deals with arrangements for coordination between national enforcement authorities. The issue of these standards is a sign that regulators will in future be working together more closely, and scrutinising company accounts with greater rigour.

Corporate governance
Recent corporate failures in Europe have raised the profile of corporate governance. EU ministers considered the subject to be of such importance that they added it to the remit of a High Level Group of Company Law Experts, appointed by the Commission.

Responding to the Group’s report, the EC issued a Communication and Action Plan on company law and corporate governance in May 2003. Areas that will receive attention in the short term are the role of independent non-executive directors, and directors’ remuneration. The company Accounting
Directives will also be amended to introduce tougher rules on board responsibilities for financial information and disclosure of group structures.

The Action Plan will result in increased levels of disclosure to the market, including the likely introduction of a corporate governance statement in annual reports. However, companies used to Irish and UK Combined Code governance requirements are less likely to find the EC’s proposals in this area a challenge.

Prospectus and Transparency Directives
As part of the FSAP, the Commission has issued a number of capital market directives including on Prospectuses, Transparency, Market Abuse (insider trading) and Takeovers. Taken together, these are intended to regularise the previously fragmented approach to rule making in Europe’s equity markets. The most significant directives for companies are on Prospectuses and Transparency.

The Prospectus Directive provides a framework for a consistent approach to when a prospectus is required and sets a common standard for disclosure. It is a ‘maximum harmonisation’ directive, which means that member states will not be able to impose additional requirements on issuers from other member states. However, the directive sets out only the main principles the Commission, on the basis of advice provided by CESR, will issue detailed implementing measures.

A further key element of market regulation is the availability of information to investors on a regular basis. The Commission consulted on these aspects, resulting in the publication in 2003 of a proposed Transparency Directive. This is not a ‘maximum harmonisation’ directive - member state governments will be able to impose additional requirements above the minimum level envisaged in the directive, though only on company issuers incorporated in their own country.

Most of the debate on the Transparency Directive has concerned whether EU listed companies should be required to file quarterly finnacial reports. The latest proposal is that there will be a limited quarterly information disclosure obligation, but no requirement for quarterly accounts in accordance with IFRS. For the half-year, listed companies should file interim reports in accordance with IFRS within two months of the period-end.

These capital market requirements, including the conversion to IFRS, amount to a whole package of changes that companies will need to absorb in a relatively short time frame. Our booklet provides a brief checklist of key issues that board members should consider. One thing is certain - the next few years will not be quiet ones!

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