McCreevy’s soft line to smooth out uneven accounting practices

Date: 08/12/05

The European Commission is seeking to allay fears that it might take political control of Europe's accounting standards. Instead, it is to set up an informal forum to identify areas where standards are not being applied consistently across the EU.

In January it became a requirement for European companies listed on the stock market to follow International Financial Reporting Standards (IFRS) set by the International Accounting Standards Board.

But building confidence in the standards depends on consistent application of those standards.

Equivalence with other major international standards (US, Japanese and Canadian Generally Accepted Accounting Principles) is the ultimate goal of standard-setters. But that can only happen if there is enough confidence that the standards are being applied in the same way across Europe, the biggest bloc currently following IFRS.

The forum, or round table, to be formally proposed by Internal Market Commissioner Charlie McCreevy in January, would bring standard-setters, audit firms and businesses together to discuss where there are differences in the application of standards.

Any serious difficulties would then be addressed by an international body charged with interpreting standards, the International Financial Reporting Interpretations Committee (IFRIC).

IFRIC had feared that the Commission would try to take over the running of the standards itself, but Ken Wild, a member of IFRIC and a partner at accounting firm Deloitte, said that he would welcome the forum.

"An informal forum like the one being suggested will be good for weeding out the really important issues and getting them up to IFRIC to sort out," he said. "It will also be good for making sure that everyone accepts that there will be a degree of diversity in standards."

Wild warned that the parameters of the forum would have to be clearly defined. "Will it take place in public, for example? That would be a good idea, but if people openly air difficulties then informal interpretation could creep in and that absolutely must not happen."

Nigel Sleigh-Johnson from the Institute of Chartered Accountants of England and Wales agreed. "There is inevitably a political dimension as International Accounting Standards Board standards have to be endorsed by reference to a regulatory committee composed of government representatives. But, whilst we might want to encourage standard-setters to look properly at practicalities and cost/benefit issues - perhaps through some form of impact assessment - technical experts must make the final technical decisions."

McCreevy has recommended that the EU delay until 2009 its 2007 deadline for determining whether IFRS can be considered equivalent to the three other major standards.

"This option would align the equivalence agenda on both sides of the Atlantic and allow time for consolidating our experience of working with IFRS in practice," he said at a conference held by FEE, the European accountants' federation last week (1 December).

It now appears clear that no one expects the various rival standards to become completely converged, at least in the medium term.

Earlier this year, the US Securities and Exchange Commission (SEC) announced that it would aim to release EU companies listed in the US from their current obligation to 'reconcile' their financial reports under both IFRS and US GAAP. The aim would be to do so by 2009 as the standards become recognised as mutually equivalent.

At the same FEE conference, SEC International Director Ethiopis Tahara confirmed: "We do not expect full or even a finite degree of convergence before we are willing to eliminate the reconciliation requirement."

McCreevy sought to calm fears that the equivalence process would lead to the EU adopting many more rule-based standards - similar to those already used in the US which are set by the Financial Accounting Standards Board (FASB) - which might burden a financial industry that is already struggling to absorb IFRS.

"I am not giving an automatic commitment from the EU to any new standards, let me be absolutely clear...and when I say no I mean no," he insisted.

But some are not convinced. "It seems unrealistic, if you have the IASB and FASB working together to converge standards, that there will not be any new standards emerging from the process," said Sleigh-Johnson.

"But we would hope for a fairly lengthy period of calm to allow people in Europe to implement IFRS before any such standards are introduced."

Article reports that the European Commission was seeking to allay fears that it might take political control of Europe's accounting standards. Instead, it was to set up an informal forum to identify areas where standards were not being applied consistently across the EU.

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