Accounting standard laggards facing threat of court reprisals

By Peter Chapman

Date: 22/07/04

THE European Commission is threatening seven member states with European Court of Justice (ECJ) action for failing to allow companies to use a controversial new international accounting standard - even though the EU executive has so far refused to give its own blessing to the norm, known as IAS 39.

Belgium, Greece, France, Ireland, Luxembourg, the Netherlands and Finland have been given two months to update their national laws before the Commission refers the cases to the Luxembourg-based court.

The 'fair value' accounting directive obliges member states to permit or require banks and insurance companies to book complex financial instruments used to hedge against risks - such as derivatives - accurately.

'Fair value' is defined by IAS 39, one of a suite of accounting standards set by the London-based International Accounting Standards Board (IASB).

The EU agreed a regulation accompanying the directive last year making international standards mandatory for all listed companies in the Union by the beginning of next year.

But it refused to endorse IAS 39 earlier this month amid concerns from a group of member states, led by France, that the way the standard values financial assets would hit banking sector profits and make the financial sector more volatile.

The EU executive is working on a compromise deal that could take out some of the more controversial elements of the standard, pending further work by accounting experts.

The EU's Accounting Regulatory Committee (ARC) is expected to decide on the interim solution in September.

However, officials said the ECJ warning was unrelated to the difficulties with the content of the politically-charged accounting rule - the target of criticism from French President Jacques Chirac.

"Some have sought to justify this by referring to the difficulties surrounding the endorsement of IAS 39," said an aide to Internal Market Commissioner Frits Bolkestein.

"However, the Commission cannot see any reason for delaying the transposition of this directive into national law because this is mainly an enabling exercise - member states do not have to require companies to apply IAS 39.

"On the other hand, the disclosure provisions of the directive should allow a better insight in the way in which financial instruments have been accounted for," the official added.

Henri Olivier, secretary-general of the European Federation of Accountants (FEE) said the lapse by the seven member states would put companies in a legal limbo. That is because part - if not all - of IAS 39 is almost certain to be endorsed by the Commission-chaired ARC in time for the start of next year, when IAS become mandatory.

"Companies will be required to apply IAS and at the same time they will be obliged to infringe national law that has not been put into compliance with the directive. That will be a problem."

Even if the EU fails to back IAS 39 in its current guise, some banks, such as HSBC have indicated that they will comply with its requirements, which mirror existing ones in the US.

Despite the opposition of the French financial elite, IASB executives argue that its norms will allow European banks and financial institutions to attract more international capital. They say that is because foreign investors currently prefer the US system.

http://ec.europa.eu/comm/internal_market/accounting/index_en.htm http://ec.europa.eu/comm/internal_market/accounting/index_en.htm

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