Europe bracing itself for rough ride over IAS rules

By Anna McLauchlin

Date: 04/11/04

EUROPEAN markets are set for a rocky ride in 2006 as companies struggle to get to grips with the new international accounting standards (IAS) next year, experts have warned.

Developed markets, such as those in the UK, Ireland and the Netherlands, will experience fewer fluctuations, while those markets in which accounting has not previously been used to woo investors could see greater volatility.

7,000 companies listed on European stock markets will have to implement the 40 standards, drawn up by the independent International Accounting Standards Board (IASB) from 1 January 2005.

They are meant to make EU company information more transparent for investors and to bring EU norms closer to the US 'GAAP' accounting rules.

"We are only going to discover the differences once people start putting the standards into practice. When analysts see figures that are not what they expect, there will be a few ripples in the stock market," Ken Wild, global leader of international accounting standards at Deloitte & Touche, told European Voice.

The UK, Ireland and the Netherlands have already been using accounting standards similar to IAS because their accounting is already geared towards investors and raising money through the stock market, said Wild.

But in other member states that use accounting for tax purposes the change will be "drastic".

"Figures in the first year may not be as reliable as we could hope for," agreed Wilfried Wilms at the European Banking Federation. "It will take some time to adapt."

Wilms partly blames the IASB for not giving companies time to get ready. "The IASB has taken decisions at the very last minute on many issues," he said.

But he added that the European Commission had also played its part. The Commission endorsed one standard - IAS 39 - in a diluted form only in October, after some member states complained that it would lead to unacceptable market volatility.

"The banking sector supported [the diluted standard] but we are talking about changes made two months before the implementation deadline," Wilms complained. "That's a major hurdle for companies which had assumed the original standard would be available."

A report published by the Institute of Chartered Accountants in England and Wales in October suggested that companies might use the changeover to hide unfavourable figures, a practice known as 'aggressive earnings management'.

Wild admitted this was a possibility, although he said the report was "overstating the downside". "Because there is an element of uncertainty, more adventurous CFOs could abuse the situation," he said. "But I think they would get caught out eventually."

Article suggests that European companies were to face initial difficulties with the introduction of the 40 International Accounting Standards on 1 January 2005. The standards had been drawn up by the independent International Accounting Standards Board (IASB).