Time to sing from the same balance sheet?

By Stewart Fleming

Date: 15/06/06

EU companies registered on US stock exchanges are currently obliged to prepare burdensome reconciliation statements, which point out the differences between cash-flow reports prepared under the International Financial Reporting Standards (IFRS) regime applicable in the EU, and the Generally Accepted Accounting Principles (GAAP) system used in the US. Not only does the requirement take time, it can cost a substantial amount of money.

Authorities on both sides of the Atlantic are united in their recognition that, given the lack of major differences between the regimes, the process is largely surplus to requirements and should be scrapped as soon as possible. In a speech delivered earlier this year at the US Chamber of Commerce in Washington, Charlie McCreevy, European commissioner for the internal market, signalled that the Commission and the US Securities & Exchange Commission (SEC) had "fleshed out" how to achieve their goal of dropping the statements.

But looking further ahead to a long-term solution on ironing out differences between both regimes, the two sides would appear to be crossing wires. In the US, the SEC is anxious to see progress on the 2002 Norwalk agreement, signed between the US's Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the body issuing the IFRS model, which aims to work on convergence between IFRS and GAAP.

EU accountants are worried about what this convergence might entail and argue that, rather than creating a hybrid system adapted for EU-US purposes, it would make more sense for the US to adopt the global standard, IFRS. Henri Oliver, director-general of the Brussels-based European Federation of Accountants, asks: "What exactly is meant by the term convergence? Is it moving from one system to another or are we trying to create something new? In Europe, we have the advantage of working with globalised standards. The next step is to convince the US that this is the best way forward. We are committed to finding global solutions."

In using international standards governed by an independent body, however, the EU would appear to lack bargaining power in the debate. In February, the IASB signed a memorandum of understanding with the US' FASB which indicated continued commitment to the Norwalk objectives. The move towards a converged model would appear to be inevitable.

IFRS is now the dominant regime for financial reporting, used in 90 countries across Europe, the Middle East, the former Soviet Union, Africa and Australasia. While the idea of the US adopting a global standard might seem to be a simpler solution, Wayne Upton, IASB research director defends the decision to converge. "Neither standard is adequate," he says. "What we have been encouraged to do is to work together on basic improvements. Our objective is to write a standard that uses exactly the same wording, except in areas where we [IASB and FASB] have different conclusions."

"How do you know where the investor is based when they are buying their shares?" asks Oliver, pointing out that a complex trend would be set for EU companies registered in other parts of the world if global standards are not adopted by all. "The point is that, in a globalised world, where stock exchanges are becoming increasingly globalised, investors need to be given the same protection wherever they are buying their shares."

Author takes a look at recent developments in the attempt to reach convergence of EU and US accounting standards.
Article is part of a European Voice Special Report, 'EU-US Relations'.

European Commission: DG Internal Market: Financial reporting: Accounting http://ec.europa.eu/comm/internal_market/accounting/index_en.htm

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