FULL OR PARTIAL IAS 39? THE DEBATE CONTINUES
Surely nothing has dominated European companies’ thoughts as much in recent times as compliance with the new International Financial Reporting Standards (IFRS) – IAS 39, in particular? Expected to come into effect on 1 January 2005, this promises not only a single framework for more than 7,000 European corporates, but also the long-awaited possibility of greater convergence between European and US accounting standards.
How quickly things can change! July’s meeting of the Accounting Regulatory Committee (ARC) confirmed the divergence of views on adoption by the EU of the full version of IAS 39, which deals with the recognition and measurement of financial instruments. This was, in effect, a victory for some of Europe’s leading banks who criticised the “fair value option” and certain macrohedging provisions in the standard as likely to introduce unacceptable volatility to their balance sheets.
The Commission, instead, proposed a formal vote on partial endorsement of IAS 39 as the favoured approach. Other options under consideration are full endorsement of IAS 39, with a sectoral carve-out for the banks, or the temporary deferral of IAS 39 as a whole.
For many European corporates, anything less than full adoption of IAS 39 is a major setback to the work they have put into preparing for implementation of this new standard.
In the first instance, partial adoption or deferment of IAS 39 jeopardises plans to align European accounting standards with US GAAP. This would leave those European companies with listings in the US still having to prepare two sets of accounts to meet the relevant reporting requirements. At the same time, in the light of a global requirement for improved financial reporting, how can Europe ensure that its own companies match the highest standards? Fair value principles and the related disclosures in derivatives accounting, as embodied in IAS 39, are key to best practice.
It is for these reasons that the ACT continues to support the full endorsement of IAS 39 as it stands, which is a far better option than any partial implementation. But the ACT has also underlined to the EU and the International Accounting Standards Board (IASB) that action to address recognised flaws in the standard is the essential next step – and welcomes the formation of a working group to advise the IASB on this. We also believe that the EU’s decision on adoption should not penalise any corporates that elect to apply the international standards – including IAS 39 – in full, regardless of the view from Brussels. This week, the ARC meets again to provide the European Commission with views on the three different approaches to IAS 39. We continue to believe that full adoption – without exceptions – is the best way towards of global harmonisation.
LIZ SALECKA
Editor
Gearing up for IFRS compliance
Over 80% of companies are on target to comply with the International Financial Reporting Standards (IFRS) that come into effect on 1 January 2005, with many expecting to achieve hedge accounting under IAS 39 for 75% to 100% of foreign exchange (FX) and interest rate contracts.
These are a selection of bonds announced recently. The details, updated to the middle of last month, were supplied by Thomson Financial
Securities Data and other sources.
The global economy has recovered substantially this year and I am distinctly positive about the outlook for 2005. The euro zone is reviving and can be expected to improve further in the months ahead. A return to trend growth next year is on the cards. At the same time, the euro zone has cleared lagged the global pick-up. Recovery has been driven – particularly in Germany – largely by external rather than domestic demand.
In September three years ago, the world stood still when Al-Qaeda suicide bombers launched a tragic assault on the World Trade Centre in New York. Today, in the light of bombings in Istanbul and Madrid, the threat of terrorism hangs ominously over Europe and European corporates. How can they protect their businesses against unprovoked, unpredictable attacks? Liz Salecka reports.
Since the expansion of the European Union (EU), there has been an increase in issuance from Eastern European countries – both in the euro and US dollars. Deals here come to market from corporates that would have found it impossible to execute the same deals prior to the inception of the euro in 1999. The common currency has increased liquidity in the market, making it possible to issue in greater size. It has also enabled lower-rated credits to issue.
The 12 existing euro ‘in’ countries currently operate in excess of 30 clearing systems, each with distinctive clearing practices, different structures, processes, formats, account numbers and bank codes. The harmonisation and consolidation of this environment continues to be a central challenge for consumers, corporates and banks alike.
The European Central Bank’s (ECB) objectives with regards to monetary policy can present challenges for treasurers and money market fund (MMF) managers when they are trying to predict the future direction of euro zone interest rates.
The EU Regulation 1606/2002/EC’s requirement for the use of International Financial Reporting Standards (IFRS) for the consolidated accounts of group companies raises a number of important tax questions for corporates in Europe. In most countries of the world, companies do not pay taxes based on their consolidated group accounts. Instead, they file tax returns, based upon the profits reported in their own individual company accounts.
While Shared Service Centres (SSCs) are hardly a new concept, they nevertheless remain one of the fastest growing and evolving areas of treasury influence. This dynamism is reflected in the recent Shared Services and Business Process Association (SBPOA) survey, in which 45% of respondents stated that their SSC programmes were less than two years old. At the same time, SSCs are clearly seen as an area of corporate competitive advantage. Two thirds of the survey’s respondents also stated that they had expanded the size or scope of their SSCs since establishing them.
Having focused on the centralisation of its operations since the 1990s, the Royal Dutch/Shell Group of Companies, which has five core businesses and a presence in 145 countries worldwide, is now reaping many of the economies of scale and efficiencies this can bring. The treasury function, which was once run on a country-by-country basis, with local treasurers taking responsibility for the cash and FX needs of their individual operations, is no exception.
The advent of the euro stimulated the development of treasury management technology, and led to a wave of new implementations that was further amplified by the inevitable approach of the new Millennium. These issues may have stimulated the market in a very creative way, but they did also lead to the collapse of some of the earlier and perhaps more rigid systems. The euro brought a dramatic shift in European treasury priorities.
When the euro replaced 12 currencies in January 1999 it was clear, from a financial point of view, that one of the first direct consequences of this event would be the simplification of currency hedging. Treasurers, whose countries adopted the euro, no longer had to worry about so many foreign currencies when hedging their transactions.
After a three-year stretch, Germany’s economy is growing again, albeit not as fast as in some other Economic Monetary Union (EMU) countries.
The economic outlook for the Benelux region is positive. In Belgium, the growth of export trade has been more than enough to compensate for the negative effects of a stronger euro. However, although overseas markets and exporters are likely to keep performing well, exports do not look set to provide the main stimulus to growth.
In October 1997, the Chancellor of the Exchequer said that in principle the UK government is in favour of UK membership of the single European currency, but in practice the economic conditions must be right. The determining factor was whether or not joining would be in the national economic interest; a clear and unambiguous case would have to be made.
Gross domestic product (GDP) in France grew by 0.8% in the first quarter of 2004, indicating that the country’s economic recovery is gathering pace. Since mid-2003, the upswing has been rapid, with all three quarters witnessing growth in line with, or above, expectations (about 0.5-0.6%) quarteron-quarter – the best record since 2000.
ACT queries IAS 39 changes
For a standard that was fully revised in December 2003, the subsequent amendments to IAS 39 are still coming in thick and fast, but perhaps this was only to be expected. The ACT has now responded to the April 2004 Exposure Draft (ED) on the fair value option.
We are often asked to give our definition of the perfect Curriculum Vitae (CV) by both candidates seeking their next roles and clients searching for the next member of their treasury teams. A CV should focus upon real events and actual achievements, rather than quoting generalised attributes such as ‘flexible and motivated’. Clients want clear proof of practical situations where candidates have demonstrated the ability to overcome obstacles through a positive attitude and strong treasury knowledge.
