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