The European Union (EU) will adopt International Financial Reporting Standards (IFRS) for consolidated statements of all companies with quoted equity for financial years beginning after Dec. 31, 2004 and for those with quoted debt two years later.
IFRS is a comprehensive system of accounting standards and interpretations intended to provide global accounting consistency and comparability. Most countries outside the EU, including the U.S., Australia, and China, have made clear their intentions to converge their unique accounting systems with IFRS.
Many companies already have converted to IFRS, mostly for market-based reasons. For example, some of these companies are headquartered in countries whose accounting standards lack global acceptance, but they desire access to the international capital markets. These multinationals include financial institutions such as UBS and corporates such as Nokia.
While the most revolutionary aspects of IFRS — those involving financial instruments and hedging — may be delayed in the EU conversion, the transition will nonetheless require careful management on the part of reporting companies and some knowledge of the technical changes on the part of analysts.
Neither of these is without risk, and investors may be uncertain about how to interpret IFRS-based financial statements early on. Additionally, while Fitch Ratings does not doubt that the financial statements of EU companies will ultimately become more useful and certainly more consistent across countries, short-term risk of misstatement is high, although somewhat tempered by what will likely be an extended transition period.
Moreover, given the uncertainties associated with unified auditing and enforcement regimes for IFRS, this risk could extend even further into the future unless decisive steps are taken to put these infrastructures in place and ensure their effectiveness and consistent application. Fitch believes that investors should consider these factors carefully in their analysis of listed EU companies.
