by Jeremy Woolfe

The Europe Union’s agonizing over international accounting standards continues, with the most likely outcome now emerging as one unified set of rules applying to all of the EU’s 7,000 listed companies from Jan. 1, 2005. The package will, however, involve an inevitable softening of the contentious “banking” section, IAS 39, that rules on financial securities.

Accounting purists will be content that a carve-out of sections from IAS 39 from the full IAS set of rules will be limited to a transitional period. However, they will be worried that the length of the period will remain unspecified, in that it is renewable. EU observers note that it would not be Europe if there were not some kind of political embroidery involved, as there often is in many of the agreements reached among the EU’s 25 member states.

For European companies, the result will mean that, under Europe’s likely “IAS-lite,” companies will have the choice between filing their financial results to conform with the so-called endorsed “international” accounting standards, or filing to meet full, international accountancy standards. Those that are also listed in the U.S. will take the latter option.

Nevertheless, many subsidiaries of groups in continental Europe will also have to continue to produce yet another set of figures to meet their own national generally accepted accounting principles. In addition, they will also sometimes need to meet the special demands of their national taxation authorities.

The removal of 17 paragraphs from IAS 39, as recommended by Frits Bolkestein, EU commissioner for the internal market, follows resistance by some banks to the tighter codes. Philippe Pelle, an official in the European Commission, said that under the “temporary adjustment,” banks will now be able to count in their “core” deposits as longer-term sums for hedging purposes. Core deposits are made up of current accounts and some deposit accounts, which theoretically can be withdrawn easily.

Pelle explained that the European Commission is reluctant to force a sudden jump to full IAS, even though this could theoretically be possible via meetings of Ecofin, the forum of the finance ministers from the 25 EU countries. This was because an important minority of countries would resent it. Belgium, France, Italy and Spain have expressed opposition to full IAS in the case of IAS 39.

He gave the impression of being exasperated at the need to fudge. He pointed out that “business [could not] complain that they were not warned.” Advance notice of the European regulation went back to February 2000, and has been followed by various notifications since.

Behind the scenes, Bolkestein will no doubt be thinking that spitting in the face of the accounting traditionalists with a somewhat half-baked deal is his only realistic option. It would be less catastrophic for European business than to risk having no international financial accounting standards in Europe at all.

Getting it all in place
The mechanics of the currently ongoing negotiations — all very much behind closed doors — involve Europe’s version of IAS, as cut down by the European Commission’s civil servants early in July. The commissioners themselves discussed the proposals late in the month and their opinions were to be passed on to the member states in early August.

On Sept. 8, there will be a meeting of the European political advisory group, the Accounting Regulation Committee, presumably to give its blessing. The commission itself has a late October deadline to finally approve the new accountancy rules.

All the demand for different company financial reporting is bringing rich pickings to the financial business performance management market. This comprises mainly a triumvirate of global software firms, two of them European. They are, in size order, SAP AG, of Germany, Hyperion, of California, and Cartesis (formerly owned by PricewaterhouseCoopers), headquartered in Paris.

James Fisher, European marketing director of Cartesis, says that the market is now growing by 10 percent per year (and even higher this year), and is expected to reach an annual £850 million by 2007. The growth was also being fuelled by the impending Basel II regulations on capital adequacy for banks. He noted that there was also the need for firms to tell the “full story behind the numbers.” Markets react dramatically to any failure, said Fisher.

According to SAP’s Stefan Karl, a director in the financial services sector, the majority of large European listed companies are already prepared for IAS. Those firms not ready on Jan. 1, 2005, would have to apply to work with an intermediate procedure before having the full-blown process in place.

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