By Jeremy Woolfe
Brussels — Convulsions continue in Europe over the saga of international accounting standards. Deadlines come and go, and all the while political forces in Brussels continue to suffer buffeting from special interest groups. The European Union’s Accountancy Regulatory Committee — a political body that represents the EU member states — was due to meet July 9, but the results are hard to guess.
There could even be none.
Only one thing is certain. The knock-on effects of the outcome, whatever it is, are already well in focus. Three principle sectors would be most affected: European capital markets; the European banks themselves; and the software firms that have to interpret the rules when they pass into legislation.
Also in the picture is the accountancy profession. The European Accountants Federation, or FEE, supports the principle of global standards. It is afraid of EU standards being seen as second best, and notes the danger that access by European industry to capital markets could be restricted or made more expensive.
The European Commission, the EU’s central civil service, made a similar point nearly two years ago. “The integration of EU financial markets will bring significant benefits to businesses, investors and consumers,” it said. By “integration,” it was already implying the need for common accountancy standards.
The commission — which is based mainly in Brussels — quoted from a report that integrated capital markets in Europe would produce an EU-wide real GDP increase of 1.1 percent over a decade or so. Total employment would increase by 0.5 percent. And businesses would get cheaper finance.
Since two years ago, Europe’s climate for capital markets has picked up anyway. The improvement either anticipates IAS in Europe as inevitable, or is due to the comparative strength of Europe’s trade balance and government deficits.
Clifford Damers, of the International Primary Market Association, in London, recently observed several issues of paper in the 600 to 800 million euro bracket. Italian Telecom went up to billions, admittedly in several takes. Two years ago, you would do issues with longer maturities and weaker credits in the U.S., but more recently the U.S. has relatively less advantage, said Damers.
The European Banking Federation, in Brussels, also is conscious of “the gain from the strengthening of the European capital markets resulting from the application of international accounting.” That’s what it says, but that is not stopping it from trying to block the whole IAS package because of its dislike of the crucial IAS 39 clause.
Banks are apprehensive that fair value accounting of financial instruments would cause unfair volatility in their balance sheets.
In June, the banks of France, Belgium, Italy and Spain banded together to get their governments to oppose the clause.
The banks’ obstructionist stance seems to be supported by a study from Merrill Lynch’s European equities banking team. The study spoke of the dramatic impact that IAS 39 would have on the way European banks would have to present their financial statements. According to the investment bank, underlying profits should on average remain flat, while equity could fall by 4 percent.
The merchant bank noted that the protracted nature of the IAS negotiations are now making the implementation of the code from the start of January 2005 look more and more doubtful. It thinks that an IAS 39 that departs materially from the U.S. generally accepted accounting principles equivalent, SFAS 133, would bring into doubt the whole long-term convergence project between IAS and U.S. GAAP.
Within the software industry, the tone shifts immediately from apprehension to excitement. Those that are already working for banks in matters directly or indirectly concerned with IAS 39 include Cartesis Hyperion, Oracle and German giant SAP.
Jonny Cheetham, operations director of Cartesis, said that potential business is seen from three related sources. These are the impending Basel II packet of banking regulations to tighten up on operational risks by 2007, the Sarbanes-Oxley accounting reform legislation in the U.S., and IAS 39.
For company accounting, superior software is now becoming essential just to meet legal obligations, observed Cheetham. Directors of companies could be found criminally liable for accountancy system weaknesses that were considered quite acceptable until not long ago.
In the banking field, new standards would enable them to consolidate different operating sectors, such as credit cards and mortgage loans, and be able to report consolidated management information, covering, for instance, risk factors. There could be 20 such reporting sectors. Currently, banks carry out their reporting on a sector-by-sector basis.
Parallel views are held by Hubert Spaeth, director of business management of banking operations at SAP. Spaeth believes that full IAS, including IAS 39, will come. “It’s just a matter of time,” he said. However, he warns that upgrading software operating systems can take banks as much as one to two years. They also face the risk of things going wrong.
The solution to Europe’s woes therefore seems obvious, at least to another observer from the software supply industry, who suggested that the Brussels discussions should, without further ado, decide on full IAS in Europe, but with an implementation delay set back from January 2005 to January 2007.
During the two-year delay, banks would have to preserve all records, so that when their systems were finally operational they could eventually represent all data between January 2005 and January 2007 to meet IAS 39 norms.
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