Europe's coordinating institution for national securities regulators - the Committee of European Securities Regulators - has issued an alert on the importance to issuers of giving clear and transparent disclosure of the accounting policies that they adopt in their consolidated annual statements.

Most of those reports cited by the CESR will be released in early 2006 for the first time under Europe's new International Financial Reporting Standards accounting guidelines.

The companies being addressed comprise most of the EU's 8,000 listed companies, in addition to U.S. firms listed on regulated markets in the EU. A small number of mainly smaller enterprises, with no subsidiaries, will continue to report under locally accepted accounting principles.

The CESR highlighted as one potential hazard that varied options available under IFRS rules could make it more difficult for investors to weigh the results from one company to another. That concern stems from the comparative flexibility of some of the standards included in the IFRS package.

Established by the European Commission in 2001, the CESR works to ensure consistent implementation of European legislation in the field of securities in the EU member states. Like the Securities and Exchange Commission in the U.S., it protects investors in order to facilitate capital formation.

The advisory body, which is based in Paris, is therefore stressing measures to give investors a clear basis on which to understand the results. The CESR underlines that the company reports must disclose a summary of their significant accounting policies.

"This requirement is very important and should include all information that enables investors to have a clear and complete picture on the use of the various [alternatives] ... in implementation," stated the CESR advisory and coordination committee.

The committee maintained that specifics must be disclosed on accounting for options for the future purchase of shares at a fixed price.

When it comes to areas not currently specified under IFRS, the accounting treatment selected has to provide meaningful information to the users of the financial statement, the CESR stated. Such areas include accounting for service concession arrangements, for public-private partnerships to build bridges, highways, etc.

Also addressed is the subject of emission rights, that is, "carbon accounting," a subject that is specified in U.S. generally accepted accounting principles. However, Europe - following the withdrawal of a draft from the International Financial Reporting Interpretation Committee - has no specific rules for the time being. The IFRIC is part of the London-based International Accounting Standards Board.

Accounting for minority interests is also mentioned in the warning by the CESR, but that is still subject to interpretation of the IFRS rules. The committee clearly said that all the above-mentioned aspects are covered in IAS 8. The rule - a long-established item - covers the way that accountancy standards are applied.

The CESR also highlighted the importance of spelling out precisely what companies are doing when they opt to apply forthcoming standards before those standards actually become a legal mandate. It noted that IAS requires additional disclosure when the forthcoming rules are not applied.

The CESR's current alert, which is one of only four on accounting issues it has issued since 2004, goes on to refer to the "carve out" of part of the IAS 39 code from IFRS. It forecast that a number of companies will nevertheless choose to apply the full version of IAS 39, on the recognition and measurement of financial instruments. Other firms may not apply the amended standard. As a result, companies will use different accounting approaches in the areas of hedge accounting. The committee commented that whatever they do, they should explain their policies, "all the more so where the 'carve out' is used."

As for the relationship between U.S. GAAP and IFRS, transparency in consolidated accounts is relevant to "equivalence." A European Commission official explained that the term refers to mutual acceptance of the other's accounting system in each economic zone - even if the systems were not fully converged. Consistent application was one of the key issues, he continued. Convergence would obviously facilitate equivalence.

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