The course is firmly set for the European Union to have International Accounting Standards in place for its 7,000 listed companies by Jan. 1, 2005.

But the new rules will come in with one standard - IAS 39 - with a carve-out of 17 paragraphs. The result would be to allow fair value hedge accounting of bank core deposits on a portfolio basis. Against this relaxation, it will prohibit the use of the IAS 39 fair value option as it applies to liabilities.

This overall position follows a recommendation to go ahead with "IAS-lite" by the governments of the 25 EU countries. Their Accountancy Regulatory Committee confirmed its decision in early October, a ruling that has since been approved by the European Parliament's economic and monetary affairs committee.

In consequence, the members of the European Commission themselves have little choice but to continue on the same track with formal acceptance, which is expected before the end of November.

Overall, the effect would be a big step forwards for the growth prospects of European industry, which has been developing at a snail's pace. Since the early 1980s, per-capita GDP growth in the EU has run at approximately 70 percent of that in the U.S. The fragmented nature of capital markets, which leads to a high rate for investment, has been blamed.

Half-baked or not, the new set of standards has gotten mixed reactions.

Carlos Almaraz, a representative from the Union of Industrial and Employers' Confederations of Europe - which bills itself as the official voice of 16 million small, midsized and large companies in Europe - welcomes the "development of a single set of high-quality, global accounting standards that will improve transparency and comparability of information in financial statements."

He added that the use of International Financial Reporting Standards in the EU must be seen as a step in the convergence process that must be followed by a similar move from the U.S. "That should attract investors," said Almaraz.

In contrast, the European Trade Union Confederation does not believe that the new accounting standards are "either a priority or the right approach."

Wilfried Wilms, of the European Banking Federation, noted defensively that in September the London-based International Accounting Standards Board set up a working group to deal with the question of financial instruments.

He interpreted this move as implied acceptance by the IASB that IAS in its present form "is not perfect." He thought that, anyway, it would help Europe attract more foreign direct investment, because "IAS will be a great leap forwards, especially in comparison with what we have today."

A cooler reaction comes from the European Financial Advisory Group, which coordinates different interest groups over IFRS. Project manager Reinhard Biebel stated that "this is not the solution we were hoping for." He admitted that it is, however, better than having no standard at all, adding that the carve-out leaves room for companies in Europe to decide whether to adopt the full or the carved-out version of IAS 39, at least with regard to the hedging rules.

Biebel thinks that the resistance to allowing application of the fair value option to liabilities may be solved reasonably soon by the IASB. This would be in a way that addresses the concerns of the European Central Bank and the Basel Committee on banking regulation. On the hedging issue, he is more pessimistic regarding the timetable.

Among regulators showing signs of disquiet at what could become something of a goldmine for lawyers interpreting the new legislation is the Danish government. It is worried about the effect of the carve-out on accounting for mortgage loans, as home loans represent a high proportion of GDP in Denmark. Denmark wants to be able to use the fair value option on liabilities as well as assets to prevent a mismatch, which would result in volatility.

The position of the European Accountants Federation, or FEE, remains steadfast against usurping the basic principles of accounting, and is against the IA539 carve-out. However, its spokesman, Derek McGlynn, also noted that, compared with what went before, the new rules are "a great step forwards in progress."

'Very unsatisfactory'

Behind the scenes, Frits Bolkestein, European commissioner for the internal market, has not heaped praise on the compromise that he feels he has been forced to nurture. What is coming is his only realistic option, he explains. It would be less catastrophic for European business than to risk having no international financial accounting standards in Europe at all.

In a recent interview Bolkestein said, "It is a very unsatisfactory situation, let's not mince our words ... but it was the only possibility apart from having nothing, and I thought the risk was worth taking."

In fact, Bolkestein has gone down the path of "convergence." This is the term used in Brussels to describe the bringing together, step by step, of the norms across the EU member states, now 25 in number. It has been going on since the signing of the treaty that created the EU's predecessor, the European Coal and Steel Community, in 1951.

Simultaneous with the final steps towards some kind of reality for the EU's IAS is a move by the IASB and the Accounting Standards Board of Japan to start talks about minimizing the differences between IFRS and Japanese accounting standards.

Other steps to put the EU's company regulations to rights have been put in hand by the departing Bolkestein. He has set up the European Commission's European Corporate Governance Forum to tighten up on corporate governance in Europe. David Devlin, president of FEE, is one of 15 forum members. Issues will include disclosure of directors' remuneration and measures to combat the off-shoring of financial operations.

Bolkestein has also been pushing ahead with a move to tighten up on regulations covering auditors and auditing in Europe (the Eighth Directive).

At the end of October, he handed the reins over to Charlie McCreevy of Ireland, the new commissioner for the internal market. However, his division's portfolio on the free movement of goods is moving to the division for enterprise, under commissioner Gnter Verheugen. The portfolio on the free movement of capital is moving from the department of economic and monetary affairs to the division of the internal market.

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