by Jeremy Woolfe
Brussels — The European Commission endorsement of Europe’s package of international accountancy standards, which would normally have to be cleared by a political committee in July, appears now to be set for clearance later this year — but it could be even later than that.
High-profile problems concerning objections from parts of the European banking and insurance sectors have succeeded in threatening the hoped-for achievement of having all the international accounting standards in place by Jan. 1, 2005 — and the probable delays could already be damaging the European capital market.
Paul Rutteman, secretary-general of the European Financial Reporting Advisory Group, said that, in the current impasse, the European debate now is: Will it be better for Europe to have endorsed international accounting standards on time and with the option of improving them later, or should Europe seek improved standards, but at a date later than the originally planned January 1?
EFRAG was set up in 2001 to bring together European accountants, industry and consumer groups in negotiations with the European Commission, the EU’s civil service, over international accounting standards. The commission is also advised, politically, by the Accountancy Regulatory Committee, which represents the EU member states.
Rutteman said that Europeans view the International Accounting Standards Board standards that are adapted from U.S. models as certainly thorough. However, Europeans feel that they were created in a litigious environment, and contain excessive detail rather than setting out the principles.
Among the various problems impacting Europeans are interest rate swaps to protect asset values. European banks are fearful that the requirements will lead to higher volatility in equity and, therefore, a fatter capital cushion. They want a standard that relates to the way that they actually do business, with the derivatives backing assets and liabilities grouped in time baskets.
Anything else, they claim, is “ivory towerism.”
However, opposition to the IASB’s “stable platform” is not unanimous. A letter from the bank HSBC, addressed to Alex Schaub, commission director general for the internal market, expressed the view that, no matter what the internecine squabbles in Europe, the international bank itself would adhere to full international standards. The bank would oppose an “IAS lite” — that is, a version with fudged versions of IAS 32 and 39 (and IFRS 4).
Another group joining the protest is insurers, especially in France. They are nervous about IAS 39, which sets “fair value” accounting for financial instruments at market values. They see their profits rising and falling as their assets (generally bonds) have to be shown in the books from year to year at current market price. They talk about “artificial volatility.” Bonds, they say, should be booked at face value.
Overall, the French see the IASB as too “Anglo-dominated,” with its membership including the U.S., the U.K., Australia, Canada and South Africa, with just one French member. Other members are from Japan, Germany and Switzerland.
Not everyone agrees with the French insurers. Some firms from the U.K., the Netherlands and Germany are themselves putting pressure on Frits Bolkestein, the EU Commissioner for the Internal Market, to push ahead for endorsement of a complete European package as quickly as possible.
The early date set for endorsement is necessary in the EU to cope with the inevitable delay resulting from translation. Currently, the EU’s 15 member states have 11 official languages, into which all legal texts must be translated. Beginning May 1, the 10 “accession” countries (mainly former Soviet Union-dominated countries from Eastern Europe) will have brought the total up to a legislative nightmare of 20 different languages.
The FEE, the Brussels-based European Federation of Accountants, commented that if IAS 32 and 39 are not endorsed, Europe’s 7,000 listed companies would not be able to apply the full set of IFRS. Companies would not be able to utilize the transitional provisions of IFRS 1, and there would be a clear loss of opportunity for convergence with U.S. generally accepted accounting standards. This would substantially lower acceptance by European companies in accessing U.S. capital markets.
From European industry’s point of view, this would be a blow. Kevin Stevenson of the IASB said that European companies cannot fall back on EU funds, because the financial markets are just not there. So-called “major” companies are often “closely held,” and there is a lack of range of buyers and sellers.
Rutteman said that, if nothing changes, the result for the U.S. will most likely be continued higher comparative confidence in U.S. capital markets on the part of both domestic and international investors. The prospect of delay to IAS will upset various European sectors, but especially large German companies, including those with listings in the United States.
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