Global Business

European Group Seeks Accounting Changes

While finding broad similarities among U.S. and European accounting systems, the group of regulators cites "significant differences" among them, in...
Stephen TaubMay 2, 2005

The Committee of European Securities Regulators has concluded in a recent report that generally accepted accounting principles in the United States, Canada, and Japan are mostly equivalent to International Financial Reporting Standards.

CESR’s conclusion came in the context of moves in the United States and Europe toward closer recognition of each other’s accounting rules. Mutual recognition would lift burdens on companies wanting to list on exchanges outside their home continents.

U.S. Securities and Exchange Commission Chairman William Donaldson said he has discussed a “roadmap” with Charles McCreevy, the European Union Internal Market commissioner, that would allow foreign public issuers to not reconcile their financials to U.S. GAAP provided that they follow international financial reporting standards, according to the SEC.

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In its advisory report issued last week, however, CESR urged authorities in the three countries to address certain “significant differences” among the accounting systems that concern business combinations and group consolidations.

For example, the report cites companies that have special-purpose entities that don’t have to be consolidated for GAAP purposes but must be consolidated to comply with IFRS. Although such companies could report pro-forma balance sheets and income statements on their local GAAP basis, they would have to include the unconsolidated subsidiaries to have their financial considered compliant with both accounting systems.

The CESR also urged the accounting authorities in the three countries to put the finishing touches on their SPE policies “as quickly as possible so that the need for any supplementary statements may be eliminated altogether.”

The group is also calling for a change among companies that report under Japanese GAAP and have either accounted for mergers by the pooling-of-interest method and/or have consolidated subsidiaries on the basis of GAAPs not consistent with either IFRS, the United States, or Canada. Such companies should adhere to IFRS in reporting a pro-forma balance sheet and profit-and-loss account covering business combinations and consistent accounting policies, respectively.

CESR also urged the United States and Japan to put in place accounting policies for expensing stock options on a basis equivalent (but not necessarily identical) to those of IFRS on or before Jan. 1, 2007. “CESR understands that Japan is indeed considering proposals to adopt such a standard according to this timetable and the [United States] has recently adopted such a standard,” the report adds.

The report “represents a measured and technically robust assessment recognizing the objective of more open global capital markets which secures the protection of investors,” said John Tiner, chairman of CESR-Fin (the operational group of CESR which developed the document) and chief executive of the U.K. Financial Services Authority.

But the European regulators stressed that, on their own, their conclusions don’t provide adequate protection for investors. “CESR considers rigorous interpretation and application of accounting standards as critical as the quality of accounting standards itself,” stresses Paul Koster, a CESR official and commissioner at the Dutch Authority for the Financial Markets.

“Therefore, our conclusion on equivalence cannot rest on these standards alone. It is crucial that effective filters are in place for the interpretation and application of the standards, such as corporate governance, auditor oversight, and appropriate enforcement mechanisms in the home country of the issuer. It is also vital that effective filters are in place at the company level,” he said.