Capital Markets

Europe Called Threat to Accounting Convergence

European "carve-outs" to accounting standards could disrupt globalization, the International Accounting Standards Board contends.
Alan RappeportOctober 18, 2007

The International Accounting Standards Board has warned that if European policymakers try to create their own set of accounting standards, it could jeopardize the push towards a single global standard, the Financial Times reported Thursday.

Gerrit Zalm, the IASB’s new chairman of the trustees, told the FT that if Europe continues to demand exceptions to international standards, other countries could do the same.

Such demands could unravel the move to universal International Financial Reporting Standards. “One of my first priorities will be no new carve-outs in Europe and trying to get rid of the existing carve-out, because if Europe is doing this, other countries could get the same inspiration and then all the advantages of the one program fade away,” Zalm told the FT.

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One key “carve-out” was Europe’s decision to change IAS 39, a standard on hedge accounting. European standard-setters also came close this year to changing IFRS 8, which covers reporting business segments.

The issue is especially sensitive here because the Securities and Exchange Commission is considering allowing foreign companies to file under IFRS without having to reconcile with U.S. generally accepted accounting principles. SEC acceptance of foreign issuers’ statements would represent a culmination of efforts by the Financial Accounting Standards Board, which sets GAAP, and by the IASB, which sets IFRS, to converge the two standards.

Last month, during the SEC’s comment period on convergence, a letter from the European Association of Listed Companies highlighted the difficulty European firms could face if forced to adopt IFRS in their “pure” form. The letter said: “While European companies would prefer that there be only one ‘IFRS’ (and not an IASB version plus jurisdictional variants), they are faced with the reality that they are legally bound to publish financial statements in accordance with IFRS as adopted by the European Union.”

Although the EU’s changes to IFRS have so far been minor, according to the association, “there is no guarantee, however, that it will always be true,” the association wrote. Because a future conflict between IASB’s version of IFRS and the EU’s “could result in confusion for investors,” the association said it strongly recommends that the SEC allow companies to list in the U.S. using the EU-approved version of IFRS.

In another letter, Michael Ryan, of the U.S. Chamber Center for Capital Markets Competitiveness, urged the SEC to be reasonable in dealing with companies from places that use different versions of IFRS. “Requiring rigid adherence to the IASB version of IFRS would in effect be forcing foreign private issuers to transition from one reconciliation process to another,” Ryan said.

Thus far the SEC has said it would only accept “full” IFRS to avoid being flooded with exceptions. But adhering rigidly to that policy would require European companies to continue reconciling their books. Some have expressed concern that the SEC may use convergence as an opportunity to exert influence on global accounting standards.

Meanwhile, the EU’s attempts to maintain its own version of IFRS reflects the difficulty of imposing a “one-size-fits-all” standard. “There’s a lot of tension between the IASB and the European Union,” said Anthony Cope, a recently retired member of the IASB, during a speech in Boston earlier this month. “The [EU] always wanted a standard-setter of their own.”