Global Business

E.U. Drops Reconciliation Requirement

Following the move the SEC made last year, foreign firms doing business in Europe now can use their own accounting standards.
Alan RappeportJanuary 9, 2008

The European Union took another step toward convergence of international accounting standards by announcing on Tuesday that foreign-based companies doing business in E.U. countries no longer will have to reconcile their financial statements with E.U. standards.

The new regulation, to take effect in 2009, mimics last year’s move by the U.S. Securities and Exchange Commission to allow overseas companies to file statements using International Financial Reporting Standards (IFRS). Such firms previously had to convert their statements in the United States to the U.S. generally accepted accounting principles (GAAP) format.

However, the E.U. rule will apply only to companies based in countries that are on the path to convergence and plan to adopt IFRS by the end of 2011.

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“This is a crucial milestone towards our objective of promoting the efficiency of capital markets by establishing a common worldwide accounting language,” said Charlie McCreevy, European Internal Market and Services commissioner.

The new rule was more than three years in the making. McCreevey opted in 2005 to delay it because the United States was still requiring foreign companies to use U.S. GAAP in their filings, which was cumbersome and costly. The European Union estimated that the U.S. reconciliation requirement cost European companies €2.5 billion ($3.66 billion) per year.

The new regulation allows companies outside of Europe to use their own country’s version of GAAP as long as investors are able to make the same assessments of assets, liabilities, financial position, profit and losses, and future prospects as they can with IFRS. The basic equivalence test will be whether investors would be likely to make the same decisions based on either version of a company’s financial statements.

Equivalence should be welcome news for American businesses that operate in Europe. In 2006 the European-American Business Council supported efforts to eliminate reconciliation requirements as quickly as possible. They argued that the move would “greatly contribute to promoting investment and the efficient allocation of capital.”

Accounting standard setters around the world are likely rejoicing as well. Some have criticized the European Union for its reluctance to adopt IFRS in their entirety, saying it could unravel the push for convergence.

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