Explanatory Memorandum to COM(2001)80 - Application of international accounting standards - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2001)80 - Application of international accounting standards. |
|---|---|
| source | COM(2001)80  |
| date | 13-02-2001 |
The 23-24 March 2000 Lisbon Council Conclusions stressed the need to accelerate completion of the internal market for financial services, set a deadline of 2005 to implement the Commission's Financial Services Action Plan and urged that steps be taken to enhance the comparability of financial statements prepared by listed i companies.
On 13 June 2000, the Commission adopted its Communication The EU's Financial Reporting Strategy: The Way Forward i. The Communication proposes that all EU companies listed on a regulated market should be required to prepare their consolidated accounts in accordance with a single set of accounting standards, namely International Accounting Standards (IAS) from 2005, at the latest. Adoption of uniform, high quality financial reporting rules in EU capital markets will enhance overall market efficiency, thereby reducing the cost of capital for companies.
On 17 July, the ECOFIN Council welcomed the June 2000 Communication and emphasised in its conclusions that the comparability of the financial statements of listed undertakings, financial institutions and insurance undertakings is an essential aspect of the integration of the financial markets. ECOFIN also invited the Commission to present a proposal to introduce the new requirement and to establish an appropriate mechanism for recognising IAS.
A recent survey i of 700 EU listed companies reveals that 79% of Chief Financial Officers support the European Commission's recommendation that IAS should be mandatory for listed companies by 2005. Strategic business and financial considerations, ahead of accounting issues, are the most compelling reasons for considering the change to IAS. These include marketability, cross-border mergers and acquisitions, shareholder dialogue and finance raising.
EU accounting legislation, adopted in the 1970s, provided a base level for harmonisation, as regards reporting requirements for limited liability companies. However, it has not been able to deliver sufficient comparability for publicly traded companies. A new approach is necessary to meet the current needs of a fully integrated European capital and financial services market, which the Lisbon European Council aspired to. Furthermore, these companies are subject to more demanding disclosure requirements from investors and need a financial reporting system that offers a much higher level of transparency and comparability of company performance.
The lack of comparability in financial reporting has adverse effects for stake-holders. Adaptation of financial statements to take account of local conventions was understandable when investors and other stakeholders were of the same nationality as the company. However, with the emergence of an integrated financial market, the securities of any one company are often held by an internationally diverse group of investors. The prevailing level of diversity is also detrimental to the effective supervision and efficient enforcement of financial reporting requirements of publicly traded companies.
In an integrated European securities market, it is necessary that listed companies publish their financial statements on the basis of a single set of financial reporting standards. Rather than relying on market forces to determine the standards that should be used, the most effective basis for ensuring this objective of comparability is a requirement for listed companies to publish financial statements that conform to a single set of standards. The EU itself will not attempt to produce a distinct body of accounting standards. This would miss the trend towards globalisation of financial markets and weaken the ability to raise capital by EU companies on third country markets. Therefore, an internationally recognised set of standards appears to be the most suitable basis for financial reporting in the EU.
In its 1995 Accounting Strategy Communication, the Commission expressed its preference for IAS as the set of standards for EU companies wishing to raise capital on an international basis. Since 1996 the IASC (International Accounting Standards Committee) has undertaken a gradual and in-depth process of revision and development of the standards. Also, in 1999 the IASC finalised the core set of standards agreed with International Organisation of Securities Commissions (IOSCO). IAS provides a comprehensive and conceptually robust set of standards for financial reporting specifically intended to serve the needs of the international business community.
Contents
- 2. An Internal Market approach
- 3. Main issues considered in this proposal
- 3.1. Timing and date of application
- 3.2. Role of the Accounting Directives
- 3.3. Endorsement mechanism
- Regulatory level of the endorsement mechanism
- Expert level of the endorsement mechanism
- 4. Outline of the contents of this proposal
- 4.1. Article 3 - Powers of the Commission and publicity
- 4.2. Articles 4 to 5 - Requirements applying to EU companies
- 4.3. Article 6 - The Accounting Regulatory Committee
- 4.4. Articles 7 to 10 - Final Provisions
This new approach is to deliver the European Union's political objective of cementing the conditions necessary for the realisation of an integrated, efficient capital market. Continuing to rely on establishing minimum, equivalent requirements concerning the extent of the financial information to be made available by publicly traded companies is no longer sufficient. In order to build a fully integrated capital market by 2005 at the latest, the Community must now adopt measures that bring about a much higher level of comparability of financial accounts throughout the Internal Market. This will improve competition and greatly facilitate the free movement of capital as an essential, key parts for completing EU's capital markets..
A Regulation is necessary to ensure that by 2005 all listed EU companies apply International Accounting Standards. It will also ensure early take-up and provide the right signals to the markets. By complying with IAS, the quality of financial statements will be dramatically improved and there will be an increasing degree of comparability. The credibility and consequently the usefulness of financial statements will be enhanced throughout the EU capital markets. Investors must be able to compare the financial statements of an enterprise through time in order to identify trends in its financial position and performance and also be able to compare the financial statements of different enterprises in order to evaluate their relative financial position and performance.
In order to achieve full legal certainty and consistent application of IAS by all listed EU companies, it is necessary to reduce the risk of national variations that do not correspond with today's needs of financial markets and which could hinder establishing a single set of accounting standards in EU capital markets. The approach proposed is also necessary in order to avoid uneven implementation and undue delays in transposition of the new requirements into national law.
This proposal introduces the requirement that, at the latest from 2005 onwards, all EU companies listed in a regulated market as well as companies preparing admission to trading prepare their consolidated financial statements in accordance with IAS adopted for application within the EU. It also provides an option for Member States to permit or require the application of adopted IAS in the preparation of annual accounts and to permit or require the application of adopted IAS by unlisted companies. This means that Member States can require uniform application of adopted IAS to important sectors such as banking or insurance, regardless of whether companies are listed or not. This proposal also establishes the basic rules for the creation of an endorsement mechanism that will adopt IAS, the timetable for implementation and a review clause to permit an assessment of the overall approach proposed.
It is extremely important to facilitate early application of the proposed legislation in order to meet the 2005 deadline set out by the Lisbon Council. It is also crucial for the objective of comparability to achieve consistent application of IAS by all listed EU companies, with no national variations. This is indispensable for the efficient functioning of the markets. The proposed Regulation will enter into force immediately in order to foster application of IAS by listed companies as soon as possible. However, as provided in the June Communication, a later date of application (before obligatory application in 2005) is necessary in order to allow Member States and companies to carry out the necessary adaptations to make the application of international accounting standards possible. During this transitional period Member States may however anticipate the requirement or permit the use of adopted IAS for all or certain companies within the scope of the proposal. Member States are also free to apply or to adopt any measures which do not conflict with the scope or objectives of the proposed Regulation and that ensure its application.
The requirement for listed companies to apply IAS will be additional to the Directives' requirements. The Directives will remain applicable to maintain a base level of comparability for all limited liability companies across the EU. This will also help unlisted companies that do not use IAS to be encouraged to move from the minimum requirements of the Accounting Directives to more sophisticated financial reporting such as IAS. Conformity with the Directives will be required for all companies, the application of IAS will be a supplementary requirement for listed companies.
In order to provide for the necessary public oversight, an EU endorsement mechanism is needed. The role of that mechanism is not to reformulate or replace IAS, but to oversee the adoption of new standards and interpretations, intervening only when these contain material deficiencies or have failed to cater for features specific to the EU economic or legal environment. The central task of this mechanism should be to confirm that IAS provide a suitable basis for financial reporting by listed EU companies. The mechanism will be based on a two-tier structure, combining a regulatory level with an expert level.
The regulatory level will include representatives of all Member States and operate on the basis of appropriate institutional arrangements under established comitology rules that will ensure full transparency and accountability towards the Council and the Parliament. The regulatory level will give its opinion as to whether or not an IAS standard shall be adopted by the EU and by which date adopted IAS apply within the EU.
An accounting technical committee will provide the support and expertise needed to assess the standards on a timely basis. It will also provide input into the IASC standard setting process at all stages, and particularly in the early phases. The expert level must be able to issue final opinions expeditiously. EU users of IAS and the markets in general, need to be certain about the standards to be used. Timely decision-making can only be ensured if the mechanism can anticipate potential problems concerning forthcoming IAS. This means that the mechanism needs to follow, proactively and continuously, the IASC standard setting process.
The expert level of the endorsement mechanism will ensure that EU users and preparers are involved in the preparatory discussions of the standards at international level and in the technical assessment of the standards before their EU adoption. This requires the involvement of standard setters, the accounting profession, users and preparers as well as a close co-operation with supervisory and prudential authorities. The endorsement mechanism will facilitate the application of IAS in the EU environment. The Accounting Technical Committee will also advise the Commission on whether or not an amendment to the Directives is recommended in the light of international accounting developments.
Paragraph 1 of this Article defines the powers conferred on the Commission for the adoption of international accounting standards in the Community
Paragraph 2 foresees that two years after entry into force of the proposal at the latest, the Commission assisted by the Accounting Regulatory Committee will, in accordance with the procedure laid down in Article 6, decide on the adoption and applicability of the international accounting standards listed in the Annex to the proposed legislation.
Paragraph 3 refers to the necessary legal publicity that would follow adoption of a standard. This will require publication in the Official Journal (title and reference number of the standard and its effective date).
All EU companies traded on a regulated market i as well as all companies preparing a public offer prospectus i in accordance with the Listing Particulars Directive i in view of their admission to trading on a regulated market shall be required to prepare consolidated accounts in accordance with IAS, at the latest from 2005 onwards. Member States will be permitted either to require or to allow non-traded companies to publish financial statements in accordance with the same set of standards as those for publicly traded companies. The requirement to use IAS relates to the consolidated accounts of publicly traded companies. Member States will be able to permit or require the use of IAS for individual accounts.
The endorsement mechanism's central regulatory function will be to assess IAS in order to confirm that they represent a suitable basis for financial reporting by listed EU companies. The Accounting Regulatory Committee corresponds to the regulatory level of the endorsement mechanism and will deliver its opinion upon the proposal of the Commission as to the standards and interpretations to be used (adopting or, conversely, rejecting a standard for application in the EU) and their date of application in the Community.
The specific, regulatory characteristics of these functions could imply that the composition of the Accounting Regulatory Committee may well be different from that of the Contact Committee set up pursuant to Article 52 of Directive 78/660/EEC, whose function is strictly of an advisory nature. Moreover, the powers of the Contact Committee also include statutory audit. It is therefore appropriate to create a new committee distinct from the Contact Committee, with the powers indicated in this Regulation.
The Accounting Regulatory Committee's procedure will follow existing comitology rules. It will be a committee composed of representatives of the Member States and chaired by the Commission. The Commission will provide the secretariat. Under such arrangements, the Commission will present to the Committee a report, which will identify the standard, examine its conformity with the Accounting Directives and its suitability as a basis for financial reporting in the EU. Within one month, the Committee must decide (on the basis of qualified majority voting) upon the proposal made by the Commission. This procedure will also apply for the adoption of amendments to previously adopted IAS. In accordance with the internal rules of procedure for the Accounting Regulatory Committee, the Commission may decide to invite experts to talk on particular matters, at the request of a Committee member or on its own initiative.
In preparing its report, the Commission may ask an accounting technical committee for advice. If this committee were to recommend the adoption of a standard, but the Commission did not agree with this recommendation, the Commission will substantiate its view and then ask the technical level to examine an alternative solution.
Article 7 requires Member States to inform the Commission and other Member States in case where they exercise any of the options included in the proposal. Article 8, for accountability purposes, requires the Commission to inform the Council and the European Parliament about the measures adopted pursuant to this Regulation. Also, as provided in the June 2000 Communication, this article establishes that the provisions, mechanisms and procedures laid down in the proposal will need to be reviewed subsequent to final implementation. This is foreseen by mid 2007.