European Union’s Role in International Standards Setting
Will Bumps in the Road to Convergence
Affect the SEC’s Plans?
Kennard S. Brackney and Philip R. Witmer
2005 - The move toward accounting harmonization centers around
the standards being developed by the International Accounting
Standards Board (IASB). Presently, 65 countries require their
listed companies to use the IASB’s International Financial
Reporting Standards (IFRS). That total approaches 100 when
including countries that allow their companies to use IFRSs
and countries that require only certain companies to use them.
The harmonization movement received a significant boost in
2002 when the European Union (EU) adopted a regulation requiring
public companies to convert to IFRSs beginning in 2005. The
EU now accounts for more than a third of the countries that
prescribe application of IASB standards.
long-time participant in harmonization efforts, the United
States added to the dramatic progress in 2002 by entering
into an agreement with the IASB to begin converging its
standards to IFRS. The Sarbanes-Oxley Act of 2002 (SOA)
requires FASB to work toward international convergence on
high-quality standards in order to maintain its standards-setting
role and funding. In a relatively short time, FASB and the
IASB have made important progress in narrowing their differences.
the IASB is concerned with developing standards that can
be applied on a global basis, it recognizes that achieving
this objective depends on help from the United States and
the EU. The IASB’s reliance on these two key players
is evident from their heavy representation on its oversight
and standards-setting bodies. Together, the United States
and the EU account for 10 of the IASB’s 19 trustees,
and 10 of the IASB’s 14 board members.
April 2005, the SEC announced its intention to accept financial
statements from EU companies without requiring a reconciliation
to U.S. standards if certain conditions can be met. Acceptance
depends upon FASB and the IASB continuing to narrow their
differences and upon the EU achieving full compliance with
IFRS. The SEC anticipates that these conditions can be satisfied
by 2009, and possibly as early as 2007. At the same time,
the EU is contemplating whether to accept the financial
statements of U.S. companies as equivalent to IFRS reporting.
With the roadmap in place, it is important for the U.S.
accounting and business communities to monitor developments
in the EU. This article examines recent developments, from
the regulation requiring convergence with IFRSs to the current
controversies relating to financial instruments and emission
rights. The authors also discuss the EU’s single-market
vision, its new IFRS endorsement mechanism, and the progress
and controversies in adoption of IFRSs.
EU’s Single-Market Vision
background. The EU traces its roots to the
European Coal and Steel Community, formed in 1951. The six
member countries signed the Treaty of Rome in 1957 to form
the European Economic Community (EEC), and extended their
cooperation to other sectors of their economies. The EEC
expanded to nine members in 1973, to 10 members in 1981,
and to 12 members in 1986. In 1995, the EEC members signed
the Maastricht Treaty to establish the EU, and increased
its size to 15 countries. In May 2004, the EU expanded again,
to its current membership of 25 countries. Exhibit
1 shows the 25 member states and four candidates for
membership, and identifies the 12 countries that have adopted
the euro as their official currency.
key governing bodies in the EU include the European Parliament,
the Council of the European Union, and the European Commission.
The European Parliament and the EU Council together are
responsible for the legislative aspects of EU government.
The council takes on varying configurations according to
the nature of the issue being considered. The Economic and
Financial Affairs Council (ECOFIN) configuration deals with
economic and financial matters, including accounting issues.
The European Commission (EC) conducts the executive aspects
of EU government. The EC is the body most involved with
developing accounting requirements in the EU.
directives. The founding treaties give the
EU authority to develop laws to regulate accounting and
auditing for the member states. Its first attempt to establish
common financial reporting requirements was the issuance
of two Accounting Directives: the Fourth Directive (1978)
and the Seventh Directive (1983). Accounting directives
are binding on the member states as to the result to be
achieved, but they allow states great latitude in achieving
Fourth Directive, the broader of the two, sets out recognition
and disclosure guidelines. It addresses financial statement
formats as well as selected recognition and valuation issues.
The Seventh Directive addresses consolidated reporting.
The directives are rather rigid in terms of financial statement
format, but less detailed and more permissive than U.S.
GAAP in terms of recognition and valuation. For example,
prior to recent changes to the directives associated with
the implementation of IFRSs, the accounting options that
they permitted for goodwill included capitalizing it, amortizing
it, or writing it off directly to retained earnings.
a result of the directives’ permissiveness and the
varying financial reporting environments within the EU,
the member states’ financial reporting standards and
practices are very diverse. In countries with a stronger
equity culture (e.g., Ireland and the United Kingdom), financial
reporting has tended to be more important and more transparent.
In contrast, financial reporting has tended to be less important
and less transparent in countries where debt financing dominates
(e.g., France and Germany). The International Forum on Accountancy
Development’s GAAP 2001 survey demonstrates
the broad diversity of financial reporting standards among
the EU member states under the directives. The survey identified
differences between a country’s accounting requirements
and International Accounting Standards (IAS) for 80 key
financial statement items. The survey found that the number
of differences with IASs ranged from a low of 20 (Ireland)
to a high of 42 (Austria). The mix of types of differences
(i.e., recognition, valuation, and disclosure issues) varied
significantly as well. It is not surprising that Fritz Bolkestein,
then internal market commissioner of the EC, described the
state of variation in accounting standards as a European
“Tower of Babel.”
regulation. The variation in accounting standards
mirrored the generally fragmented state of capital markets
in the EU. Because EU capital markets lack the size and
the degree of integration of those in the U.S., many of
the EU’s larger companies seek financing in U.S. markets.
With the goal of improving the integration and competitiveness
of EU capital markets, the EC detailed its vision for a
single EU financial services market in a June 2000 position
paper, EU Financial Reporting Strategy: The Way Forward.
The EC identified harmonization of accounting standards
for listed companies as central to achieving its vision;
more specifically, it identified the adoption of IASs as
the best path to successful accounting harmonization.
EC formally proposed an IAS regulation in February 2001
calling for listed companies in the EU to begin applying
IASs in 2005. At the urging of France and Germany, the EU
Council added an amendment allowing member states to delay
the required adoption of IASs to 2007 for companies with
only listed debt and for companies that use a globally accepted
GAAP (e.g., U.S. GAAP). The European Parliament approved
the amended regulation in March 2002, and the EU Council
approved it three months later.
IAS regulation has affected the vast majority of listed
companies in the EU. At the time the regulation was approved,
only 275 of the EU’s 7,000 public companies used IAS.
Of the 7,000 public companies, 6,500 were reporting under
their applicable national standards. All of these companies
were required to convert to IFRS beginning January 1, 2005.
(IFRSs are issued by the IASB, which was formed in 2001.
IASs were issued by the IASB’s predecessor, the International
Accounting Standards Committee, and many of them remain
in effect. The term IFRSs in this article includes the surviving
IASs.) With the EU’s expansion in 2004, the number
of EU public companies applying IFRS in 2005 has grown to
IAS regulation should be viewed as adding to, rather than
replacing, the Fourth and Seventh directives. These directives
will continue to apply to most private companies, and thus
the IAS regulation calls for modernizing them in the direction
of IFRSs. Also, certain aspects of the directives that are
not addressed in an IFRS will continue to apply to all companies,
such as certain required disclosures concerning a company’s
workforce and its subsidiaries.
important developments in EU accounting related to financial
reporting have occurred since the issuance of the IAS regulation.
The first is the establishment of an endorsement mechanism
to evaluate IASB standards for adoption in the EU. The second
is the series of adoption controversies that have arisen
in the evaluation of pronouncements on financial instruments
and emission rights. Such controversies are problematic
because they could derail the EU’s full adoption of
IFRSs or delay its implementation of them. These outcomes
would impede harmonization and could affect the U.S.’s
decision to accept reporting by EU companies.
guidelines. Under the IAS regulation, the
EU’s adoption of an IASB pronouncement is not automatic.
The regulation established an endorsement mechanism for
the EU to use in evaluating IASB pronouncements. Pronouncements
subject to endorsement review include the IASs and Standing
Interpretations Committee Interpretations (SIC) in existence
at the time the IAS regulation was adopted, any subsequent
IASB amendments to them, and the new IFRSs and International
Financial Reporting Interpretations Committee Interpretations
(IFRIC) issued by the IASB.
IAS regulation specifies criteria that an IASB pronouncement
must satisfy to achieve adoption. The pronouncement must:
1) enhance understandability, reliability, and comparability;
2) facilitate “true and fair” reporting by companies;
and 3) contribute to the EU public good. The regulation
established a two-tier endorsement mechanism to help the
EC evaluate the acceptability of IASB pronouncements. While
the EC possesses the ultimate decision-making authority
in adopting pronouncements, it receives input from two endorsement
bodies, one in the private sector and one in the public
2 shows the key players and their roles in this process.
group. The European Financial Reporting Advisory
Group (EFRAG), formed in June 2001 by European financial
reporting interest groups, serves as the private-sector
endorsement body. EFRAG advises the EC on the technical
merits of IASB pronouncements, and also conveys the EU’s
perspective in the IASB’s standards-setting process.
The more successful EFRAG is at influencing the IASB during
the development process, the more likely it is to endorse
the resulting standard when issued. Thus, the EU considers
EFRAG’s proactive role to be of primary importance.
carries out its technical agenda through the Technical Expert
Group (TEG). At present, TEG’s 11 voting members are
drawn from seven EU countries. Membership is tilted toward
the largest economies, with France, Germany, and the UK
having multiple voting representatives. Official, nonvoting
observers include the EC, the IASB, and the Committee of
European Securities Regulators. EFRAG seeks input from national
standards-setting bodies through the Consultative Forum
of Standard Setters, which it created. EFRAG may recommend
rejecting an IASB pronouncement, but this requires a two-thirds
majority of TEG’s voting members.
Regulatory Committee. After receiving and
considering EFRAG’s endorsement advice, the EC may
formulate a draft regulation and submit it to the Accounting
Regulatory Committee (ARC), the other endorsement body.
ARC’s role is to give an official endorsement opinion
on the proposal; as a public-sector body, it operates within
the confines of EU law, process, and oversight. While the
EC chairs ARC, its membership consists of one voting representative
from each of the 25 member states. Endorsement decisions
are determined by simple majority. In contrast to EFRAG,
ARC considers the full range of potential economic and political
effects of an IASB pronouncement on member states.
decisions. If ARC recommends approving the
proposed regulation, the EC is able to issue a final regulation
adopting the IASB pronouncement. On the other hand, if ARC
recommends rejection, the EC has two options: It can return
the controversial aspects of the issue to EFRAG for further
consideration and advice, or it can send the proposal, along
with ARC’s recommendation to reject, to the EU Council
for it to render a final adoption decision.
Progress and Controversies
IASs and SICs. As the first step in the EU’s
conversion to IASs, the IAS regulation stipulated a review
of the existing inventory of IASs and SICs to provide a
basis for an adoption decision. The regulation set a deadline
of December 31, 2002, for the EU to complete its review
and adoption of the existing standards. In June 2002, EFRAG
recommended adopting them in full. Despite the prompt response
from EFRAG, the EU missed its December 31 deadline, citing
the challenge of translating the existing standards into
the EU’s 11 official languages at the time.
IASB’s proposed changes to two standards dealing with
financial instruments likely contributed to the missed deadline
as well. In June 2002, the IASB issued an exposure draft
to revise IAS 32, Financial Instruments: Disclosure
and Presentation, and IAS 39, Financial Instruments:
Recognition and Measurement, as part of an improvements
program. The exposure draft proposed changes to the guidance
on financial instruments, the most significant and controversial
of which related to the derivative and hedging provisions
of IAS 39. Specifically, it proposed allowing special hedge
accounting for portfolio hedges of interest-rate risk. These
hedges, also known as macro-hedges, concern a collection
of assets, liabilities, or overall net of the two. The IASB’s
proposal produced a strong reaction, particularly in the
sent a comment letter to the IASB in October 2002 expressing
its concerns with the proposed changes to hedge accounting
requirements. The letter conveyed its view that the accounting
for a hedge should follow from the accounting for the hedged
item. For hedged items such as receivables and financial
liabilities that are accounted for at amortized cost, accounting
for the related hedging instrument at fair value creates
a mismatching of accounting measurements and, as a result,
artificial volatility in a company’s equity or net
income. The letter also conveyed EFRAG’s concerns
with the application of fair-value hedge accounting as proposed
in the exposure draft. When a hedged item is settled prior
to maturity, and the related hedging instrument remains,
the hedge is considered ineffective, which disqualifies
special hedge accounting. Furthermore, the exposure draft
required companies to identify specific items in a portfolio
being hedged and to mark them individually to fair value,
tasks that would be cumbersome for a large portfolio.
member states (Belgium, France, Italy, Portugal, and Spain)
expressed strong opposition to IAS 39 and to the proposed
changes in the exposure draft. French president Jacques
Chirac joined the debate by requesting a meeting of ECOFIN
to discuss how to pressure the IASB into eliminating the
fair-value reporting requirements for financial instruments
altogether. At the July 2003 ECOFIN meeting, Chirac stated
that adopting IASs 32 and 39 would be harmful to EU banks
and national economies, and he called for the EU to drop
the two standards from its endorsement review. ECOFIN announced
that it might recommend delaying adoption of IASs 32 and
39. When ARC met the following day, it unanimously recommended
adopting the existing IASs, except for IASs 32 and 39, and
three related SICs.
September 2003, the EC issued a regulation requiring adoption
of the 32 IASs and 28 SICs approved by ARC. The EU hoped
to work with the IASB to produce new versions of the standards
on financial instruments that could be approved by the EU’s
endorsement mechanism. With input from the EU, the IASB
issued an amended version of IAS 32 in December 2003. The
revised standard added guidance on netting of assets and
liabilities and on classification of redeemable preferred
stock, compound financial instruments, and derivatives based
on an entity’s own shares. EFRAG and ARC endorsed
the amended IAS 32, and the EC adopted it in December 2004;
EU companies were required to apply it beginning in 2005.
In sharp contrast to the relatively smooth revision and
adoption process for IAS 32, the EU’s consideration
of IAS 39 has proved far more contentious, particularly
concerning macro-hedging and the fair-value option.
39 macro-hedging controversy. EU banks objected
to the form of the special hedge accounting proposed in
the IASB’s June 2002 exposure draft for macro-hedges
of interest-rate risk. Banks frequently use macro-hedges
to neutralize the interest-rate risk on their variable-rate
demand deposit liabilities (DDL). The exposure draft proposed
cash-flow hedge accounting for these hedges, which banks
opposed because they believe it creates artificial volatility
in their reported equity.
3 presents an example of cash-flow hedge accounting
for a bank’s macro-hedge of interest-rate risk. Banks
frequently employ interest-rate swaps to hedge the interest-rate
exposure associated with their variable-rate DDLs. With
cash-flow hedge accounting, a bank revalues the interest-rate
swap to fair value at reporting dates, and reports the change
in fair value each period directly in equity. In contrast,
the hedged item (portfolio of DDLs) is not revalued each
period. Rather, the DDLs are reported at their nominal value
(sum of customers’ account balances).
the example, the variable interest rate on the DDLs increases
during Year 1. When the variable rate increases, the bank
reports higher interest expense on the DDLs in net income.
At the same time, it reports the interest-rate swap as an
asset and shows a corresponding unrealized gain in equity.
In addition, the bank must make a reclassification entry
to shift a portion of the unrealized gain from equity to
net income. For the perfect hedge in this example, the amount
of unrealized gain reclassified from equity to income is
the amount required to offset the increase in interest expense
(€20,000 for Year 1). In its equity section, the bank
shows the residual portion of the unrealized gain that pertains
to the swap’s remaining term (€36,668 at the
end of Year 1). The variable rate on the DDLs decreases
during Year 2, leading to a net unrealized loss at year-end
of €9,709. Thus, in the example, the unrealized gain
at the end of Year 1 becomes an net unrealized loss at the
end of Year 2. Many EU banks view these changes in equity
as artificial volatility caused by the IASB’s “mixed-measurement”
model, which requires DDLs to be reported at their nominal
amount rather than their fair value.
banks cite an additional problem if customers draw down
their accounts: The hedged item (portfolio of DDLs) would
decrease, yet the hedge would remain in force. The hedge
would be ineffective at that point, forcing the bank to
give up special hedge accounting and reclassify the remaining
unrealized gain on the hedge to net income. Thus, the volatility
would be shifted to the income statement.
the release of the June 2002 exposure draft, many EU banks
and other companies lobbied the IASB aggressively, calling
for the board to revise the proposed guidance for macro-hedges
to permit fair-value hedge accounting. With fair-value hedge
accounting, changes in the fair values of the hedged item
and the hedging instrument offset each other in net income.
EU banks asserted that fair-value measurement of DDLs is
appropriate because, in their experience, the actual term
of these accounts is a year or more, and customer withdrawals
can vary over this period with changes in interest rates.
So, with the settlement of DDLs likely to be deferred at
least a year, banks claim the present value of the expected
future settlement of these accounts is less than the accounts’
nominal amount. Moreover, the banks believe the value of
their DDLs varies over time with interest-rate changes,
which impact customer withdrawals (a form of interest-rate
August 2003, IASB responded to the lobbying by issuing a
revised exposure draft on portfolio hedging. The revision
extended the use of fair-value hedge accounting to more
situations, and addressed application concerns raised by
EFRAG and others. It proposed allowing companies to group
hedged items according to their expected maturities; to
identify a currency amount of hedged items; and to use a
separate valuation account to adjust hedged items to fair
value. However, the revision specifically precluded the
use of fair-value hedge accounting for the interest-rate
risk associated with DDLs. The IASB cited the immediate
settlement rights on these accounts as the basis for reporting
them at their full nominal amount. The IASB wanted to finalize
the guidance on macro-hedging in time for the EU and others
to begin applying it in 2005, and in March 2004 issued an
amendment to IAS 39 that was in line with the August 2003
revised exposure draft.
39 fair-value option controversy. A second
aspect of IAS 39 has met with stiff resistance in the EU
as well. The June 2002 IASB exposure draft proposed a fair-value
option for companies to extend the application of fair-value
measurement (with value changes reported in net income)
to financial assets and liabilities that are not permitted
this treatment by IAS 39. A company electing this option
must do so at the time of initial recognition of the asset
or liability, and the election is permanent. The IASB added
this option to address the mixed-measurement problem in
IAS 39, whereby certain financial assets are measured at
fair value but others are not. Moreover, financial liabilities,
which many banks and insurers manage with the goal of maintaining
a natural hedge of the interest-rate risk on their financial
assets, are reported at their amortized initial amount.
This mismatching of asset and liability measurements creates
artificial volatility in income. With the fair-value option,
companies could report matched financial assets and liabilities
at fair value and thus achieve a natural offsetting of unrealized
gains and losses in income.
many EU banks and insurers favor the fair-value option,
banking regulators such as the European Central Bank (ECB)
strongly oppose it because they believe weaker banks with
deteriorating credit conditions could use it to write down
their liabilities, thus helping them meet statutory capital
requirements. Despite the concerns, in December 2003 the
IASB finalized amendments to IAS 39 that retained the fair-value
39 carve-out compromise. The EU returned to
IAS 39 again after the IASB amended it in December 2003
and March 2004. At a meeting in June 2004, ARC conducted
a straw poll on IAS 39; four member states (Belgium, France,
Italy, and Spain) opposed adoption of the standard, and
six others (including Germany) abstained. The large number
of opposing and abstaining countries raised the possibility
that ARC might not recommend adoption of the standard. When
EFRAG met a month later, TEG’s vote was 5–6
against adoption, falling short of the two-thirds majority
required for a recommendation to reject. Officially, EFRAG
issued no opinion on IAS 39.
the IFRS implementation date looming, the EC moved quickly
to formulate a compromise proposal. It proposed temporarily
removing from the EU’s adoption review the most controversial
aspects of IAS 39, those relating to portfolio hedging and
the fair-value option. The EC reasoned that these “carve-outs”
would give EU interests more time to develop alternative
approaches and present them to the IASB. With the carve-out
version of IAS 39, EU banks would not have to apply cash-flow
hedge accounting to macro-hedges involving DDLs and would
be free to choose fair-value hedge accounting. In addition,
EU companies would not be permitted to elect the fair-value
EC asked EFRAG to conduct a limited review of the carve-out
proposal to determine if it would be acceptable from a technical
perspective. TEG gave a favorable assessment of the proposal
as a short-term solution, but expressed concern with applying
it on a long-term basis. ARC endorsed the proposal in October
2004, despite opposing votes from the Czech Republic, Denmark,
Hungary, and Sweden. The EC adopted the carve-out version
in November 2004, with application required in 2005.
that time, EU interests have continued to lobby the IASB
to rework the carved-out aspects of IAS 39. The European
Banking Federation proposed an alternative hedge accounting
concept, interest-rate margin hedging, which the IASB is
examining. A rapid resolution of the differing viewpoints
on macro-hedging seems unlikely at this time.
contrast to the standoff on the macro-hedging issue, the
two sides have resolved their differences on the fair-value
option. The ECB sent a proposal to the IASB in 2004 asking
for restrictions on use of the fair-value option to prevent
companies from writing down their liabilities due to their
own deteriorating creditworthiness. The IASB responded favorably
to that input, and after further discussions, it issued
an amendment in June 2005 limiting use of the option to
a few specified situations where fair value is verifiable.
These include the following:
Financial assets and liabilities with embedded derivatives;
Financial assets and liabilities where use of the option
significantly reduces an accounting mismatch; and
Financial assets and liabilities evaluated on a fair value
basis according to a documented risk management strategy.
and receivables are specifically excluded. Instruments with
embedded derivatives (e.g., convertibles) are included to
ease the requirement under IAS 39 to separate the embedded
derivative from its related component and apply fair-value
accounting to it. As an unusual show of its support for
these amendments, EFRAG deviated from its normal process
and issued a draft recommendation to adopt the new guidance
prior to its official release. ARC followed with its endorsement
in July 2005. Thus, one of the two IAS 39 carve-outs has
now been eliminated.
remaining carve-out is creating confusion and frustration
within the EU. For example, the United Kingdom’s Accounting
Standards Board, which opposed the IAS 39 carve-outs, has
contemplated recommending that British companies apply the
macro-hedging guidance in IAS 39 as issued by the IASB.
Because the carve-out relating to macro-hedging allows,
rather than requires, EU companies to opt out of the cash-flow
hedge accounting guidance in IAS 39, the potential exists
for different companies to apply different hedge accounting
treatments. The flexibility provided in this carve-out will
impair comparability across EU companies, and with non-EU
companies that apply IAS 39 as issued.
IAS regulation requires the EU to also review new IASB pronouncements
upon their issuance. To date, the IASB has issued seven
IFRSs (1–6), and six IFRICs (1–5), and 12 amendments
to existing standards. Exhibit
4 summarizes the EU’s endorsement and adoption
decisions on these pronouncements. EFRAG has reviewed them
and issued a recommendation to adopt for all but one, IFRIC
3, which relates to reporting of emission rights. ARC has
reviewed 17 of the new pronouncements and recommended adoption
for all. Thus far, the EC has formally adopted 11 of those
endorsed by ARC. ARC and the EC are still reviewing several
emissions controversy. IFRIC 3 is creating
another adoption controversy in the EU. Following TEG’s
0–8–2 vote (two abstentions) on IFRIC 3 in February
2005, EFRAG issued a recommendation in May to reject it.
With the EU introducing a system of tradable greenhouse-gas
emission allowances in 2005, the issue of accounting for
emission rights is of great interest to EU companies. EFRAG’s
objections relate to potential mismatching that could arise
in the reporting of emission assets and liabilities. If
a company chooses the cost option provided in IFRIC 3, it
will report tradable emission allowances at acquisition
cost and report the liability for emission penalties at
the settlement amount, which could differ. If a company
chooses the fair-value option, mismatching will arise in
the reporting of unrealized gains and losses. Unrealized
gains and losses related to the liability will be reported
in income, while those related to the asset will be reported
in equity. Similar to the IAS 39 carve-outs, the EU is stating
its intention to reject guidance provided by the IASB. Prompted
by EFRAG’s rejection, the IASB decided to withdraw
IFRIC 3 in June 2005. It plans to study the issue further
to address the concerns raised regarding mismatching.
Chairman Sir David Tweedie has referred to the EU’s
mass conversion to IFRSs in 2005 as the biggest change to
hit European business since the introduction of the euro.
One could argue that the EU’s transition to IFRSs
is the largest and most complex accounting conversion in
history. It is significantly impacting 9,000 EU companies,
their auditors, national regulators, and, more generally,
all aspects of the investing and financing functions relating
to these companies.
adoption process thus far has demonstrated the EU’s
willingness to assert its influence in protecting its own
interests. It has on three occasions voted to reject IASB
guidance. Its first act of defiance was to carve out IASs
32 and 39 from its adoption of existing standards. The second
was the carving out of certain provisions of IAS 39 dealing
with portfolio hedging and the fair-value option from the
subsequent adoption of the standard. The most recent case
was EFRAG’s recommendation to reject IFRIC 3. At each
step, the EU has shown its intention to shape IFRSs in its
rejection of an IASB standard is not the EU’s only
means of promoting its interests. In addition, EFRAG issues
comment letters on draft IASB standards. The EU members
of the trustees and the board push the EU’s agendas.
Additionally, EU interest groups directly lobby the IASB.
EU’s participation in the IASB’s standards-setting
process could complicate and slow the creation of global
standards. At the same time, however, the EU has a counterbalancing
interest in seeing the swift creation and adoption of standards
that the United States would be willing to accept. The 300
EU companies currently listed in U.S. markets want the SEC
to accept their filings without reconciliation to U.S. GAAP.
If the SEC eliminates the reconciliation requirement, many
more EU companies are likely to seek a listing here. Then–SEC
chief accountant Donald Nicolaisen stated that failure on
the part of the EU to observe IAS 39 and other standards
as issued by the IASB could jeopardize or delay U.S. acceptance
of EU reporting. The EU is certainly aware of the potential
for this undesirable outcome.
interests are watching from the sidelines to see how the
EU’s adoption controversies play out. In addition
to the SEC, these interests include U.S. parent companies
with EU subsidiaries that may now be using the EU-approved
version of IFRSs, and U.S. subsidiaries of EU companies
that must now report using EU-approved IFRSs. They also
include many companies in the United States making investing
and financing decisions regarding EU companies.
the prospect of the United States deciding to adopt IFRSs
as its GAAP would have been unthinkable a few years ago,
it could happen. If it does, the EU’s endorsement
experience could provide potentially useful lessons in carrying
out such a program.
S. Brackney, PhD, CPA (Inactive), is an associate
Philip R. Witmer, PhD, CPA, is an associate
professor, both in the department of accounting of the Walker
College of Business at Appalachian State University, Boone,