March 2001

European Commission Proposes Regulation to Mandate IAS Use

Wanting to help European Union companies compete for global capital by improving the transparency of financial reporting, the European Commission has proposed a regulation that would require all EU-registered companies to use International Accounting Standards by 2005 at the latest.

The proposal, which was released in February and is in accordance with policies the Commission framed last June, also calls for the formation of an Accounting Regulatory Committee to assess rules created by the International Accounting Standards Board.

In addition to the Commission’s IAS review mechanism, a private-sector committee of expert users, accountancy professionals, and regulators known as the European Financial Reporting Advisory Group would be set up to provide technical expertise concerning the use of IAS.

“The use of one global accounting language will greatly benefit European companies. It will help them to compete on equal terms for global capital,” said Internal Market Commissioner Frits Bolkestein. “Investors and other stakeholders will, at last, be in a position to compare company performance against a common standard.”

Europe’s largest professional accountancy body, the Institute of Chartered Accountants in England and Wales (ICAEW), endorses the Commission’s proposal. In particular, the ICAEW said that it supports the establishment of a technical committee, which the organization believes could anticipate potential problems relating to the adoption of IAS in the EU.

The accounting profession has expressed deep interest in the creation of global rules, but critics fear that the Commission’s proposed review process could hamper IAS, according to a February Financial Times story. These critics suggest that the review mechanism has too many checks and balances, namely the proposed technical committee, and could lead to the U.S. adoption of a similar approach, which would only breed rival sets of standards.

U.S. standards notwithstanding, a recent international survey reveals that there is much to be done before company financial results can be directly compared between one country and another. The survey, which the large accountancy firms published in January, examined 53 countries and found that their national rules notably differ from one another and their written national rules allow for significantly different treatments from IAS.