Opinion of the Economic and Social Committee on the "Proposal for a Regulation of the European Parliament and of the Council on the application of international accounting standards"
Date: 2001-07-11
Institutions: European Economic and Social Committee
Subjects: EU Member State, accounting system, standardised accounting system, third country

C 260/86

EN

Official Journal of the European Communities

17.9.2001

Opinion of the Economic and Social Committee on the ‘Proposal for a Regulation of the European
Parliament and of the Council on the application of international accounting standards’

(2001/C 260/15)

On 16 March 2001, the Council decided to consult the Economic and Social Committee, under Article 95
of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing
the Committee’s work on the subject, adopted its opinion on 27 June 2001. The rapporteur was
Mr Byrne.

At its 383rd plenary session (meeting of 11 July 2001), the Economic and Social Committee adopted the
following opinion by 97 votes to one.

1. Summary of the Commission’s document

The Lisbon European Council of 23/24 March 2000
1.1.
set a deadline of 2005 for the implementation of the Com-
mission’s Financial Services Action Plan (1). This proposed
Regulation is an important element of the Plan.

regulated market must prepare their consolidated financial
statements/accounts in accordance with adopted International
Accounting Standards (IAS) (Article 4). Adopted International
Accounting Standards are those which have been adopted for
application within the EU in accordance with the proposed
Endorsement procedure (Article 6).

1.2.
The purpose of the Regulation is to ensure that by
2005 all listed EU companies will apply adopted International
Accounting Standards (IAS). This will affect the 7 000 listed
companies in the EU.

2.2. Member States’ Discretions (Article 5)

Member States may:

1.3.
The arrangements being made will also ensure that the
EU will participate in future in shaping the development of
International Accounting Standards.

1.4.
Strategic business and financial considerations rather
than technical accounting issues are the most compelling
reasons driving this change. These include marketability, cross-
border mergers and acquisitions, shareholder dialogue and
finance raising.

1.5.
The Commission points out that seven Member States
(Austria, Belgium, Germany, France, Finland, Italy and Luxem-
bourg) already specifically allow listed companies to prepare
their consolidated financial statements in accordance with IAS.

2. Details of the proposals

2.1. Basic requirement

At the latest from 2005 onwards, all EU listed companies as
well as companies preparing for admission to trading on a

— require or permit the application of adopted IAS in the
preparation of annual accounts for those companies
referred to in Article 4 (2);

— require or permit the application of adopted IAS to

unlisted companies; or

— require uniform application of adopted IAS by important
sectors such as banking or insurance, regardless of
whether companies are listed or not.

2.3.

Endorsement Mechanism

2.3.1.
The Endorsement Mechanism is a critical element in
the proposed regulation. To ensure that no IAS contain
deficiencies which would render them inappropriate for appli-
cation in the EU, all IAS will be subject to an Endorsement
Mechanism which will have a regulatory and an expert level.

(1) COM(1999) 232 final of 11.5.1999.

(2) i.e. the accounts of the Holding Company itself as opposed to the

consolidated accounts for the Group.

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2.3.2.
The regulatory level — the Accounting Regulatory
Committee — will include representatives of all Member States
and will give its opinion as to whether or not an IAS standard
should be adopted by the EU and the date of application.

2.3.3.
The Commission will be supported by an expert level
which will be provided by an accounting technical committee.
The Accounting Technical Committee will be advisory in
nature and will have the expertise needed to assess the
standards but furthermore, by staying continuously in touch
with the IAS standard setting process, it will be in a position
to influence these developments and ensure timely decision-
making on new standards.

2.3.4.
The Commission intends that all existing IAS and
related interpretations listed in the annex to the Regulation
will be subject to this adoption procedure by 31 December
2002 at the latest.

2.4. Role of Accounting Directives

2.4.1.
The Existing EU Accounting Directives will remain
in force and conformity with them will be a requirement for
all companies. The application of IAS will be a supplementary
requirement for all listed companies.

The Commission has already initiated the process to
2.4.2.
amend the Fourth (1) and Seventh (2) Accounting Directives to
deal with a small number of
instances where they are
incompatible with IAS.

3.3.
The Committee accepts there are only very limited
options available by which to achieve the agreed objective. In
fact the only practical alternative is US GAAP (3). The Com-
mittee believes that it would be totally inappropriate for the
EU to adopt the US financial reporting requirements as a world
standard because, for example, EU interests would not be
reflected at all in the development of these standards.

3.4.
The Committee believes therefore that IAS are the only
accounting standards having wide international recognition
by which the objective of developing standards via global
participation could be achieved.

3.5.
Given the size and importance of the EU economy the
proposal will establish the EU as a corner-stone of international
support for the IASB (4) (which has recently been reviewed and
strengthened). Although the EU will not be a direct participant,
this will ensure that EU interests will be very much to the fore
within the IAS development processes, in addition to the five
European based members of the IAS Board.

3.6.
The Committee recognises that there are approximately
300 EU companies which use US GAAP. This is primarily
because it is currently a requirement in order to obtain a SEC
(US Securities and Exchange Commission) market listing,
rather than because of any inherent value in the US GAAP per
se.

3.6.1.
The Committee believes that the chosen route pro-
vides strong support to the IASB in their efforts to get
SEC agreement
IAS based accounts without a
reconciliation to US GAAP, although it accepts that this is
unlikely to be achieved by 2005. This would parallel the
situation where US companies can obtain an EU listing on the
basis of their US GAAP based accounts.

to accept

3. General Comments

3.1.
The ESC strongly supports the objective of the pro-
posed Regulation i.e. to establish a common basis of account-
ing across the EU for all listed companies. This is an important
element in the programme to complete the Single Market in
financial services.

3.7.
The Committee suggests that the long term interests of
all parties would be best served by an eventual convergence of
both IAS and US GAAP and it should be noted that, despite
the US attachment to US GAAP, the US is fully represented on
the IASB Board.

3.2.
The Committee recognises that the choice made now
is very important in that it is likely to shape the direction of all
EU financial reporting in the longer term. The Committee
believes therefore that the interests of all stakeholders from
investors to workers must be considered.

3.8.
The Committee agrees with the Commission that the
proposed Regulation will not only advance the integration of
European capital and financial services markets but will
encourage inward investment into EU listed companies.

(1) 78/660/EEC, OJ L 222, 14.8.1978, p. 11.
(2) 83/349/EEC, OJ L 193, 18.7.1983, p. 1.

(3) Generally Accepted Accounting Principles.
(4) International Accounting Standards Board, previously Inter-

national Accounting Standards Committee.

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3.9. While expressing its support for the use of IAS, the
Committee also welcomes the Endorsement Mechanism which
is being established. This will ensure that should an IAS
inappropriate for use in the EU be published it will not be
implemented in the EU.

should have regard to the potential impact on (a) the taxation
of the companies concerned, and (b) the level of information
available to workers about the enterprise in which they work.

3.9.1.
Thus IAS will not automatically apply within the EU
but will only do so when they have been adopted under the
Endorsement Mechanism in which the Accounting Regulatory
Committee, chaired by the Commission and with representa-
tives of all Member States, will play a critical role.

3.9.2.
However to provide a detailed technical evaluation,
an Accounting Technical Committee is being established as
described in paragraph 8 of the recital in the draft Regulation.

3.9.3.
At the invitation of the Commission, this function
will be provided and financed by a private sector body named
EFRAG — European Financial Reporting Advisory Group (1).
As a private sector body its recommendations will not be
binding on the Commission which will provide a full report
detailing the EFRAG recommendation and its own evaluation
to the Accounting Regulatory Committee for decision.

This body will not only support the Endorsement
3.9.4.
Mechanism but will enable the EU to monitor and contribute
to the development of future standards.

3.9.5.
The Committee strongly supports the Commission’s
intention that each IAS will either be adopted or rejected in
total. To introduce partial approval or modified versions of
IAS would be extremely confusing and would undermine the
fundamental decision to use IAS.

3.10.
The Committee recommends that in considering the
use of the discretion available under Article 5, Member States

3.11.
The Committee is particularly concerned that the
needs of SMEs be addressed. It is pleased to note, therefore,
that SMEs will be represented in EFRAG.

3.12.
The Committee also suggests that since the likely
long term evolution of all financial reporting in the EU will be
based on IAS, the IASB should now be urged to begin the
process of developing a standard or set of standards more
appropriate for SMEs; the enhanced reporting requirements
for listed companies would be additional. Since some SMEs
will become the listed companies of the future, this would
enable a relatively easy transition for the SME when required.

3.13.
The purpose of adopting the IAS will be undermined
if non-adoption is other than a most exceptional event. The
Committee hopes that the EU expert involvement in the
standard setting process and the recognition by the IASB of
the value of maintaining EU support will ensure that non-
adoption will rarely, if ever, happen.

3.14.
must ensure that all
available in all Community languages.

The Committee stresses to the Commission that it
IAS and related interpretations are

The Committee is aware that

3.15.
the Banking and
Insurance industry is concerned at certain aspects of the
possible introduction of full fair value accounting for financial
instruments in a future IAS and that this matter is under review
by the Commission. It will also be subject to the normal
consultation procedures used in developing new accounting
standards. The Committee trusts that a satisfactory solution
will be found.

(1) The bodies that make up EFRAG are as follows: CEA —
European Insurance Committee, EFAA — European Federation of
Accountants and Auditors for SMEs, EFB — European Banking
Federation, EFFAS — European Federation of Financial Analysts
Societies, ESBG — European Savings Banks Group, FEE —
Federation of European Accountants, FESE — Federation of
European Stock Exchanges, GEBC — European Group of Co-
operative Banks, UNICE — Union of Industrial and Employers’
Confederations of Europe, UPEAME — European Association of
Craft and Small and Medium-sized Enterprises.

3.16.
The Committee notes in Article 2 that it is possible
to use ‘equivalent accounting standards’. The Committee
understands that the Commission intends that this provision
would only be used on a temporary basis until an appropriate
IAS becomes available. The Committee believes that Article 2
should be redrafted to make this clear.

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The

introduction of

3.17.
these proposed financial
reporting requirements for listed companies must, if they are
to achieve their objective, be supported by measures to ensure
compliance. The Committee suggests that
the company’s
auditors should state in their report if the accounts comply
with IAS. If they do not, the national authorities in the Member
State should have the power to require the company to
republish its accounts in the correct format.

the operation of

The Committee notes that

3.18.
the
Regulation will be reviewed by 1 July 2007 at the latest and
would be happy to comment on this review in due course. The
Committee believes it will be particularly important to review
the operation of the Endorsement Mechanism to ensure that
the aim of using IAS in the EU is working effectively.

4. Conclusion

The Committee strongly supports the objectives of the
4.1.
proposed Regulation and believes the adoption of IAS is the
only practical option for achieving it.

The Committee also strongly supports the Endorse-
4.2.
ment Mechanism, which provides a legal basis for the use of

Brussels, 11 July 2001.

IAS and a procedure for validating their appropriateness. It
believes that early EU involvement in all new IAS developments
is the best way of protecting European interests.

4.3.
The Committee stresses the need to plan ahead for the
needs of SMEs and other entities not immediately affected by
the proposed Regulation, so that a truly common basis for
accounting may emerge in the EU as a necessary component
of the Single Market.

4.4.
The Committee believes that other important require-
ments such as taxation and worker information should not be
adversely impacted by the new proposals.

4.5.
The Committee stresses again that full availability of
IAS and related interpretations in all Community languages is
a sine qua non.

4.6.
The Committee draws attention to the need for
measures to ensure full compliance with the new reporting
requirements.

4.7.
Finally the Committee suggests that the EU should use
its influence to encourage the IASB to enter into a dialogue
with their US counterparts to pave the way for an eventual
common international framework for financial reporting.

The President

of the Economic and Social Committee

Göke FRERICHS