INTERNATIONAL ACCOUNTING NORMS
BACKGROUND AND RECENT DEVELOPMENTS IN EU
For information on terms and acronyms please see the Glossary .
This section describes the background and recent developments in the field of accounting norms at world and European levels that are likely to be significant for Community statistics.
The focus is on the norms for annual financial reporting statements of entities with legal form in the countries where they have centres of economic interest, i.e. "enterprises" or "companies". The section is organised as follows:
The EU accounting directives until 2000
The 2000 EU Financial reporting strategy and consequent legal acts
3.1 The Commission Communication "EU Financial Strategy: the way forward"
3.3 The IAS Regulation. and the consequent Commission Regulation endorsing the IAS
3.4 The Modernisation Directive, amending the Accounting Directives
3.5 The Recommendation on Environment
The International Accounting Standards Board and the IAS/IFRS
4.1 IAS : history and production process
4.2 Current IAS/IFRS and Interpretations
4.3 Issues currently being considered by the IASB
4.4 Comparisons between IAS and the existing directives
4.5 Changes from GAAP and IAS: examples
4.6 Convergence between IASB and US-FASB standards
IAS/IFRS applications and extensions
5.1 Table of listed companies in EEA Countries
5.2 IAS extensions in EEA countries: situation July 2004
5.3 IFAD surveys on the extent to which national accounting standards differ from IAS
5.4 IFAD 2002 Study on GAAP Convergence
5.5 IASB section on the use of IAS around the world
Particularly since the Second World War, many countries have developed national systems to regulate the form and content of company accounts.
In some countries, this responsibility has been reserved to governments and has been set out in specific legal acts, usually under company law. An example here is the Plan Comptable (General Accounting Plan) system of very detailed codification in France and certain other European countries.
In other countries, the responsibility has been discharged wholly or in large part by representatives of professional accountancy bodies acting either on their own authority or with only the most general statutory backing to set "good practice" accounting standards.
In those countries where significant markets for long term capital have evolved, an additional influence on accounting norms has come from the "listing agreements" made by companies seeking rights to trade on stock exchanges.
In a special position is the rule-based regime found in the United States. This is operated in tandem by the US Securities & Exchange Commission (SEC) for the over 12000 companies listed on American capital markets and by the Financial Accounting Standards Board (FASB), an independent non-statutory body to which the SEC delegates the task of setting accounting standards for companies in general. The about 140 existing Statements of Financial Accounting Standards are an important part of US Generally Accepted Accounting Principles (US GAAP). The SEC requires foreign (including European) registrants either to prepare US GAAP statements directly or to reconcile them with information required in the SEC's Form 2.
The rise of multinational enterprises and the great increase in international capital movements during later decades has been paralleled, at the world level, by the creation of international organisations concerned in various ways with standards of commercial conduct.
One of these was the International Accounting Standards Committee (IASC) formed in 1973 by the accountancy bodies of nine countries and with a membership, in 2000, of accountancy bodies from more than 100 countries. The IASC produced about 40 International Accounting Standards (IAS) and some 20 "Standard Interpretations" to assist in compliance with IAS. This body of standards has been particularly influential regarding consolidated accounts, and the original standard on consolidated financial statements (IAS 3) contributed to formulation of the EU Seventh Accounting Directive (see below).
Laws were passed in 1998 in Belgium, France, Germany and Italy to facilitate the use of IAS for the consolidated statements of listed companies and a small but economically significant number of companies also use IAS voluntarily.
Also relevant in this context is the International Organisation of Securities Commissions (IOSCO), founded in 1983 as a committee of government bodies (such as the SEC) with regulatory powers over stock exchanges.
However, only one organisation above the national level has made accounting norms the subject of legislation, namely the European Union.
Up to 2000, the EU legal acts that deal specifically with the form and content of company financial statements were
the Fourth Council Directive of 1978 on the annual accounts of certain types of companies (78/660/EEC)
the Seventh Directive of 1983 on consolidated accounts (83/349/EEC)
the Council Directive 86/635/EEC on the annual accounts and consolidated accounts of banks and other financial institutions
the Council Directive 91/674/EEC on the annual accounts and consolidated accounts of insurance companies.
The Directives set minimum standards and national authorities responsible for accounting are free to specify additional requirements as they wish. For instance, the Fourth Directive contains more than 60 separate options for alternative courses of action by Member States and the options in the Seventh Directive are also numerous.
The practical outcome of the Directives has therefore not been standardisation of national financial reporting systems, but a greater degree of harmonisation between them. National legislation in nearly all of the European Economic Area (EEA) countries therefore incorporated the basic European requirements, but the actual accounting frameworks that may, for instance, be utilised for statistical reporting purposes still vary considerably from country to country.
At the national level, the Directives are now established features in the accounting environment. Although the Directives were framed in terms of limited liability companies, some countries have been able to apply them to other types of business as well. The framework provided by the Directives has proven flexible enough to adapt both to the Plan Comptable approach as in, say, France, and to the "investor and creditor protection" approach as in, say, the UK. It has also proven possible for accounting laws in certain countries to allow the use of IAS or US GAAP for the consolidated statements of listed companies.
The Fourth Directive 78/660/EEC contains detailed requirements relating to information disclosure, the classification and presentation of information and methods of valuation for the annual accounts of certain types of companies.
For reporting purposes, a choice is offered between two formats for the balance sheet and four formats for the profit and loss account. Countries were further able to choose to transpose into their national legislation either one format each for the balance sheet and the profit and loss account or else all of the formats, so allowing their companies the freedom to adopt the format for each statement that is right for them. Governments of some countries have exercised the first of these options and for reasons of national economic management have specified the profit and loss account format with the so-called breakdown of items "by nature". In countries where governments effectively leave the choice of formats to companies, it turns out that the profit and loss account format most often chosen is the one incorporating the so-called breakdown of items "by function". An explanation of these terms is given below.
Most of the provisions of the Directive do not apply to financial and insurance companies, which are the subject of separate and more detailed legislation.
One balance sheet format is the "horizontal" format and, as in the German tradition, aims to be a faithful summary of balances in double-entry books of account with debits on one side and credits on the other. The second, "vertical", format aims, as in the British tradition, to show how shareholders' (or owners') funds have been used to finance net assets. For the vertical format, a modified balance sheet summarizing items under main headings is permitted on the face of the accounts, providing that the more detailed information still required is disclosed in the notes to the accounts.
The prescribed balance sheet formats similarly allow for both the horizontal/account book approach and the vertical/proprietorial approach and both start with net turnover. Within each of these formats, it is further possible to classify expenses either "by function" or "by nature". The "by function" breakdown distinguishes between the "cost of sales", namely all costs uniquely identified with generating turnover in business activity, and the distribution costs and administration expenses which are the overheads. This enables calculation and specific disclosure of gross profit (turnover minus cost of sales) and also calculation of any net profit (gross profit minus overheads and perhaps other items) which is due to the owners.
Whereas the "by function" breakdown groups all expenses whatever their type according to their function (or "purpose or "destination") in the business, the "by nature" breakdown groups them whatever their purpose according to their type (or "nature"). This enables total costs to be calculated of raw materials and consumables, wages and salaries, depreciation and other items defrayed by the business as an economic unit. Items for "change in stocks and work in progress" and " own work capitalised" are also shown explicitly on the face of the accounts. Member states are also allowed to combine or split the profit lines respectively for ordinary and extraordinary activities.
On valuation methods, Article 34 of the Directive states that these shall be based for items in the accounts on "the principle of purchase price or production cost". However, there are at least three ways of determining such prices or costs in European business accounting. These include "historical" cost accounting method as has been prevalent in Germany, "replacement" or "current" cost methods as used in the Netherlands and "book value" supplemented by periodic re-valuations as practised in the UK and Ireland. The Directive accordingly recognises all of these methods by making options for their use available. Flexibility is particularly evident regarding methods of stock valuation, and depreciation and the treatment of goodwill, all of which have been contentious in the accounting community at one time or another. The Commission has additionally decided to recognise a fourth method, namely "fair value" (usually market value) in an amendment to the Directive (see below "Fair Value Directive").
The original Directive also introduced additional disclosure requirements, including the reporting of segment information relating to sales by geographical area. A Commission Recommendation (95/377/EC of 13 September 1995) subsequently provided for the segmental breakdown of net turnover by type of activity in accordance with NACE Rev.1.
Because many countries had traditions of partially or fully exempting private companies from national requirements to file or otherwise published audited annual accounts, the Directive provides for the amount and content of required disclosures to vary according to whether the sizes of companies are "large", "medium" or "small". A company falls into any of these size categories when it exceeds given threshold values for any two of the three variables balance sheet total, annual turnover and average number of employees. Member States may exempt small companies from filing profit and loss accounts (as in the UK) or from being audited (as in Germany and the Netherlands). Medium companies may be allowed to file abridged balance sheets and profit and loss accounts summarizing under main headings and to limit additional disclosures in the notes to the accounts.
Given that in the first place the Directive applies only to incorporated companies, making up between 10 and 15 per cent of the EEA business population, the above-mentioned abridgements and exemptions mean that the full disclosure regime of the Directive applies to just about 1 per cent of all companies. This small number may nonetheless account for more than a third of all business turnover. (However, certain large family-controlled companies such as C&A Modes and IKEA avoid the filing and publication obligations usually entailed in incorporation with limited liability by remaining unlimited private companies).
The Fourth Directive was transposed into the national laws of EU countries between 1981 and 1998. It has led to important changes in the accounting regimes of many countries by, for instance, introducing greater standardisation of formats of company financial statements, by greater disclosure of items in notes to the statements and by setting out valuation procedures clearly. In 1998, a report was prepared by an international accounting firm for the Commission on the Implementation of the fourth Directive .
The Fourth Directive further provided for the establishment of a Contact Committee of representatives of the Member States and of the Commission to examine practical problems arising from its application and to advise on additions and amendments to the text. This committee was supplemented, in 1990, by an Accounting Forum, in which experts at the European and national levels can discuss issues that the Accounting Directives do not cover.
The Seventh Directive 83/349/EEC sets out accounting rules and requires the use of prescribed formats for consolidated balance sheets and consolidated profit and loss accounts, with associated notes to these accounts and also a directors' report. No model formats are given in the text, which says that those of the Fourth Directive are to apply with some modifications such as separate disclosure of minority interests and (in certain circumstances) combination of items relating to stocks. Valuation rules are also to be as in the Fourth Directive, where appropriate, and other disclosure requirements (and options) are also similar.
The Seventh Directive more specifically requires full world-wide consolidation for subsidiary undertakings (instead of consolidation only as far as the national border as had been previously practised in some countries) and consolidation methods must be applied consistently so that inter-company debts, transactions and profits are eliminated in group accounts.
The Directive was originally framed to obtain information about concentrations of economic power under the control of "a central and unified management" and formalities of ownership, such as shareholdings and legal voting rights, were not considered vital to this. However, the final text requires consideration of ownership as well as of management criteria in determining whether a company has a subsidiary or an associate relationship. (The same compromise is evident in the definition of "enterprise group" in the Council Regulation on Statistical Units).
Three options are of particular interest to statisticians :
consolidation may be confined to those groups where the parent is a limited company
financial holding companies may be exempted from the requirements of the Directive under certain circumstances
small groups (equivalent to SMEs in the Fourth Directive) may also be exempted, except where any of the companies in the group is listed on a stock exchange.
The Directive was promulgated in 1983 and it only came into widespread force in the EEA during the 1990s. In the UK and the Netherlands, where group accounting has been familiar for many years, the Directive had less impact than in France and Germany, where it brought about many more consolidations than had previously existed. Its impact in other Member States such as Greece, Italy, Luxembourg, Portugal and Spain where consolidations had been rare or non-existent (at least where company law was concerned) has been even greater. The Directive effectively applies to all companies whose directors are authorised to solicit share capital from third parties (e.g. in the UK, public limited companies) and to all companies with 500 or more employees.
Statisticians in countries with relatively long experience of consolidation have seldom found it easy to work with group accounts. One formidable problem is the practical impossibility of satisfactorily separating out domestic transactions from foreign ones, something that must be done if the information is to have any real value as inputs to the national accounts. Statisticians in countries where consolidation is a more recent phenomenon have not only this problem but also the difficulty of how to make use of what is essentially a distinctive accounting framework with little or no relationship with local accounting traditions. In France for instance, the General Accounting Plan does not cover consolidated accounts and it is the professional accountancy bodies and not the government that have taken responsibility for them.
In 1998, the Commission published a Study on the Implementation of the Seventh Directive on consolidated accounts.
The Conclusions of the European Council in Lisbon in March 2000 entailed the accelerated completion of the Single Market for Financial Services and called for the development of large and liquid European capital markets to benefit issuers and investors. A priority objective identified in the Conclusions was the adoption in EU of common financial reporting standards.
In June 2000, the EU Commission adopted the Communication "EU Financial Reporting Strategy: the way forward" (COM/2000/359), as a follow up of the Lisbon Council conclusions. It characterised the desired reporting standards mentioned in the Lisbon conclusions as "transparent, fully understood, properly audited and effectively enforced".
The flexibility of the Accounting Directives mentioned earlier was viewed by the Communication as a drawback. The Directives were seen to sanction too many different presentations of accounts and, conversely, they were considered either permissive or silent about important accounting issues. Moreover, it was evident that the procedures for amending or adding to the Directives to keep up with accounting developments were too slow and cumbersome.
The Communication concluded that International Accounting Standards came closest to being the one EU-wide accounting standard system demanded by the logic of the Single Market. This conclusion was reinforced by the IASC's success in gaining acceptance for its standards by IOSCO and by the forthcoming changes in the IASC's constitution (see below for details).
It was nevertheless recognised that IAS could not be introduced for all EU companies immediately. The Communication anticipated that the Commission would bring forward formal proposals that apply only to a limited number of companies and that will be accommodated within the EU legislative framework.
The Fair Value Directive was introduced in September 2001 (2001/65/EC). It amends the existing Accounting Directives to permit financial instruments to be recorded at their fair value, and the concomitant gains and losses to be recorded in the profit and loss account. The Directive takes account of development in markets (such as widespread use of derivatives), business and IAS.
The fair value of financial instruments is determined by the market value or generally accepted valuation models if there is not a reliable (liquid) market. Nearly all changes in fair value, even though not realised, need to be shown in the company's profit and loss account. Fair valuation provides a more accurate view of a company's financial position and performance.
The Directive defines those financial instruments that can be fair valued in line with IAS 39. It also lays down rules for Member States to define the scope of companies that shall be permitted, or can be required, to use fair value. A Member State can, for example, permit or require fair value only for listed companies. The Directive requires that all companies disclose information on derivative financial instruments such as options, swaps, and futures in the notes on the accounts. However, small companies can be exempted from this disclosure.
The amendment does not replace historic cost as the basis of accounting valuation in the Accounting Directives but complements it, particularly since there is no international consensus that fair value accounting is appropriate in all cases. For example, there is as yet no international agreement on whether a company should be required to fair value its own debt. Similarly, certain financial instruments, such as investments held to maturity and credits granted, continue to be stated at historical cost.
In July 2002, the IAS Regulation (EC/2002/1606) was adopted. It requires all EU companies listed in a regulated market, as well as companies preparing for such a listing, to prepare their consolidated published accounts in accordance with those IAS that are adopted for application within the EU.
Member States have the possibility to go further, by permitting or requiring the application of IAS to the individual accounts of companies. In addition, they may permit or require the application of adopted IAS to unlisted companies. Section 5.1 below presents a table with numbers of listed companies in EEA Countries which will apply IAS.
The IAS Regulation does not require that all IAS be applied. It confers on the Commission the powers to implement IAS in accordance with the procedures for the exercise of implementing powers conferred on the Commission (Council decision of 28 June 1999, OJ L184, 17/7/1999, page 23, also known as the comitology procedure). The official endorsement is done at the political level through the Accounting Regulatory Committee (ARC), in which Eurostat and the European Central Bank participate as observers.
In order to ensure a proper input from all interested parties, the Commission has asked the European accounting profession to help bring about the co-ordination between those who use and prepare accounts in the EU as well as standard setters, so giving origin to the European Financial Reporting Advisory Group (EFRAG,), a technical group made up of highly qualified experts with assistance from the private sector. EFRAG has issued technical advise on each of the IASs. On 7th May 2003the Commission decided to submit to the ARC to endorse all existing IAS (except IAS 32 and 39 which were under review). The ARC issued a positive opinion on the proposal on 16th July 2003. This led to the publication in the Official Journalo of Commission Regulation (EC) 1725/2003 on 13th October 2003 which made the texts of the IASs available in 10 languages. In 2004 the Commission has adopted in a similar way IFRSs 1 to 5.
The 2000 Communication anticipated that the Commission would bring forward a proposal "to modernise the Accounting Directives so that they can remain the basis for financial reporting for all limited liability companies". The main aims of this modernisation would be "to reduce potential conflicts with the IAS and to bring the Directives into line with modern accounting developments". Two areas in which modernisation of the Directives were particularly desirable are the recognition and measurement of intangible assets and the impact of new technology such as the Internet on the mode of financial reporting.
In June 2002, the European Commission presented a proposal for a Directive amending the existing Accounting Directives. The proposal complements the International Accounting Standards (IAS) Regulation. The amendments proposed to the Accounting Directives would allow Member States which do not apply IAS to all companies to move towards similar, high quality financial reporting. They would allow appropriate accounting for special purpose vehicles, improve the disclosure of risks and uncertainties and increase the consistency of audit reports across the EU.
The Internal Market Commissioner Frits Bolkestein said, "This proposal demonstrates again our commitment to transparent, high quality financial reporting, consistently applied across Europe. Shareholders, potential investors and the public need to know from companies’ accounts exactly how well they are performing and to be able to compare like with like. An efficient internal market demands no less. The amendments to the Accounting Directives complement the policy of moving towards International Accounting Standards. This proposal has been in preparation since 1999, but the collapse of Enron and more recently Parmalat, serves to underline its importance even more strongly."
The proposal was adopted as Directive 2003/51/EC of the European Parliament and of the Council on 18th June2003.
Where endorsed IAS are not applied, the detailed provisions of the 4th and 7th Accounting Directives, amended by this Modernisation Directive, will continue to act as the basis of EU accounting requirements. These Directives will therefore continue to be applicable to up to 6 million companies in Europe, which will become 7 million after the enlargement.
Notably, the Modernisation Directive makes it more difficult for a company to ‘hide’ liabilities by setting up artificial structures (so-called ‘special purpose vehicles’) which, in substance, they control but which, considering only the shareholdings, appear to be largely unrelated. This is an important step in the proper treatment of off-balance-sheet financing.
Given the link, in some Member States, between annual accounts and taxation, it is important that each Member State moves toward IAS at a pace appropriate to that individual country. Accordingly, most changes are implemented as Member State options – allowing gradual alignment of national accounting requirements with IAS.
As well as modernising accounting requirements, the amendments of this Directive make clear that, in the annual report, the analysis of risks and uncertainties facing the company should not be restricted to financial aspects of its business. This concept was introduced in order to encourage disclosure of key social and environmental aspects where relevant.
The amendments also move towards a more harmonised presentation of statutory audit reports, by outlining the necessary content of such reports, which are a valuable assurance that accounts are reliable. The new requirements are consistent with those of International Standards on Auditing issued by the International Auditing and Assurance Standards Board.
On 13th June 2001, the Commission adopted a Recommendation on recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of EU companies. The Recommendation (2001/453) clarifies existing EU accounting rules and provides guidance to improve the quality, transparency and comparability of environmental data available in companies’ annual accounts and annual reports.
The Recommendation:
provides guidance on how to apply the provisions of the existing Accounting Directives as regards environmental information;
suggests closer co-ordination of separate environmental reports, statutory annual accounts and annual reports so as to reduce inconsistencies;
indicates that relevant, transparent disclosures should be incorporated into companies’ annual accounts and annual reports in a way that complements the more detailed separate environmental reports.
Investors and users of financial statements need information about the impact of environmental risks and liabilities on the financial position of the company. Moreover, the company’s attitude towards the environment and its environmental performance may also have consequences for its financial health and performance. Regulatory authorities have an interest in monitoring the application of environmental regulations by companies and the costs incurred as a result. Companies’ voluntary disclosure of environmental data in annual accounts and annual reports is however rather low.
This Recommendation applies to all companies covered by EU Accounting Directives (namely the 4th Company Law Directive on annual accounts (78/660/EEC) and the 7th Company Law Directive on consolidated accounts (83/349/EEC), allowing for exemptions that Member States are permitted to introduce for small and medium-sized companies in accordance with these Directives. Because environmental issues also have financial implications for banks, other financial institutions and insurance companies, the Recommendation also applies to them, even though they are subject to specific accounting requirements laid down in Directive 86/635/EEC for banks and other financial institutions and Directive 91/674/EEC for insurance companies.
The Recommendation was a further step in the Commission strategy to integrate European harmonisation in the accounting field, within the broader context of international accounting harmonisation. The Recommendation has been prepared taking into account relevant requirements in International Accounting Standards (IAS) that deal with environment related information. However, there exists little guidance directly related to environmental issues in IAS and no specific IAS is solely focused on these issues.
The Recommendation reinforces European Union initiatives in the area of environmental protection. It was foreseen in the Commission’s 1999 Communication on the ‘Single Market and the Environment’.
The International Accounting Standards Committee was established in 1973 by the leading professional organisations in Australia, Canada, Germany, Ireland, Japan, Mexico, the Netherlands, UK and USA.
Up to 2000, general acceptance of IAS was for a long time hampered by the practice of allowing several different options for meeting the requirements. This situation reflected the IASC's original board structure and voting methods, which tended towards establishing consensus. Compliance with IAS furthermore depended on the "best endeavours" of the IASC's member bodies. Listing agreements operated by stock exchanges represented a stronger compliance mechanism.
In the late 1980s IOSCO held out the possibility that IAS might, if suitably revised, be acceptable for the financial statements of foreign companies listed on the stock exchanges of its members. It was made clear, however, that the revised IAS would need to limit the available options substantially. Over the next 10 years, the IASC worked closely with IOSCO to produce a set of "core standards" that would satisfy the requirements of IOSCO members, including the SEC.
The first ten revised IAS appeared in 1993,some of which were subsequently accepted either wholly or partly for use by companies listed on stock exchanges regulated by IOSCO members. A further batch, including some entirely new IAS, was completed by 1999. An important stage in this process was reached in May 2000 when IOSCO recommended that multinational issuers on its members' stock exchanges should be able to use IAS in financial statements for cross-border offerings and listings.
At the end of 1999, the IASC decided to change its constitution with effect from 2001. The nucleus of the new organisation is the International Accounting Standard Board (IASB) based in London and composed of 14 members with standard-setting powers. Only eight votes are required to pass a standard, "on the grounds that this would lead to fewer compromises in the wording of standards and the standards would be clearer, tighter and less likely to provide explicit or implicit options, as regards the accounting required".
The IASB publishes its standards in a series of pronouncements now called International Financial Reporting Standards (IFRS). It also publishes a series of Interpretations of International Accounting Standards, developed by the International Financial Reporting Interpretations Committee (IFRIC, formerly called Standing Interpretations Committee (SIC) The IASB is supplemented by a Standard Advisory Council of approximately 45 members.
The set of International Accounting Standards is not a static body : IAS are revised in order to make them consistent with the new standards. New standards are proposed and submitted for comments as Exposure Draft Standards (EDs). Following the receipt and review of comments, the IASB issues a final Standard. Look at the IASB's Projects in Progress page for more details.
In this section, the IAS/IFRS are listed and a brief summary is provided presenting characteristics thought likely to be most relevant to official statistics. The dates given for each IAS refer to publication dates or to latest major revisions. The descriptions given of the contents of each IAS are brief summaries of much longer original texts. Any comments made are for explanatory purposes and are not to be taken as the views of the IASC. Each IAS authorises a "benchmark" treatment but some standards also allow an "alternative" treatment and countries are free to choose between these.
A list of the current IAS, their history, the related interpretations, the amendments under consideration as well as a summary can be found at Deloitte's IAS website.
The full text of the existing standards is available English and in French at the end of this section of the website. For full texts of the IAS in other languages the reader is referred to the Official Journal L261 of 13th October 2003 .
-IASB Framework for the Preparation and Presentation of Financial Statements
-IAS01 - Presentation of Financial Statements
-IAS02 - Inventories
-IAS07 - Cash Flow Statements
-IAS08 - Accounting Policies, Changes in Accounting Estiamtes, and Errors
-IAS10 - Events After the Balance Sheet Date
-IAS11 - Construction Contracts
-IAS12 - Income Taxes
-IAS14 - Segment Reporting
-IAS15 - Information Reflecting the Effects of Changing Prices
-IAS16 - Property, Plant and Equipment
-IAS17 - Leases
-IAS18 - Revenue
-IAS19 - Employee Benefits
-IAS20 - Accounting for Government Grants and Disclosure of Government Assistance
-IAS21 - The Effects of Changes in Foreign Exchange Rates
-IAS22 - Business Combinations. Superseded by IFRS 3 effective 31 March 2004.
-IAS23 - Borrowing Costs
-IAS24 - Related Party Disclosures
-IAS26 - Accounting and Reporting by Retirement Benefit Plans
-IAS27 - Consolidated and Separate Financial Statements
-IAS28 - Investments in Associates
-IAS29 - Financial Reporting in Hyperinflationary Economies
-IAS30 - Disclosures in the Financial Statements of Banks and Similar Financial Institutions - Superseded by IFRS 7 from 01/01/2007.
-IAS31 - Interests in Joint Ventures
-IAS32 - Financial Instruments: Disclosure and Presentation
-IAS33 -Earnings Per Share
-IAS34 - Interim Financial Reporting
-IAS35 - Discontinuing Operations. Superseded by IFRS 5 effective 2005.
-IAS36 - Impairment of Assets
-IAS37 -Provisions, Contingent Liabilities and Contingent Assets
-IAS38 - Intangible Assets
-IAS39 - Financial Instruments: Recognition and Measurement
-IAS40 - Investment Property
-IAS41 - Agriculture
International Financial Reporting Standards
-IFRS1 - First time adoption of IFRS
-IFRS2 - Share based payment
-IFRS3 - Business Combinations
-IFRS4 - Insurance contracts
-IFRS5 - Non current assets held for sale and Discontinued Operations
-IFRS6 - Exploration for and evaluation of mineral resources
-IFRS7 - Financial instruments: disclosures
International Financial Reporting Interpretations Committee
-IFRIC1 - Changes in Existing Decommissioning, Restoration and Similar Liabilities
-IFRIC2 - Members' Shares in Co-operative Entities and Similar Instruments
-IFRIC3 - Emission Rights
-IFRIC4 - Determining Whether an Arrangement Contains a Lease
Standing Interpretations Committee
-SIC01 - Consistency – Different Cost Formulas for Inventories Superseded
-SIC02 - Consistency – Capitalisation of Borrowing Costs Superseded
-SIC03 - Elimination of Unrealised Profits and Losses on Transactions with Associates Superseded
-SIC05 - Classification of Financial Instruments - Contingent Settlement Provisions Superseded
-SIC06 - Costs of Modifying Existing Software Superseded
-SIC07 - Introduction of the Euro
-SIC08 - First-Time Application of IASs as the Primary Basis of Accounting Superseded
-SIC09 - Business Combinations – Classification either as Acquisitions or Unitings of Interests Superseded
-SIC10 - Government Assistance – No Specific Relation to Operating Activities
-SIC11 - Foreign Exchange – Capitalisation of Losses Resulting from Severe Currency Devaluations Superseded
-SIC12 - Consolidation – Special Purpose Entities
-SIC13 - Jointly Controlled Entities – Non-Monetary Contributions by Venturers
-SIC14 - Property, Plant and Equipment – Compensation for the Impairment or Loss of Items Superseded
-SIC15 - Operating Leases – Incentives
-SIC16 - Share Capital – Reacquired Own Equity Instruments (Treasury Shares) Superseded
-SIC17 - Equity – Costs of an Equity Transaction Superseded
-SIC18 - Consistency – Alternative Methods Superseded
-SIC19 - Reporting Currency – Measurement and Presentation of Financial Statements under IAS 21 and IAS 29 Superseded
-SIC20 - Equity Accounting Method – Recognition of Losses Superseded
-SIC21 - Income Taxes – Recovery of Revalued Non-Depreciable Assets
-SIC22 - Business Combinations – Subsequent Adjustment of Fair Values and Goodwill Initially Reported Superseded
-SIC23 - Property, Plant and Equipment – Major Inspection or Overhaul Costs Superseded
-SIC24 - Earnings Per Share – Financial Instruments that May Be Settled in Shares Superseded
-SIC25 - Income Taxes – Changes in the Tax Status of an Enterprise or its Shareholders
-SIC27 - Evaluating the Substance of Transactions in the Legal Form of a Lease
-SIC28 - Business Combinations – 'Date of Exchange' and Fair Value of Equity Instruments Superseded
-SIC29 - Disclosure – Service Concession Arrangements
-SIC30 - Reporting Currency – Translation from Measurement Currency to Presentation Currency Superseded
-SIC31 - Revenue – Barter Transactions Involving Advertising Services
-SIC32 - Intangible Assets – Website Costs
-SIC33 - Consolidation and Equity Method – Potential Voting Rights and Allocation of Ownership Interests Superseded
In 2001 a Commission/Contact Committee prepared the document "Examination of the conformity between IAS 1 to IAS 41 and the European Accounting Directives", an analysis showing the degree of conformity between the requirements contained in the International Accounting Standards and the European Accounting Directives. It aims at constituting the basis on which each Member State may decide whether and to what extent its companies can apply the International Accounting Standards when they wish to do so.
The resulting document showed that, with the exception of two relatively minor cases, the requirements of IAS do not conflict with Accounting Directives. It did however identify examples of optional accounting treatments (optional at country or at company level) under the Directives which are not acceptable under IAS.
The Contact Committee produced also the document "Examination of the conformity between interpretations of the Standing Interpretation Committee of the IASC and the European Accounting Directives: SIC 1 to SIC 25".
Both the documents served as a basis for the draft of the so-called "Modernisation Directive", which aims at modernising the Accounting Directives and make them consistent with the IAS (see below).
In 2002, KPMG International issued the study titled "Global Accounting – UK, IAS and US compared". This provided a useful summary of the three systems and explained where they differ in principle or in application. The annexes on differences in accounting terminology and accounting abbreviations are very useful.
As already mentioned, the Accounting Directives leave many options to the member states and the companies themselves. The following real cases show the considerable impact that IAS are having on consolidated accounts of important companies, as compared with the GAAP of the country of origin.
|
BMW Consolidated accounts 2000 |
IAS |
German GAAP |
Change |
|
Billion Euro |
Billion Euro |
Billion Euro |
|
|
BALANCE SHEET – 31 December 2000 |
|||
|
Fixed assets |
17.5 |
6.8 |
+10.7 |
|
Equity |
9.4 |
4.9 |
+4.5 |
|
INCOME STATEMENT - 2000 |
|||
|
Gross profit |
8.5 |
6.4 |
+2.1 |
|
Net profit |
1.2 |
1.0 |
+0.2 |
|
Source: BMW – Financial Statements 31 December 2001 |
|||
It can be seen that applying the IAS has caused equity to almost double. Net profit has improved by 20%. This resulted from the following:
the inclusion of the financial services activities of the Group (previously excluded from consolidation on the ground of dissimilar activities)
the capitalisation of development costs incurred for vehicle and engine projects (previously expensed when incurred);
the harmonisation of depreciation methods for fixed assets;
the reclassification of finance vs. operating leases (resulting in some assets and liabilities to be capitalised on balance sheet when were previously not shown);
the reversal of some contingency provisions, inventory and receivable write-downs not compliant with IAS.
|
ARCELOR 2000 |
IAS |
French GAAP |
Change |
|
Billion Euro |
Billion Euro |
Billion Euro |
|
|
BALANCE SHEET – 31 December 2000 |
|||
|
Equity |
4.8 |
4.5 |
+0.3 |
|
INCOME STATEMENT - 2000 |
|||
|
Net profit |
0.8 |
0.7 |
+0.1 |
|
Source: Arcelor – Offering document 2001 (unaudited information) |
|||
Upon creation of Arcelor in 2001 (a merger of 3 major steel firms Usinor, Aceralia and Arbed), the newly formed group has adopted IAS as its new accounting standards. The improvement of Arcelor’s equity follows mainly from the revaluation of property, plant and equipment allowed under IAS. Consequently, annual depreciation charge is increased and future earnings affected.
Another interesting example of the differences between IAS and the existing German GAAP are provided on the website of the Volkswagen group.
On 29th October 2002, IASB and FASB announced their commitment to achieving real convergence between their respective accounting standards by 2005, when listed EU companies will be required to apply IAS. The commitment is a major step towards a global system of accounting standards and will in particular help the US Securities and Exchange Commission (SEC) to accept financial statements prepared by EU companies in accordance with IAS, without reconciliation to US GAAP, for the purposes of listing on US markets.
The IASB and the FASB announcement is based on a Memorandum of Understanding on Convergence of their respective standards. The Memorandum formalises the commitment of the two bodies to convergence based on high quality solutions and, once convergence is achieved, to its maintenance through the co-ordination of future work.
The convergence project consists of several sub projects with different timetables.
The table below gives some figures of listed companies which will have to apply IAS as complying with the IAS Regulation in EEA countries.
TABLE 1
Companies Listed on Main Stock Exchanges in EEA Member Countries, 30th June 2004
|
EEA country |
Domestic companies |
Foreign companies |
All companies |
| Euronext (Belgium, France, Netherlands, Portugal) | 1,355 | no data available |
1,355 |
| Czech Republic | 62 | no data available | 62 |
| Cyprus | 200 | no data available | 200 |
| Denmark |
182 |
7 |
189 |
| Estonia | 13 | 0 | 13 |
| Germany |
674 |
168 |
842 |
| Greece |
324 |
2 |
326 |
| Spain* |
145 |
29 |
174 |
| Ireland |
54 |
13 |
67 |
| Italy |
267 |
9 |
276 |
| Hungary | 47 | 1 | 48 |
| Latvia | 36 | 0 | 36 |
| Lithuania | 8 | 0 | 8 |
| Luxembourg |
43 |
198 |
241 |
| Malta | 13 | 0 | 13 |
| Austria |
103 |
21 |
124 |
| Poland | 191 | 1 | 192 |
| Slovakia | 29 | 0 | 29 |
| Slovenia | 141 | 0 | 141 |
| Finland |
134 |
3 |
137 |
| Sweden |
261 |
19 |
280 |
| UK |
2,354 |
368 |
2,722 |
| Norway |
164 |
20 |
184 |
|
Total |
6,800 |
|
* : figures of November 2003
Source: International Federation of Stock Exchanges and internet research.
Due to cross-border ownership of companies and listings on several exchanges, the table above includes some double counts
The companies counted in the above table are likely to prepare consolidated accounts because this is generally a requirement for listing on a stock exchange. They may in practice, however, represent only the minimum numbers that could be affected by the IAS Regulation.
There are two reasons for thinking this.
First, there are many more companies eligible for listing than those who actually do list. In the UK, for instance, the number of "public limited companies" (PLCs) authorised by the Companies Acts to solicit share capital from the general public exceeds 50,000.
Secondly, many of the entities listed are company groups and their consolidated accounts may include transactions of group members that are unlisted private companies. It is therefore quite possible that for commercial and practical reasons many companies outside of the nominal scope of the proposals may also quickly come into line with them.
TABLE 2
Summary table of IAS application in the enlarged EEA by country
The following table is provisional and summarises the information available on 2nd August 2004 about the application of IAS to other than consolidated accounts in EEA countries.
This information is based on non-official communications provided by representatives of member states to the Commision's Internal Market DG and on internet research.
|
Country |
Individual accounts of listed companies |
Individual accounts of non-listed companies |
Consolidated accounts of non-listed companies |
Status of legislation |
|
Austria
|
Not permitted |
Not permitted |
Permitted |
Final law |
|
Belgium
|
For information purposes only. To be examined for tax and legal aspects |
For information purposes only. To be examined for tax and legal aspects |
Permitted (required for banks and credit institutions from 2006) |
Proposal |
|
Czech Republic |
Required |
Not permitted |
Permitted |
Final law |
|
Cyprus |
Required |
Required |
Required |
Final law |
|
Denmark |
Permitted until 2009 Required after 2009 (permitted for financial sector) |
Permitted
|
Permitted |
Final law |
|
Estonia |
Required |
Permitted (required for financial institutions) |
Permitted (required for financial institutions) |
Final law |
|
Finland |
Permitted |
Permitted (if certified audit) |
Permitted (if certified audit) |
Final law |
|
France |
Not permitted until tax & legal questions are resolved. Over time IAS required subject to the approval of a simplified IAS for SMEs |
Not permitted until tax & legal questions are resolved. Over time IAS required subject to the approval of a simplified IAS for SMEs |
Permitted |
Final law |
|
Germany |
Permitted, but for investor’s information only |
Permitted, but for investor’s information only |
Permitted |
Final law |
|
Greece |
Required |
Permitted (if certified audit) |
Permitted (if certified audit) |
Final law |
|
Hungary |
Permitted, but for investor’s information only |
Permitted, but for investor’s information only |
Permitted |
Final law |
|
Ireland |
Permitted |
Permitted |
Permitted |
Final law |
|
Italy |
Permitted in 2005
Required from 2006 Not permitted for insurance companies in 2005 (compulsory from 2006) |
Permitted from a year to be determined by the Ministry of Economy and Justice Not permitted for SMEs which prepare financial statements in abbreviated form
|
Permitted from 2005
|
Final law |
|
Country |
Individual accounts of listed companies |
Individual accounts of non-listed companies |
Consolidated accounts of non-listed companies |
Status of legislation |
|
Latvia |
Required only for the companies whose equity securities and debt securities are admitted to the official listing of the Riga Stock Exchange and only for the needs of the Riga Stock Exchange. Accounts complying with the general law have to be prepared for tax purposes. |
Required by the supervisory authority for banks, investment funds, insurance companies and pension funds (as of 2005, for SDDS and investment companies managing investment funds). |
Required by the supervisory authority for banks, investment funds, insurance companies and pension funds (as of 2005, for SDDS and investment companies managing investment funds). |
Final law |
|
Lithuania |
Required |
Not permitted (required for banks) |
Not permitted (required for banks |
Final law |
|
Luxembourg |
Permitted |
Permitted |
Permitted |
Proposal |
|
Malta |
Required |
Required |
Required |
Final law |
|
Netherlands |
Permitted |
Permitted |
Permitted |
Proposal |
|
Poland |
Permitted |
Permitted for: 1) companies having filed for admission to public trading; 2) any parent comp. being a subs.of another parent u/t preparing its cons. acc. in line with IAS |
Permitted for: 1) companies having filed for admission to public trading; 2) any parent comp. being a subs.of another parent u/t preparing its cons. acc. in line with IAS Required for banks |
Final law |
|
Portugal |
Permitted except for financial sector |
Permitted only for daughter companies of IAS users |
Permitted Required for financial sector |
Final law |
|
Slovakia |
Required |
Not permitted |
Required |
Final law |
|
Slovenia |
Required |
Permitted (required for financial sector) |
Permitted (required for financial sector) |
Proposal |
|
Spain |
Not permitted |
Not permitted |
Permitted |
Final law |
|
Sweden |
Not Permitted |
Not Permitted |
Permitted (required for the financial sector from 2006) |
Final Law |
|
United Kingdom |
Permitted |
Permitted (except for charity sector) |
Permitted (except for charity sector) |
Final law
|
|
Country |
Individual accounts of listed companies |
Individual accounts of non-listed companies |
Consolidated accounts of non-listed companies |
Status of legislation |
|
Norway |
Permitted |
Permitted |
Permitted |
Final law |
|
Iceland |
Permitted |
Permitted |
Permitted |
Consultation ongoing |
|
Liechtenstein |
Permitted |
Permitted |
Permitted |
Final law |
The International Forum on Accountancy Development (IFAD) performed the two surveys GAAP 2000 and GAAP 2001, which are "status reports" of the extent to which national accounting standards in about 60 countries differs from international standards. The comparison between the two surveys shows that, while progress has been made in many countries, much work remains to be done. Convergence will require a joint effort of governments, stock market regulators, standards setters, preparers, users and the accounting profession.
The GAAP Convergence 2002 Survey was conducted by several international accounting firms to determine the extent to which countries planned to promote and achieve convergence with International Financial Reporting Standards (IFRSs). Some 90 percent of 59 countries surveyed said they intend to converge with IFRSs.
This section of the IASB Website
contains information on the use of
IASB Standards around the world. The
information concentrates on the requirements of the capital markets: