The European Union's Role in International Standards Setting

By Brackney, Kennard S.; Witmer, Philip R. | The CPA Journal, November 2005 | Go to article overview

The European Union's Role in International Standards Setting


Brackney, Kennard S., Witmer, Philip R., The CPA Journal


Will Bumps in the Road to Convergence Affect the SEC's Plans?

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 lASB'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.

A 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.

While 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 lASB's 19 trustees, and 10 of the IASB's 14 board members.

In 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.

The EU's Single-Market Vision

EU 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.

The 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. …

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