Harmonization of International Accounting Standards in Europe

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The accounting profession has long recognized the need for a globally harmonized accountancy framework. More than twenty years ago the accountancy profession took the initiative in creating the International Accounting Standards Committee (now the International Accounting Standards Board -IASB) and the International Federation of Accountants (IFAC) to produce guidance in response to the increasingly international demands of the business community.

The key role of IASB is to develop and promulgate International Accounting Standards (now International Accounting Reporting Standards -IFRS), on a due process, exposing its ideas for discussion and comments, once the exposure draft has been prepared. IFAC responsibilities include the development and promulgation of International Standards of Auditing and the Code of Ethics, education guidelines, studies and statements for the public sector and of assistance to those accountants in business or involved with IT. IFAC's role in the accounting standards is to assist their promulgation and to encourage their development.

The implementation of IFRS has generated major impact in Romania and in most of European countries. Following the IFRS regulation a large number of companies (at least all listed companies) will use IFRS in 2005. It is therefore extremely important to enforce for IFRS at latest by 2005.

Over the last few years the European Federation of Accountants (Federation des Experts Europeens - FEE) has been actively involved in the debate on financial reporting strategy for Europe. The EU Commission has proposed a Regulation on the Application of IFRS to introduce a requirement for listed companies to use IFRS from the financial year 2005 onwards for their consolidated accounts. Individual Member States of the EU will have the option of applying IFRS to other companies, including in preparing their individual accounts. In March 2002, the European Parliament has voted and approved the IAS regulation.

Another aspect of the Regulation is that International Financial Reporting Standards must be endorsed for use in the EU and a part of this an endorsement mechanism has been established by the EU Commission.

At the request of the EU Commission, FEE led the creation of EFRAG, the European Financial Reporting Advisory Group, in March 2001, an european forum designed to influence the work of IASB to set high quality standards that are relevant to complex business transactions within Europe and to keep those standards up to date as transactions and business environment change. EFRAG will provide the technical level of the endorsement mechanism created by the EU Commission. EFRAG is providing additional commentary to IASB, giving EFRAG's assessment on general applicability and the need for IFRIC interpretations or amendments to IRFS.

FEE strongly supports and promotes the use of International Financial Reporting Standards by European companies where they are used to communicate with capital markets and other interested parties. In recent years FEE has been at the forefront in supporting the Regulation to require IFRS to be implemented in 2005 and in recommending improvements to IFRS so that they are increasingly suitable for this task. In the meantime the European Commission is looking into the differences between the directives and IFRSs.

Enforcement arrangements covering the financial statements of European companies, prepared under IFRS, are the key component of the new arrangements to require use of IFRS by 2005.

Enforcement is built on effective national enforcement bodies of all EU member States. Enforcement should not result in standards setting, interpretations and limits concerning the application guidance issued by IASB or EFRAG. Enforcement bodies should provide information to other regulatory or supervisory authorities or private oversight bodies with a view to their imposing sanctions where appropriate.

The Effective Enforcement Bodies should follow essential features such as:

support for high quality corporate governance and external audit

high quality, expert, globally-consistent decisions on important issues

freedom from bias

transparency and clear procedures

confidentiality and speed of action

avoidance of making detailed accounting rules

focusing resources

rectification of defective financial information


Taking into account the need to have an effective enforcement mechanism in place at the latest in 2005 actions needs to be taken, especially by those countries which do not already have official bodies for the enforcement of accounting standards.

Consistent application of IFRS is a feature of effective enforcement. It is a major issue for accountants, auditors and those charged with enforcement, knowing that:

there is a short time left until at least listed companies must apply IFRS in their consolidated financial statements

IASB in improving and developing IFRS in the immediate future, therefore the standards will themselves evolve over the period to 2005

special issues may arise on initial implementation of IFRS and the IASB project on first time application of IFRS

the potential for issues of urgent interpretation of IFRS to arise and

the practical need for consistency across the Member States and the future member states as well and with regard for global consistency

The interpretation of IFRS by enforcement bodies gives rise to unavoidable difficult issues, such as:

the need to avoid inadvertent development of separate permanent system of case-by-case interpretation in the EU

achieving global consistency

consultation with IASB as far as possible;

ensuring that other enforcement bodies agree on the enforcement decisions taken

making other prepares and auditors immediately aware in time to take account of the interpretation

the formal status of the views expressed

Ideally global standards require global enforcement. The ultimate objective should be to establish one enforcement system that applies to those that use IFRS throughout the world. However, given national differences in corporate governance and legal and economic systems, a single enforcement system, even at a European level, is a difficult goal at present. Therefore enforcement of accounting standards should be arranged at the national level following the general EU principle of subsidiarity.

In preparing for 2005, many companies/countries may apply IFRS early, possible from 2003 or 2004. FEE calls on all those involved in the process to organize themselves to minimize the risks of first time application through an action plan whereby:

national standard setters through Europe should change their standards, at least for listed companies, to IRFS, over the period between now and 2005 as far as possible under the Accounting Directives

at least each listed company should establish a specific plan for IFRS conversion and for implementing changes to national GAAPS

at least each listed company should establish a training plan and implement it for all concerned

audit firms should establish and implement a specific training plan for IFRS within their firms.

Romania is facing important changes in the accounting standards setting, from 1999, when the development stage has begun. From that moment the romanian national accounting system, based on the 1982 French "Plan comptable general", begun to adjust to the European Directives and the International Financial Reporting Standards, adjustment due to the integration process and globalisation of the national and regional capital markets.

The Development Program of the Romanian Accounting System, settled by the Ministry of Public Finance of Romania and assisted by the United Kingdom Government that provided financial and technical support, had overcome the following steps:

the assessment of the (former) romanian accounting system's capacity to provide appropriate information for decision-makers, others than governmental agencies;

elaboration of an implementation plan for the adjusted accounting system, with the following main tasks:

clear distinction between financial, fiscal and statistical information

restructuring the accounting regulations to achieve harmonization with European Directives and International Accounting Standards.

elaboration of a simplified accounting system for small and medium enterprises, based on a set of requirements withdrawn from International Accounting Standards (valuation, recognition and disclosure matters).

Within the second step, the Ministry of Public Finance Edict number 403/1999 has been published. This regulation led the harmonization of the romanien accounting system with the Euporean Directives and International Financial Reporting Standards in terms of conceptual framework and specific disclosure requirements, as a mixture between the 4the European Directive and International Accounting Standards. The practical outcome of this phase consisted of an experiment conducted over thirteen listed and national companies, in order to provide and disclose their financial statements based on the new regulations. The Big five representatives in Romania had audited those financial statements.

The most important conclusions of this experiment imposed the endorsement of the Ministry of Finance Edict number 403. Therefore a new regulation has been published in 2001: the Edict of the Ministry of Public Finance number 94. This more recent regulation has enforced the obligation for all Romanian entities to submit their financial statement disclosures to the standards of this Edict, if two of three criteria are provided: the turnover, the total of assets and the average number of employees.

In 2001 197 economic entities conformed to this regulation: listed companies, public interest companies, utility providers, other companies. New entities will face this program until 2005, if conditions are overcome (turnover, total of assets, average number of employees). The lowest level of achievements required by this program, for 2005, consist of more than 5 mil euro as turnover, more than 2.5 mil euro as total of assets and more than 50 -average number of employees.

In order to support the accounting reform the english version of International Accounting Standards 2000, 2001 and 2002 has been translated into romanian and became the professional reference. Several practical guides had been published to help the romanian accounting profession to better assess the financial reporting' s new issues.

Finally the Accounting Law number 82/1991 had been modified and adjusted to comply with the national accounting system development. Based on this law there are three categories of economic entities in Romania:

economic entities that comply with the Ministry of Public Finance Edict number 94/2001 , that are preparing and disclosing their financial statements based on International Accounting Standards and EU Directives

small and medium entities that comply with the Ministry of Public Finance Edict number 306/2002 "Simplified regulation for business reporting", based on a set of IFRS rules (valuation, recognition, disclosure), the equivalent of the second level )

microenterprises that comply with Ministry of Public Finance Edict number 24/2001, amended by the Law number 111/2003 for microenterprises (the equivalent of the third level), concerning a special set of requirements in terms of accounting system and disclosure.

In terms of group accounting another Ministry of Finance Edict had been issued and published in 2000 (Edict number 772: Consolidated financial reporting), based on the 7the EU Directive requirements.

Special requirements had been issued for financial institutions, insurance companies and intermediate entities acting on the stock exchange market. New regulations had been published for non-profit organizations as well.

Some particular comments should be done, concerning the development plan of the romanian accounting system:

important changes in accounting framework, financial reporting disclosure and professional judgment had been enforced

romanian economic entities are disclosing a more faithful image of their business but improvements are still necessary;

regulation improvements are still to be done; fiscal impact on financial statements is still very significant ("classical" examples are: depreciation policies, impairment policies, revenue recognition, recognition of the cost of goods sold etc.);

Romanian accounting regulations, that are a mixture of EU Directive and IFRS requirements, emphasize the following features:

mandatory accounting principles are: going-concern, permanence of methods, prudence, independence of the financial years, identical disclosure format for the year end balance sheet and the next year' start balance sheet, non - offsetting , substance over form, materiality and separate disclosure (a mixture of the EU Directive requirements and qualitative characteristics of the IASB Framework);

the compulsory disclosure format of the profit and loss account is based on the nature of expenses ; in the notes the function format of the operating profit is required;

although the notes are not regulated in terms of a compulsory format, few companies are extending their presentation beyond the regulation examples;

historical cost accounting is still "preferred", in assessments like "companies may follow one of the following options a) reevaluation of fixed assets, according to the specific legal requirements issued...or b) current cost accounting for balance sheet and profit and loss account valuation (MPF Edict 94/2001, par. 5.35)"; however the requirements of IAS 29 Financial Reporting in Hyperinflationary Economies are not applied by the majority of romanian companies;

published financial statements can not be changed; therefore the conclusion is that the benchmark treatment of fundamental error's correction and change in accounting policies (of IAS 8) are difficult to apply in Romania;

difficulties disclosing deferred taxation impact in the financial statements (few companies are providing this type of information);

property, plant and equipment recognition criteria is still enforced by romanian legal requirements (utility life more than 1 year and value more than 8 mil lei), giving raise to confusion in the financial reporting area;

the alternative treatment of IAS 21 is not allowed because "the specific conditions of the IAS 21 alternative are not applicable " (MPF 94/2001, par. 5.13)

the national chart of accounts is (still) compulsory and some accounts are not relevant for the application of IFRS requirements (e.g.: 711 "Variation of inventories", that is a revenue account, used to emphasize the variation of finish goods and work in process).

Important efforts are done to provide IFRS based financial statements. In the first year of IFRS application, romanian companies are suppose to provide the financial information based on "old accounting practices", that are adjusted/restated by the year end, according to IFRS requirements. Therefore different new concepts, methods and practices are used and an important set of changes in accounting policies are provided for the following issues:

the government grants amortization method,

the effects of changes in Foreign Exchange Rates,

the accounting treatment of the research and development costs,

the borrowing costs,

the fair value measurement of financial instruments,

the inventory measurements,

the bad debt measurement and disclosure,

the deferred taxation,

the adjustment of reevaluation reserve,

the impairment tests and the depreciation of assets,

the contingent assets and liabilities

the events after the balance sheet date

the lease contracts

the revenue recognition

the earning per share disclosure

the discontinuing operations

new financial statements to disclose: the cash flow statement and the statement of changes in equities

Based on the analyze above we shall conclude that the romanian accounting profession is facing great social changes and big professional difficulties:

the accounting regulations are enforced by the Ministry of Public Finance and not by the professional bodies and business community, therefore important fiscal and macroeconomics impact is driven;

compromise between IAS requirements and the "old" romanian accounting practice in terms of valuation (historical cost is still emphasized within the financial statements, based on the lack of adjustments for current costs, limited reevaluation, weak and infrequent tests for fixed assets impairment);

"old accounting practices" effects that are still on the face of financial statements : the reevaluation reserves of fixed assets that had been disclosed as an increase of the capital of the business and no adjustments for IAS purposes are possible because of the legal impact;

accounting policies are not clearly selected and applied, because of concerns regarding future endorsements of romanian regulations and IFRS proposed improvements;

difficulties in assuring comparability between companies: some are complying with IFRS some do not.

A globally harmonized accountancy profession will not prevent or cure companies' failures but it will ensure that investors and other interested parties have prior warning of impending dangers and that they have an opportunity to take remedial action at the earliest possible stage. Where a company's financial health is not in question, reliable, transparent and internationally comparable information can only help to boost confidence and promote future corporate prosperity. The need for harmonization is self evident but it can only become a reality as a result of commitment and concerted effort by regulators, standard setters, financiers, business community, the public and the accountancy profession.