Changeover to IFRS: the European experience.

• Author: Peyret, Jean-Luc
• Position: Financial reporting - International Financial Reporting Standards - Legislation

In its "IAS Regulation," the European Union mandated that, effective 2005, publicly traded companies established in EU member states (approximately 7,000 companies in all) prepare their consolidated financial statements under International Financial Reporting Standards. Each member state could also extend the application of the IAS Regulation to permit or require the use of IFRS-EU in the separate financial statements of companies and in the consolidated financial statements of non-listed companies.

Where the use of IFRS is permitted but not mandatory, local generally accepted accounting principles are still authorized (this is the case in France and in Germany for consolidated accounts). Where IFRS are prohibited, local GAAP remain mandatory (as is the case in France and in Germany for separate accounts).

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Differing Starting Points

A significant point is that in continental Europe, consolidated accounts still differ quite significantly from separate accounts since the latter, being regulated by the national jurisdictions of each member state, are heavily used for income tax purposes and make extensive use of historical cost with little room left for fair value measurements.

In Germany, for instance, local GAAP applicable in separate accounts mandate that construction contracts are accounted for under the completed contract method.

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Depending on the member state, the consolidation standards that existed prior to the current mandatory IFRS were either close to local GAAP, quite similar to the current IFRS (United Kingdom) or somewhere in between (France). Prior to the IAS Regulation, while a majority of member states required compliance with local consolidation GAAP (France, U.K., Belgium, etc.), others had authorized their listed groups to adopt U.S. GAAP or IAS (Germany, Finland, etc.) for their consolidated accounts.

This resulted in the magnitude of the change for transitioning groups being widely different. This view is shared by Vincent Frambourt, a partner with Grant Thornton France in Paris, who was involved in a number of IFRS projects from 2003 through 2005.

General Framework and Changeover Timeframe

A major concern of Europe's securities regulators was to avoid any risk of a disruption on financial markets in the period when the first IFRS financial statements were to be released. As early as December 2003, the Committee of European Securities Regulators (CESR) issued to its members a...