The regulation that would require all European Union (EU) companies listed on a regulated market, including banks and insurance companies, to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS -- previously known as International Accounting Standards, or IAS has been heralded as a major step. One top European official even says it would bring "the end of the Tower of Babel."
"This eagerly-awaited proposal signals the beginning of a new era of transparency and the end of the Tower of Babel in financial reporting in Europe," says Frits Bolkestein, commissioner in charge of the European Commission's Internal Market. "The use of one global accounting language will greatly benefit European companies. It will help them to compete on equal terms for global capital.
"Investors and other stakeholders will, at last, be in a position to compare company performance against a common standard. Listed companies should start preparing now for this change-over to a single set of financial reporting rules. Although some investment will be needed in terms of training, I am confident that it will repay itself many times in the long run, notably through the reduced cost for companies of raising capital."
This quote contains several interesting and insightful observations on the background to the proposal to require the use of International Financial Reporting Standards (IFRS)/IAS throughout the EU. First, the proposal is primarily driven by market needs, not by a desire for more regulation for the sake of regulation. Second, the proposal is only a part of a much broader series of initiatives needed to reform the European capital markets. Finally, the end goal is a truly integrated, open, transparent and efficient European capital market, resulting in real economic benefits and the reduction of costs of capital for European companies.
It is important for European companies to keep this background in mind when deciding on their approach to converting to IFRS/IAS by 2005. The tendency will be to consider the conversion as a constraint -- as a compliance exercise. It is, but it can also be much more: a truly unique opportunity to take advantage of this fundamental change in external reporting to significantly improve the way the company views itself and measures performance internally, and the way it communicates about itself externally. Why do we think it is appropriate to go beyond what is...