A group of European regulators announced plans on Thursday to review the accounting standards of Japan, the US and Canada to see if they are adequate or whether companies that use them must provide additional disclosures, or even completely redo their financial statements, if they want their securities to trade in European markets.
The Committee of European Securities Regulators or CESR said it would weigh whether the overseas accounting standards are equivalent to the international accounting standards to go into force in the European Union next year, and recommend to the European Commission what to do if they are not.
At issue is whether, beginning in 2007, companies from those countries would still be able to maintain European listings without providing more financial information. The US has long required European and other companies to reconcile their financial statements to America’s generally accepted accounting principles.
While the US Securities and Exchange Commission has promised to consider whether companies following the international standards could simply file those statements without additional reconciliation, it has made no commitment to accept them.
Accounting rule setters in both Japan and the US have begun consultation processes with the international accounting standards board to bring about convergence of accounting standards, but that process is likely to take many years, if it succeeds at all.
Some in Europe, resentful over American domination of the world financial system, would like to see a requirement that American companies provide additional disclosures. Some see that as a potential bargaining chip in negotiations with Americans over whether they will accept European financial statements. But others in Europe want to remain as open as possible to foreign company listings.
London has recently had some success in getting companies from countries like China to list there, rather than in New York, arguing that the Sarbanes-Oxley Act in the US, which required new auditing procedures, had made an American listing too expensive.
The announcement by CESR said the assessment should “be carried out independently of whether the third country concerned already recognises” international standards as equivalent to their accounting principles.
CESR added that it was “firmly of the view that ‘equivalent’ should not be defined as meaning ‘identical.”’ Instead, it said, an accounting system should be viewed as equivalent when financial statements prepared under it “enable investors to take at least similar decisions in terms of whether to invest or divest, as if they were provided with financial statements” based on the international standards.
“We take the investor’s point of view,” said Mr Paul Koster, the commissioner of the Netherlands Authority of Financial Markets and the head of the committee that would review accounting standards. If a country’s accounting standards are deemed to be not equivalent, companies could be required to prepare complete financial statements under international rules, he said.