The European Union will turn up the heat on experts drafting global accounting standards to prevent the rules from damaging its banks and insurers, finance ministers agreed on Tuesday following French pressure.
The EU is to ditch national rules in favour of International Accounting Standards (IAS) in 2005 to improve the quality of financial reports at its 7,000 listed firms and avert scandals like those of Enron or Ahold.
But French President Jacques Chirac has urged the European Commission to reconsider adoption of two draft standards for the accounting of derivatives — IAS 32 and 39 — for fear they could generate volatility in company earnings and balance sheets and create problems for the European economy.
At a Brussels meeting the ministers asked the Commission to request that the London-based International Accounting Standards Board (IASB), which is drafting the rules, “find a satisfactory and timely solution” to the problems posed to EU banks.
Internal Market Commissioner Frits Bolkestein, the EU's top financial regulator, said the Commission had called on the IASB “to ensure that all parties are given a fair opportunity to participate in the drafting of the standards.”
He said the Commission will recommend the temporary suspension of adoption of IAS 32 and 39 at a technical meeting on July 16. Adoption of all other parts of IAS would continue.
“The EU Commission shares the concern of European banks,” said Manfred Weber, managing director of the federation of German banks BDB, in a statement.
“The partial approval of IAS is a clear message to the IASB to finally remove the serious shortcomings.”
The two rules that have been criticised require all assets and liabilities to be accounted for at current market prices, a practice close to U.S. standards but not common in Europe.
The EU has thrown its political weigh behind IAS hoping they can become the global standard and replace the U.S. Generally Accepted Accounting Principles (GAAP), the only accepted accounting system in the United States.
The Commission views the lack of a single global standard as a potential barrier for EU companies wanting to list in the United States since these firms have to file their reports under two different sets of bookkeping rules at an extra cost.
“The remedy can only be convergence,” Bolkestein said.
“If we do not converge, it would be difficult for European companies to list in the United States without falling within the empire of the Securities and Exchange Committee.”
Paul Chisnall, director of the British Banking Association, said, said adopting IAS as the single standard for Europe would undoubtedly bring in benefits. But he added that the U.S. was not showing willingness to abandon its bookkeeping practice.
“The likelihood of the United States adopting IAS is increasingly remote,” he told Reuters. “The IASB should try and meet the needs of its major constituency: The EU.”
EU finance ministers have also definitely adopted a directive on single disclosure rules for issuers and will hear the outline of a Commission plan to rationalise VAT in Europe. France, which prompted the VAT debate as well as the one on IAS, is likely to gain lower VAT rates for its key restaurant sector under the Commission plan, to be unveiled on Wednesday, EU sources told Reuters. France is also likely to retain reduced VAT rates for its pay-TV services and for high-intensive working sectors such as building and house repair.
The jury is still out on whether the Commission will propose to axe a zero VAT rate for children's clothes and shoes.
“We would be opposing it along with Britain,” said Irish Finance Minister Charlie McCreevy. In the early 1990s the Irish government in office suffered a political defeat while trying to introduce VAT on these items.