The European Commission has ordered all of the European Union's 7,000 publicly traded companies to switch to international accounting standards beginning in 2005, aside from derivatives rules that remain disputed by banks.
The single set of rules “will put an end to the current Tower of Babel in financial reporting, improve competition and transparency and make the free movement of capital much easier,” EU Single Market Commissioner Frits Bolkestein said in a statement issued in Brussels.
The standards are the centerpiece of an `action plan'' designed to stitch together the EU's financial markets by 2005. Other planks include a law to break down barriers to hostile takeovers, opposed by Germany and Scandinavian countries, and a law on stock and bond sales.
The commission, the EU's executive arm in Brussels, left out rules that the International Accounting Standards Board, the independent organization in London writing the rules, has proposed on bookkeeping of derivatives. The board's proposal would require companies to record derivatives at current value, even if they aren't held for sale.
The accounting board designed the rules to ensure that a company's books accurately reflect the risks of the instruments, contracts based on underlying assets or indexes. Financial- services firms and banks including HSBC Holdings Plc and BNP Paribas SA complained the treatment would make their reported earnings more volatile and that their hedges wouldn't qualify under the rules.
The IAS 39 rule only permits what is known as hedge accounting if certain principles are followed, such as proving the hedge is effective. Macro hedging is where companies guard against the interest-rate risk in their holdings of securities.
The EU's 15 governments rejected the derivatives proposal in July and, along with the commission, urged the IASB to continue consulting with banks to find an agreement. The IASB last month changed proposals on how to account for Derivatives.
French President Jacques Chirac warned in a July 4 letter to commission President Romano Prodi that some of the standards would trap executives in a 'short-term' mindset that is bad for the economy.
“Excessive emphasis on market value would Increase the volatility of our economies,” Chirac said in the letter.
“What matters above all is that purely financial transactions may not, quarter after quarter, have a disproportionate impact on the results of companies that must above all reflect their economic performance.”
The IASB's proposals remain open for comment until November, Jonathan Todd, Bolkestein's spokesman, told reporters in Brussels today. Bolkestein will meet with IASB Chairman David Tweedie on Thursday, Todd said.
“Talks are continuing between the board and various European interests” including banking groups, Todd said.