The EU's Adoption of IFRS

Topics: International Financial Reporting Standards, Financial statements, European Union Pages: 6 (1953 words) Published: December 29, 2010

Student No. 09175515


The harmonization of accounting standards across countries has been engendered by the globalization of politics and markets. In the past 20-30 years the growth in international trade fostered by increased Foreign Direct Investment flow of capital and development of technology has led to multinational firms establishing presence across the world. This has led to these firms being listed in foreign stock exchanges; this has fuelled the desire to have common international standards that could be understood easily and followed across nations. The European Union (EU) could be said to be in the forefront in the process of harmonizing accounting practices of its member countries. The enactment of the 4th and 7th Accounting Directives (1978, 1983) by the EU and the obligatory implementation of its provisions into law by member countries demonstrate a clear attempt by the EU to create accounting practices which is transparent and comparable across member countries. The 4th Directive was aimed at harmonizing the national laws on the accounting regulations of companies. Besides aspects affecting format and valuation, main features of the 4th directive include the requirement to prepare annual accounts which provide a true and fair view (TFV) of the company’s assets, liabilities, financial position and profit or loss as well as substantial requirements on information which has to be provided by means of notes (Art. 43, Fourth Directive). The Seventh Directive on consolidated accounts determines the identification of groups, scope of groups accounts and obligation to prepare, audit and publish group financial statements as well as consolidation-related methods Germany and the United Kingdom provide examples of the two primary accounting philosophies worldwide-the Anglo-Saxon and Continental models (Mueller, Gernon, and Meek, 1991). Anglo-Saxon models historically focuses on equity holders, permitted discretion in preparation of financial statements as long as the resulting statement provides a true and fair view (TFV) of financial conditions, and decoupled tax and financial reporting. Continental model focuses on debt holders, codified reporting requirements and a strong link between financial and tax reporting (Joos and Lang 1994). Given these accounting philosophies, the implementation of the 4th and 7th Directives into national laws brought changes to the accounting practice of EU members to differing significance. Although the objective of the 4th and 7th Accounting Directive was to establish comparability and equivalence of financial statements, it failed to achieve this because of the incorporation of considerable number of options which balanced controversial aspects on formats and recognition as well as valuation which were then implemented by the different member states (Thorell and Whittington, 1994: 220). Another shortcoming of the Accounting Directives to achieve its objective was the different implementation and interpretation of the true and fair view (TFV) principle that has resulted in the possibility that financial statements may provide a TFV in the perception of one country, whereas the principle is essentially violated in another country. In September 2002, the EU by its Regulation (EC) No.1606/2002 took a major step in the harmonization of accounting practice by mandating that all companies listed in regulated markets adopt the International Financial Reporting Standards (IFRS) in preparing consolidated financial statements for year beginning on or after January 1, 2005. The International Accounting Standards Board (IASB) is a privately financed independent body whose predecessor was the International Accounting Standards Committee (IASC). The adoption of IFRS by the EU marked one of the most important developments in the effort to harmonize...
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