EU considers new accounting standards

City of London: New shake-up on the way?

Thousands of firms across the EU will have to change their accounting practices to an international standard if a plan announced by the European Commission is ratified.

The EC has issued proposals for all 7,000 European listed companies to adopt International Accounting Standards (IAS) by 2005.

The standards have been in development since the 1970s but, although many national accounting practices have been moving towards IAS, the new scheme has been slow to gain currency.

However, establishing a benchmark for presenting corporate accounts is now becoming more urgent as globalisation transforms the business world.

Harmonisation

Take a multinational company such as Unilever. It is based in the UK and Netherlands and listed in the US.

This means it must produce accounts under all three sets of national standards.

Clearly harmonisation would reduce costs, but it would also enable like-for-like comparisons of the performance of multinationals.

At the moment, corporate accounts can all too easily be misinterpreted across national borders.

Also, problems in getting a clear picture of a firm's position make it more difficult, and therefore more costly, for that firm to raise capital.

Crisis

Advocates of IAS have pointed out that if Asian companies had been disclosing the same kind of information in the late 1990s as UK companies, there would have been an early warning of the financial crisis which devastated the region.

PwC's Mary Keegan

There has been a reluctance to embrace IAS in the US but the standard is gaining ground in all other regions.

Mary Keegan, head of Global Corporate Reporting at accountants PwC, says the Americans have demonstrated so much interest in IAS that she feels sure they will adopt the system eventually.

She says it is really a question of whether the market will drive the conversion.

If there are significant cost savings to be made and raising capital becomes cheaper, that will be a big incentive to adoption.

But for European companies, there is no time to lose if the EC plan is ratified.

Time is short

If listed firms are to be using IAS by 2005, comparative IAS information will be needed for the two previous years, which means those firms will have to set up new systems by 2003.

PwC's Peter Holgate

Peter Holgate, head of PwC's UK technical accounting department, says his reading of the EC proposal is that it will come in, although the exact time-frame is unclear.

He says IAS is well on the way to becoming adopted in Asia, the Middle East and other regions.

To help raise awareness of the significance of IAS, PwC has carried out a survey of more than 700 companies in the EU and Switzerland.

It is aimed at establishing whether European firms are ready for the new standard, whether they want to use it, what they think of the 2005 proposal and what difficulties they anticipate.

PwC says the results of the survey will be available on 27 November.