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The European Union (EU) closed the gap further regarding international accounting standards when it announced on Tuesday that overseas companies operating and reporting in the EU would not have to restate their accounts to EU standards.
Companies that are committed to adopting International Financial Reporting Standards (IFRS) will be able to use their own country's version of GAAP providing these statements match, at a high level, the IFRS objectives of identifying assets, liabilities, financial position, profit and losses, and future prospects. There will be a basic equivalence test which will test whether investors would make the same decisions regardless of whether a company's financial statements followed IFRS or GAAP standards.
This new permission matches the change, late last year, whereby the US’s Securities and Exchange Commission allowed overseas companies to file statements using IFRS for the first time and not to have to convert their financial statements to the GAAP format.
Charlie McCreevy, European Internal Market and Services commissioner, a proponent of merging international financial reporting standards said "This is a crucial milestone towards our objective of promoting the efficiency of capital markets by establishing a common worldwide accounting language. Without this Regulation in place we would not be able to proceed with (this) key decisions on the acceptability of third-country GAAPs in the EU."
The European Commission (EC), using this new regulation, can now identify ways in which third country GAAPs can be accepted as equivalent with effect from 2009. The EC will also be entitled to allow third country issuers to use their GAAPs in the EU for a transitional period ending in 2011, provided these countries are converging with IFRS or the respective third country intends to adopt IFRS. Through these decisions, foreign issuers listed in the EU will be allowed to continue preparing their accounts using their GAAP instead of having to restate their financial statements using IFRS.
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