Financial reporting

Compiled by David Cairns, a consultant on international financial reporting issues and author of the International Accounting Standards Survey 2000 (
European Union Fair-value accounting

The EU Council has unanimously adopted the directive amending the Fourth, Seventh and Bank Accounts Directives (78/660/EEC, 83/349/EEC and 86/635/EEC) to allow companies to apply

IAS 39, Financial Instruments: Recognition and Measurement, from its 2001 effective date. In particular, EU-based companies will now be allowed to measure certain financial instruments at fair value instead of historical cost, a practice that the Fourth Directive does not currently permit.

The change does not mean that historical cost has been replaced as the basis of accounting valuation in the directives. It also does not mean that the EU's proposed IAS endorsement mechanism for IASs will necessarily result in the endorsement of

IAS 39. In approving the new directive, the EU Council has acknowledged that there is no international consensus that fair-value accounting is appropriate in all cases. There is, therefore, a possibility that the EU will not require compliance with IAS 39 from the 2005 deadline. Enforcement mechanisms

Enforcement of accounting standards - particularly IASs - is a critical component of the EU's proposal that all listed EU companies should publish IAS consolidated financial statements by 2005. As a contribution to the discussion on the future development of enforcement, the Fédération des Experts Comptables Européens (FEE) has published a factual study, Enforcement Mechanisms in Europe.

The study distinguishes between six different levels of enforcement:

•   self-enforcement: preparation of financial statements;

•   statutory audit of financial statements;

•   approval of financial statements;

•   institutional oversight system;

•   judicial: sanctions/complaints;

•   public and press reactions.

The FEE study focuses on the enforcement of financial reporting standards by means of reviews that are substantive in nature, rather than limited to formal checks. The study includes detailed information on financial reporting enforcement mechanisms for 14 EU countries, two non-EU countries and three central and eastern European countries.

Self-enforcement, the approval of financial statements and statutory audit are parts of enforcement mechanisms that exist throughout Europe and have, according to the FEE study, 'many common features'. However, there are differences, in particular with respect to single/two-tier systems for approving financial statements, and the role of audit committees.

The main differences in enforcement systems in Europe, according to the FEE study, relate to the institutional oversight systems. Such systems may involve government bodies or private institutions, but FEE notes that, for nearly half of the countries surveyed, there is no institutional oversight system in place. FEE recognises that security market regulators have a significant role to play in ensuring that listed companies comply with financial reporting requirements. Some countries such as Ireland and Spain are moving towards regulator-based systems. FEE also recognises that private oversight systems such as the UK's Financial Reporting Review Panel can contribute to enforcement of accounting standards. Germany is currently considering a private oversight system that is similar to the FRRP.

While audit of financial statements will continue to play a major role in enforcement, in more and more countries audit will be accompanied by an institutional oversight system. With the proposed EU regulation on the application of IASs and the final Lamfalussy report, changes in the capital market regimes and enforcement may be expected over the coming years, in particular as far as the institutional oversight systems are concerned.

Copies of the study may be ordered, free of charge, from or can be downloaded from FEE's website at Canada Harmonisation with US GAAP

At its May meeting, the Accounting Standards Oversight Council indicated that the goal of harmonisation with US standards should continue to be the top priority for the Canadian Accounting Standards Board (AcSB). Over the past 18 months, the AcSB has accelerated its efforts to harmonise accounting standards and eliminate significant differences between Canadian and US GAAP. The AcSB is carrying out a number of projects in conjunction with the US Financial Accounting Standards Board, most notably on business combinations.

Germany Exposure draft

The German Accounting Standards Board (GASB) has published exposure draft E-GAS 10, Duty to Prepare Consolidated Financial Statements and Scope of Consolidation. The draft is available in German on, and comments may be submitted until 23 July 2001.

Standards published

The Federal Ministry of Justice has also published GAS 5, Risk Reporting, GAS 5-20, Risk Reporting by Insurance Enterprises, and GAS 8, Accounting for Investments in Associates.

Japan Amendments to the Commercial Code

The Ministry of Justice has published a Tentative Proposal for Amendments to the Commercial Code, one of the major elements of the Japanese accounting system. It proposes that all the accounting requirements should now be removed from the Commercial Code and that larger companies should prepare consolidated accounts. The proposal also includes a framework for more effective corporate governance and improvements in corporate financing.

All Japanese companies are currently required to comply with the accounting requirements in the Commercial Code. However, the Ministry of Justice has recognised that it is difficult to amend the Code in response to changes in business environments, and that the Code has often been seen as an obstacle to accounting standard-setting.

Under the new proposal, the accounting requirements currently included in the Commercial Code would be promulgated by Ministry regulations that would not require the the National Diet's approval. This will facilitate future amendments to those requirements.

The Commercial Code does not currently require any companies to prepare consolidated accounts, although the Securities and Exchange Law (administered by the Ministry of Finance) does require public companies to publish consolidated financial statements. Under the new proposal, all large companies (joint stock companies with capital in excess of Y500m or total liabilities in excess of Y20bn) would be required to prepare a consolidated balance sheet and income statement for the board of directors' approval.

Financial instruments

The Japanese Institute of Certified Public Accountants (Jicpa) has published an exposure draft of amendments to Accounting Committee Report 14, Practical Guidelines for Accounting for Financial Instruments (Interim Report). The proposed amendments relate to accounting for the impairment of securities.

Jicpa has also issued Auditing Committee Report 71, Audit Treatment of Valuation Allowances for Investments in Stocks and Other Securities of Subsidiaries. This replaces Auditing Committee Report 22, Treatment of Valuation of Stocks and Loans to Subsidiaries and Associated Companies, and permits the establishment of a valuation allowance for declines in values of stocks of subsidiaries and associated companies with no available market values.

Jicpa has issued Accounting Committee Research Report 7, Accounting for Division of Corporations, which provides guidance on the accounting aspects of corporate divisions carried out under Art 373 of the Commercial Code.

Jicpa has published Accounting Committee Research Material 2, Computation of Dividable Profits, which provides reference for computation of dividable profits after the implementation of the accounting standard for financial instruments and Accounting Committee Report 14, Guidance on Accounting for Financial Instruments (Interim Report).

Jicpa has issued Industry Audit Committee Report 23, Investigation of Values of Specified Assets Held by Investment Trusts and Investment Corporations. Under the November 2000 amendments to the Investment Trust Law, auditors are required to investigate the acquisition or transfer of real properties and derivative financial instruments by investment trusts or investment corporations. The method and result of the auditor's investigation should be included in the fund management report or asset management report. The new Jicpa report provides guidance on the work that the auditor should do when investigating the values of real properties and derivatives.

Russia IAS convergence deadline

The Russian Central Bank has announced that the country's transition to International Accounting Standards will be completed by 1 January 2004.

Speaking to a banking congress in St Petersburg at the end of May, the bank's first deputy chairman said that the deadline had been set by the government and the bank in their economic policy statement for 2001.

US Business combinations re-deliberations

The Financial Accounting Standards Board (FASB) has completed its re-deliberations on its 1999 exposure draft, Business Combinations and Intangible Assets, and its 2001 revised exposure draft, Business Combinations and Intangible Assets - Accounting for Goodwill .

FASB plans to vote on the resulting final statements on goodwill and intangible assets in June.

The main conclusions are: the use of the purchase method of accounting for all business combinations initiated after 30 June 2001, so eliminating the use of the pooling of interest method; and the capitalisation of goodwill but without amortisation.

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