The integration of the IAS

07 October 2004

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In the coming months, thousands of European companies will have to begin the process of moving from domestic accounting standards to international ones, writes SJ Berwin in a recent press release. But many thousands more will not. By and large, the only companies that will move quickly to international accounting standards (IAS) are those that have to because they are listed or those where there are compelling administrative reasons for doing so. For example, some companies may be part of a group with an ultimate parent company that is listed. Most independent companies in Europe (including most that are private equity-backed) will continue to apply the same rules they apply now. The law firm highlighted, however, that the IAS may still affect those companies that do not adopt them.

Firstly, the rules are very likely to take hold pretty quickly and the inefficiency of two separate sets of standards is likely to drive national standards out. SJ Berwin outlined that this likely to happen in two ways: IAS rules will be applied (either by European or national lawmakers) to a wider group of companies. In any case, the national standard setters will conform their rules to the international rules, making the differences much less obvious than the similarities. Both changes are happening already. In the UK, the Government stated earlier this year that it would review the position in 2008 and could extend the requirement to use IAS to all British companies soon after that. The main reason that it did not do so immediately was that there is no equivalent IAS standard to that which now applies to smaller UK companies. That is something that the IASB - the IAS standard setter - is addressing and that is unlikely to be an issue in four years time. In addition, the UK's Accounting Standards Board has also made it clear that it will converge its rules to IAS as soon as possible.

Secondly, there is no doubt that companies coming up to an IPO, or that are interested in attracting serious levels of funding (particularly across borders) will have to be able to state their profits in IAS terms. Also, any company that finds itself part of a group that chooses to report under IAS (or becomes forced to, as some private equity funds may be) will need procedures in place that allow it to pass useable information to the parent.

The law firm states that the work of the IASB on its standards - particularly those that are designed for unlisted companies - should be of very real concern to the private equity community in Europe. A discussion paper issued in June began the task of developing 'a set of high quality, understandable and cost efficient accounting standards designed to reduce the financial reporting burden on SMEs who wish to use global reporting standards'. The IASB also wants to offer an easy transition to full international standards for those planning a public offering.

SJ Berwin continues to outline that there may be a real opportunity to influence the development of those standards, and the European Private Equity and Venture Capital Association (EVCA) has already begun the dialogue. In a response to the IASB discussion paper issued last week, it has argued the case for financial statements that respond more clearly to the needs of their users, and for a reduction in the cost burdens for smaller companies. The law firm highlighted that the IASB is already persuaded that a company's accounting requirements may differ depending on who uses the accounts. But the process of working out how different the standards will be, and which companies they will apply to, has only just begun.