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AbstractThe acceptance of European Union (EU) standards by candidate countries

and the integration of their national system to the EU system (fully adaptedto Acquis Communautaire) takes a long time. During this period there arevarious milestones. The determination of these milestones is specified by acareful screening procedure; the current situation is looked at and, alongwith the targets, it is compared with Acquis Communautaire. As part of thisprocedure, the Turkish Accounting System was examined under Economicand Financial target and adapted to EU standards. In this sense, the currentsituation has been evaluated in this paper by examining the TurkishAccounting System, EU directives and other studies. Additionally, the effectsof the EU adoption period on the Turkish Accounting system, the state ofthe Turkish Accounting System within the adoption period and the problemsthat the Turkish Accounting System may have during the adoption of theEuropean Union Accounting Standards have all been mentioned in thispaper.

Key words: European Union, Screening Procedure, Directives,International Financial Reporting Standards

EFFECTS OF THE ADOPTION OF

EUROPEAN UNION

STANDARDS ON ACCOUNTING

PRACTICES Assoc. Prof. Dr. Cengiz TORAMAN

Bal›kesir University Faculty of Economics and Administrative Sciences

Res. Assist. Fatih BAYRAMO⁄LUKaraelmas University Faculty of Economics and Administrative Sciences

Assoc. Prof. Dr. Cengiz TORAMAN Res. Assits. Fatih BAYRAMO⁄LU

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1. European Union andScreening Procedure

The European Union is acommunity which was foundedunder the name European EconomicCommunity (EEC) by the signing ofthe Treaty of Rome in 1957 byBelgium, Germany, France, TheNetherlands, Luxemburg and Italy.The European Coal and SteelCommunity founded in 1951 tostrengthen the coal and steelindustry after World War II formedthe basis of this community. TheTreaty of Rome signed in 1957proposed a Customs Union, i.e. freetrade of goods without payingcustoms tax. However, the finaltarget of the Treaty of Rome wasnot only economy based but alsolooked at the formation of commonpolicies in agriculture, transportationand competition, founding economicaland financial unity and theformation of common foreign andsecurity policies.

The first expansion movement inthe European Economic Communityoccurred in 1973 with the accessionof Britain, Denmark and Ireland.Later accessions included Greece in1981, Spain and Portugal in 1986when the number of membersbecame 12. The number increasedto 15 in 1995 with the accessions ofAustria, Finland and Sweden. Thebiggest expansion in the EU was in2004 as membership agreements

were signed with 10 new countriesand the number of membersreached 25. Bulgaria and Romaniaare currently continuing theirnegotiation period and thesecountries are expected to gainmembership in 2007 1.

The screening procedure is adetailed investigative procedure inwhich national legislation of thecountry to join is compared withAcquis Communautaire of the EU.The areas which are compatible withAcquis Communautaire or need tobe harmonized are specified at thesame time. Furthermore, thescreening procedure specifies theareas in which transition proceduresor exceptions are to be applied.Concerning these properties, thescreening procedure is accepted asthe first stage of accessionnegotiations and it aims to specifythe compatibility of nationallegislation with Acquis Communautaireof the EU. The start of accessionnegotiations is principally possibleafter specifying the differences interms of legislations 2.

The application of the screeningprocedure is very important informing a base on which bilateralnegotiations are built between thecandidate country and the EU.Screening procedures accepted asthe first stage of negotiation periodare a detailed evaluation of laws,legal regulations and compatibility of

1 www.deltur.cec.eu.int2 www.abmerkezi.org.tr/

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institutions of a country with AcquisCommunautaire. Transfer andapplication of Acquis Communautaireis one of the main problems thatcandidate countries encounter. Thisprocedure necessitates the strengtheningof administrative and legal systemsand the compatibility of infrastructureof the candidate country with EUstandards, especially in the areas ofenvironment, transportation, energyand communication.

2. European UnionAccounting Standards

Harmonization of accountingstandards is executed by “Directives3 ”published by the EU. In this respect,the 4th, 7th and 8th directives havebeen published. The 4th Directiveregulates the structure, content,valuation principles and audit offinancial statements to be preparedby certain institutions, The 7thDirective includes legal decisions onconsolidated financial statements.The 8th Directive contains legaldecisions about supervisors executingconsolidated financial statements4 .In harmonization efforts on accountingstandards by means of directiveswithin the EU some problems areencountered like:

o Inability to transfer directives tonational legislation on time due tosome technical deficiencies indirectives and of continuity ofcountry differences,

o Inability in providing updates, sinceno changes have been made sincethe date of publishing accountingdirectives,

o Failure of the policy of providingcompatibility in accounting standardsby mutual acknowledgement due toinability to form quality-developingmechanisms,

o Mitigation of legal decisionsincluded in directives since most ofthe countries have foundedcommissions and councils for theestablishment of national accountingstandards,

o Realization problems. BigEuropean companies hope to utilizecapital markets if they match EUAccounting Standards. But theirdesire was failed.

In order to prevent suchproblems, the EU has been workingon alternative harmonizationstrategies since the beginning of the1990s, including issues like revisionof current directives and founding acommittee to form an accounting

3 Directives” are possessions of Union for one ore more countries. A directive binds the coun-tries in terms of conclusions to be obtained by leaving authorization to national institutions. Inorder to operate directives in national level, contents of them have to be transferred to domesticlaw. With a publication of a directive, member countries have to make necessary arrangementsin order to adapt that directive to their national legislation. Usage of a legal instrument like“directive” is the only example in adoption of accounting standards by EU.

4 AKDO⁄AN, Nalan; 1991, “Dördüncü Yönergenin Öngördü¤ü Bilanço Tablosu ve ÜlkemizdekiUygulamalarla Karfl›laflt›r›lmas›”, Girne,p:6

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standard in Europe. Thus, thegeneral trend has been to provideharmonization not only within theEU concerning financial reporting/accounting standards, but also on anational scale. Finally, the EuropeanCommission adopted the newstrategy of the EU in theharmonization of accounting standardson November, 14th 1995 and theEuropean Council and the EuropeanParliament were informed. As aresult of this progress, the newstrategy of the EU in determininginternational accounting standardswas supporting the attempts of theInternational Accounting StandardsCommittee (IASC) /InternationalOrganization of Securities Commissions(IOSCO) and the adoption ofaccounting practices of the EU toIASC. In parallel with these policies,the European Commission declared(in June 2005) that according to theoperational plan determined by thecommission, consolidated financialstatements of companies quoted inthe stock exchanges should beprepared to be compatible withInternational Financial ReportingStandards (IFRS) and IASC. Followingthis development, in March 2002,the European Commission approvedthe regulation and it was publishedin September 2002. In accordancewith the regulation, to which allmember countries are subject, othercompanies were also responsible forapplying IFRS in the preparation ofconsolidated financial statementsbefore 2005 and the expansion ofthis responsibility by member

countries, as it covers all companies,took off. (IASB, 2005).

The result of publishing thisregulation is that of having a rapidlegal strength in member countries.Adaptation of this regulation doesnot depend on adopting it as a partof national regulations. Therefore,consistency is provided in terms ofboth practice and timing. When aprocedure applied by the EU isconsidered, it can be concluded thatalthough it is in favor of harmonization,the European Commission doesn’twant to alienate the period ofcreating an accounting standard to aprivate sector which has no or littleeffect on it. The EU has formed anapproval mechanism about thesubject; it has been evaluating newstandards by this mechanism andapproves them as usage-oriented inthe EU. The unit responsible for theapproval is the AccountingRegulatory Committee (ARC) (EU,2005). ARC is a legal constitutionformed by delegates of membercountries and managed by acommittee. Technical opinions areprovided to this committee by theEuropean Financial ReportingAdvisory Group (EFRAG). EFRAG ismade up of accounting specialistsfrom the private sector (financialreporting agents, accounting employersand national standard makers).Besides the technical groupmentioned above, EFRAG has asupervisory committee. The supervisorycommittee is responsible formonitoring works of the technicalspecialists group to ensure reflection

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of opinions of the whole of Europe.It is clear that the application processneeds to be supervised andsanctioned if international standardsare to be compulsory. It is possible tohave audits at many levels. It ispossible to supervise the applicationby government, stock exchangeinstitutions or by other regulatoryinstitutions. There has been adominant opinion within the EU thatthe harmonization of accountingstandards can be developed by theharmonization of auditing andtherefore it is possible to provide acertain amount of slack to membercountries. The Committee of EuropeanSecurities Regulators (CESR) hasbeen approached regarding thisopinion. This approach covers themain topics such as thedetermination of the practice andselection of techniques related tofinancial statements to be supervised.

2.1. AccountingOrganizations Effective inthe Establishment ofInternational AccountingStandards2.1.1 International AccountingStandards Committee (IASC)

This committee aims to provide acertain unity in worldwide principlesused for financial reporting in thebusiness world. Thus; the distributionof investors, credit guarantors,governments and other relatedpeople and their abilities on political

decisions have been tried to beimproved.

The IASC was founded in 1973 byagreement among professionalaccounting institutions fromAustralia, Canada, France, Germany,Japan, Mexico, Netherlands, Britain,Ireland and the USA. All members ofthe International Federation ofAccountants (IFAC) have becomemembers of IASC since 1983. IASC,having 153 members from 112countries, works in cooperation withinter-governmental institutions likeOECD and with developmentinstitutions like the United Nationsand the World Bank 5.

IASC aims stated in its ownregulations are:

o Providing the usage andapplication of standards,

o Making national and internationalaccounting standards as similar aspossible in order to produce highquality solutions.

The decisions related toaccounting principles are made bythe administrative board of IASC anddeclared as International AccountingStandards (IAS). In the decisionmaking process, IASC preparesopinions both against and in favor ofa draft and a proposal is advanced tothe relevant administrative board.After a draft text is declared to thepress, IASC reviews the arguments inorder to specify final standards.Approval by 2/3 of the administrative

5 www.iasc.org.uk

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board is compulsory for theacceptance of standards. IASC haspublished almost 40 standards.These have affected the financialstatements of many institutions(companies).

Many countries have acceptedthe standards without modifyingthem. Furthermore, there have beenimportant changes in the EuropeanUnion in the last two years andAustria, Belgium, France, Germany,Italy and Spain approved lawsallowing the use of IASC standardsfor internal reporting purposesunder certain conditions. TheEuropean Commission has publishedan announcement and proposedthat the preparation of consolidatedfinancial statements of someinstitutions in the EU must be compatibleto international accounting principlesand standards. Most of the biginstitutions (or companies) preparetheir consolidated financial statementsin line with these standards6 .

2.1.2. International Federation ofAccountants (IFAC)

The IFAC is an establishmentformed by professional accountingfoundations and it representsaccountants who have specialized inthe subject and are often facingpublic, private sector, industry andeducational areas as well asaccounting. It currently has amember capacity of 153 establishments

and 2 million accountants from 113countries7. By working with memberinstitutions, committees and workgroups have been trying to getinvolve in activities such as being aleader for the liberalization ofaccounting services, a voice forworld accountants on importantprofessional issues and cooperatingwith local accounting unions andnational accounting organizations 8.

2.1.3. International AccountingStandards Board (IASB)

The International AccountingStandards Board (IASB) existed as abranch of IFAC in the beginning, andbecame an independent establishmentin May, 24th 2000 at a boardmeeting held in Edinburgh.According to the agreementaccepted in Edinburgh, IASB wasformed as a new determinationagency of new structure. As a resultof this structuring, it was decidedthat all publishing and correspondencework would be done in the name ofIASB and thus IASB superseded IASCin 2001 and become responsible forthe improvement and publishing ofstandards and drafts and forapproval of comments of TheInternational Financial ReportingInterpretations Committee (IFRIC).IASB was founded on April 1st, 2001and undertook the responsibilities ofIASC as the only commonly acceptedauthority on preparing independent

6 http://www.tbb.org.tr/turkce/arastirmalar/uluslar_arasi_standartlar.doc#para_politikasi7 www.ifac.org8 http://www.tbb.org.tr/turkce/arastirmalar/uluslar_arasi_standartlar.doc#para_politikasi

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accounting standards to createinternational accounting standards.

The aim of IASB is to produceworld-wide accepted internationalstandards. IASB is making changesand regulations in some InternationalAccounting Standards and replacessome IAS with IFRS and preparesnew standards.

IASB aims to provide high quality,reasonable and applicable globalaccounting standards providingcomparable information in financialstatements. The Board also aims tobring world-wide accountingstandards closer to each other byworking with national accountingstandard makers. Furthermore, oneof the most important tasks of theIASB is to make changes tostandards when an update is neededin practicing problems 9.

2.1.4 European Federation ofAccountants (FEE)

The European Federation ofAccountants (FEE) is the upper mostinstitution representing the Europeanaccounting profession. It bringstogether 41 professions from 29countries. Member countries of FEErepresent 15 member countries ofthe EU, 9 candidate countries and 3member countries of EFTA. Memberinstitutions in these countries cover500,000 professions, 94% of whichare from EU countries. Almost 45%of these professionals are self-

employed, 55% of the rest work foran establishment in industry, trade,government and educationalsectors. The Administrative Board isthe uppermost decision maker ofFEE and has a statutory meetingevery 2 years. Decisions are executedby an Executive Board composed ofa chairman and vice chairmen. FEEwas founded as an “internationalorganization” according to Belgiumlaws on December 30th, 1986 by aRoyal Decree.

FEE is the leading representativeof the European accountingprofession in EU institutions. It aimsto explain the qualifications andprivileges of the profession byserving both the customer and thecustomers’ interests and providinghigh quality technical support. Sincethe members of the Europeanaccounting profession serve thepublic, FEE has responsibilitiestowards society. It acts to protectthe interests of the members of theEuropean accounting professionsuch as auditing, ethics, taxation,public accounting, corporation law,legal regulations and liberalization ofprofession, European Unit and EDIelectronic information transferissues. As temporary work groupsare formed for special projects,technical responsibilities are executedby work groups (commissions) in FEE.FEE cooperates with many of the EUinstitutions especially with the

9 h t t p : / / w w w . t s r s b . o r g . t r / N R / r d o n l y r e s / 4 6 0 3 F E A 8 - B 8 C B - 4 2 B A - 9 E 6 3 -446A1BD394F2/1469/SAIY34.pdf

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European Commission. FEE is anorganization representing theEuropean Accounting Profession onan international scale. It has a closerelationship with IFAC and IASB 10.

2.2 Determinations andProperties of InternationalAccounting Standards(IAS) and InternationalFinancial ReportingStandards (IFRS)

International Financial ReportingStandards (IFRS) are standardsaiming at enabling comparison offinancial statements by bringingworld-wide standards closer. Accordingto International Financial ReportingStandards, financial statements haveto be prepared in a manner honestlyreflecting financial states, andperformance and cash flow states ofcompanies. Providing an honestexpression of reality necessitates thepresentation of applications ofaccounting practices and informationin suitable, reliable, comparable andunderstandable ways. Following aseries of accounting scandals, thework of Generally Accepted AccountingPrinciples in the United States (USGAAP) has been accelerated and theimportance of the need of thecorrect and internationally comparableinformation has resurfaced. Forty-onestandards published by theInternational Accounting StandardsCommittee (IASC) are determined as

International Accounting Standards(IAS). Seven of the standards publishedby the International AccountingStandards Board (IASB) are acceptedas International Financial ReportingStandards (IFRS).

IFRS has two meanings; narrowand wide. In the narrow sense, thereare standards having serial numbersand declared by IASC to be differentfrom the former IAS. However, thewide sense covers the commentsapproved by International FinancialReporting Interpretations Committee(IFRIC), International AccountingStandards Committee (IASC) andStanding Interpretations Committee(SIC)11. IASB approved the commentsdeclared by IAS and SIC on April 18-20th, 2001. All new accountingstandards published after thesedates are called “InternationalFinancial Reporting Standards (IFRS)”and the comments are attributed tothe “International Financial ReportingInterpretations Committee (IFRIC)”.

The professional decides whichmethod will be used in thepreparation of financial statements ifthere is more than one method thatstandards recommend. However,IASB rarely recommends one of thealternatives as a benchmark treatmentand the others as alternativetreatments. IASB doesn’t generallyrecommend different method alternativesand tries to reduce currentalternatives. Whatever the method

10 www.turmob.org.tr/web/uluslararasi/FEE.doc11 Standing Interpretations Committee of IASB

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is, all financial statements arecompatible to IFRS. Standards guidefinancial statement makers regardingrecording, measurement, presentationand footnotes. Although most of thestandards are prepared for use in allsectors, there are some specialstandards prepared for certainsectors. There are 38 standards, 31IAS and 7 IFRS, as at December 2005.

The framework published for thepreparation and presentation offinancial statements is not anaccounting standard, but it is aresource to be applied for the lack ofa standard or comment on a specificissue. Companies determine theiraccounting policies by payingattention to the decisions, or comments,in the framework. Although rarelyencountered, if there is a conflictbetween the framework andstandards or comments, standardsor comments have to be applied first 12.

2.3 European UnionAccounting Directives andInternationalization ofAccounting of EU

There are two directives acceptedas the base of Acquis Communautairein terms of corporate sectoraccounting: The Forth EU CompanyLaw Directive (1978) and TheSeventh EU Company Law Directive(193). However, these directives

cover neither the banking norinsurance sectors. Therefore, inorder to cover annual accounts 13 ofthese two sectors, 2 additionalstandards have been published(Council Directive: The AnnualAccounts and Consolidated Accountsof Banks and Other FinancialInstitutions, 86/635/EEC and CouncilDirective: The Annual Accounts andConsolidated Accounts of InsuranceUndertakings, 91/674/EEC). These fourdirectives are accepted as the mainpillars of Acquis Communautaire interms of the corporate sector.

1. Fourth Council Directive: TheTreaty on the Annual Accounts ofCertain Types of Companies,78/660/EEC

Annual accounts and reports ofmember countries coordinate generalprinciples, special valuation rules andpublishing of annual accounts forthe valuation of materials in annualaccounts. Additionally, the directiveprovides a system which allows theannual accounts of auditing companiesto be audited by one or morepersons to whom authorization ofauditing has been given by nationallaw. This directive is valid for alllimited companies, but banks, otherfinancial institutions and insurancecompanies of member countries maybe exempted. This exemption is validfor certain types of consortia 14.

12 http://www.tsrsb.org.tr/13 “Annual Accounts is a term used in EU Company Law Directives for financial statements 14 The Council of European Communities, “Forth Council Directive: The Treaty on The AnnualAccounts of Certain Types of Companies,” 78/660/EEC, Official Journal L 222 , 14/08/1978, P.0011 - 0031.

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2. Seventh Council Directive(83/349/EEC): The Treaty onConsolidated Accounts”

It coordinates national laws aboutconsolidated group accounts anddetermines the conditions necessitatingthe preparation of consolidatedfinancial statements. A parentcompany and all affiliated companieshave to be consolidated if the parentcompany or one or more affiliatedcompanies are founded as theresponsible company. Any parentcompany which controls the other

company (affiliated company) islegally responsible for the preparationof consolidated accounts. In mostcases, legal control takes the shapeof having most of the votes. Themember countries may demandconsolidated accounts in caseswhere a parent company has minorityinterests but applies “de factocontrol”. Exemptions may be providedfor these responsibilities; forexample small or middle scalegroups can be exempted fromconsolidated account needs 15.

15 The Council of European Communities, “Seventh Council Directive: The Treaty onConsolidated Accounts,” 83/349/EEC, Official Journal L 193 , 18/07/1983, P. 0001 – 0017.

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Table-1: IAS and IFRS

IFRS 1 Fist Time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment

IFRS 3 Business Combinations

IFRS 4 Insurance Contracts

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

IFRS 6 Exploration for and Evaluation for Mineral Resources

IFRS 7 Financial Instruments: Disclosures

IAS 1 Presentation of Financial Statements

IAS 2 Inventories

IAS 3 Not in effect. IAS 27 and IAS 28 replaced with IAS 3.

IAS 4 Withdrew. IAS 16, 22 and 38 replaced with IAS 4.

IAS 5 Not in effect. IAS 1 replaced with IAS 5.

IAS 6 Not in effect. IAS 15 replaced with IAS 6.

IAS 7 Cash Flow Statements

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 9 Not in effect. IAS 38 replaced with IAS 9

IAS 10 Events After the Balance Sheet Date

IAS 11 Construction Contracts

IAS 12 Income Taxes

IAS 13 Not in effect. IAS 1 replaced with IAS 13

IAS 14 Segment Reporting

IAS 15 Not in effect.

IAS 16 Property, Plant and Equipment

IAS 17 Leases

IAS 18 Revenue

IAS 19 Employee Benefits.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

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IAS 21 The Effects of Changes in Foreign Exchange Rates

IAS 22 Not in effect. IAS 3 replaced with IAS 22

IAS 23 Borrowing Cost

IAS 24 Related Party Disclosures

IAS 25 Not in effect. IAS 39 and 40 replaced with IAS 25

IAS 26 Accounting and Reporting by Retirement Benefit Plans

IAS 27 Consolidated and Separate Financial Statements

IAS 28 Investments in Associates

IAS 29 Financial Reporting in Hyperinflationary Economics

IAS 30* Disclosures in the Financial Statements of Banks and Similar Financial Institutions

IAS 31 Interests in Joint Ventures

IAS 32** Financial Instruments: Disclosure and Presentation

IAS 33 Earnings Per Share

IAS 34 Interim Financial Reporting

IAS 35 Not in effect. IFRS 5 replaced with. IAS 35

IAS 36 Impairment of Assets

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IAS 38 Intangible Assets

IAS 39 Financial Instruments: Recognition and Measurements

IAS 40 Investment Property

IAS 41 Agriculture Source: IASB

*will be non effective from 2007 and replaced with IFRS 7

**will have non effective sections and related footnotes from 2007 and replaced with IFRS 7

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3. Council Directive (86/635/EEC):The Annual Accounts andConsolidated Accounts of Banksand Other Financial Institutions

Annual accounts of banks andother financial institutions aim toprovide some special rules aboutpresentation and measurement inareas in which these rules areneeded and have resulted from thenature of insurance. The directive isvalid for almost all credit and otherfinancial institutions 16.

4. Council Directive (91/674/EEC):The Annual Accounts andConsolidated Accounts of InsuranceUndertakings

It aims to provide some specialrules about presentation andmeasurement in areas in which theserules are needed and have resultedfrom the nature of insurance. Thedirective is valid for all insurancecompanies except small mutualinstitutions.

The insurance directives aboveprovided important improvements infinancial information quality. However,they were far from providing solidneeds for quoted companiesespecially in the USA stock exchangemarket. Therefore, big Europeancompanies desiring capital increasehad to prepare a second account set

compatible with US GAAP or IAS toanswer the information needs ofinternational capital markets. Theprocedure of preparing two sets ofaccounts was drawn out andexpensive and caused conflicts mostof the time. In order to meet theneeds of international capitalmarkets, the European Commissionpublished an official statement called“Accounting Harmonization: A NewStrategy Vis-à-vis InternationalHarmonization, COM/95/508”. Thisapproach found acceptance becauseregulation of the EU-level legislationsor new legislation causing theaddition of new standards inaddition to current or in-preparationstandards, could be avoided.However, to accept IAS, the EU hadto guarantee that current IAS wereconsistent with Accounting directivesand that future IAS were going to beconsistent with Acquis Communautaire.This task force determined that therewere no important conflicts betweenthem and companies wanting toprepare annual accounts accordingto IAS would not violate Accountingdirectives 17.

The commission published anofficial statement called “EU FinancialReporting Strategy: the way forward,COM (2000) 359” In this statement,the Commission recommended EU

16 The Council of European Communities, “Council Directive: The Annual Accounts andConsolidated Accounts of Banks and Other Financial Institutions,” 86/635/EEC, Official JournalL 372 , 31/12/1986, P. 0001 - 001717 The Council of European Communities, “Council Directive: The Annual Accounts andConsolidated Accounts of Insurance Undertakings,” 91/674/EEC, Official Journal L 374 ,31/12/1991, P. 0007 – 0031.

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companies to prepare their consolidatedfinancial accounts starting from2005 in accordance with IAS. Theusage of IAS within the EU facilitatesthe comparison of financial performancesof companies and capital increaseand provides better hedging.Furthermore, this statement pointedout the improvement of theexecutive infrastructure to guaranteethe consistent application ofaccounting standards in membercountries. It also demanded themodernization of Accounting Directives.Finally, IAS were to be applied in thelegal environment within the EUafter an approval period formed atEU level 18.

Since there was an importantamount of opposition to givingdetermination responsibility ofaccounting standards to IASB, theapproval of IAS was needed. Inaddition, this situation didn’t fit thedemocratic customs of the EU,because it wasn’t going to involveParliament in any capacity. It wasdecided to authorize the EuropeanCommission to approve thesestandards. An Accounting RegulationCommittee has helped the EU 19.

2.4. AcquisCommunautaire in termsof Accounting Audit

The main Directive about audits is“Eighth Council Direction: The Treatyon The Approval of PersonsResponsible for Carrying out theStatutory Audits of AccountingDocuments” which determines theminimum qualifications of personsresponsible for carrying out thestatutory audits of accountingdocuments 20.

However, Eighth Directive hassome differences in nationallegislation and lack of certainty insome situations causing deficiency inlegislation related to auditorindependence. For this reason, theEU published a Green Paper(COM/1996/338) to initiate adiscussion about the determinationrole, position and responsibility ofthe statutory auditor. This GreenPaper argued for the weaknessesaffecting the operation of a singlemarket and obstructing theformation of a real European marketin auditing services. Furthermore, itmet the demands of the marketconcerning EU-level audit and widerstandardization. The absence of acommon determination of legal

18 Commission of The European Communities; “EU Financial Reporting Strategy: the way forward,” COM (2000) 359, 13/06/2000, Brussels.19 For detailed information about accounting legislations made by European Union:http://europa.eu.int/comm/internal_market/accounting/index_en.htm20 The Council of European Communities, “Eighth Council Direction: The Treaty on TheApproval of Persons Responsible for Carrying Out The Statutory Audits of AccountingDocuments,” 84/253/EEC, Official Journal L 126 , 12/05/1984 P. 0020 - 0026

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21 Commission of The European Communities, “Communication from the Commission on thestatutory audit in the European Union: the way forward,” 98/C 143/03, Official Journal C 143 ,08/05/1998, P. 0012 – 0016.22 Commission of The European Communities, “On Quality Assurance for The Statutory Auditin The European Union: Minimum Requirements,” 2001/256/EC, Official Journal L 091,31/03/2001, P. 0091 – 0097.

audit in the EU has created a harmfuleffect 21.

The Commission published a statementcalled “On the Statutory Audit in TheEuropean Union: the way forward,98/C 143/03”. This statementrecommended an investigation ofIAS and wanted the EU to decidewhether they support thesestandards or not. If supported, theEU had to decide how to guaranteethe improvement of EU standardsand create a high respect level forthese standards. Discussions werenecessary about auditor independence,quality control, professional competence,position of the legal audit personwithin the company and the role ofinternal audit. The commissionaccepted “On Quality Assurance forThe Statutory Audit in The EuropeanUnion: Minimum Requirements,2001/256/EC” as complementary tostatements published in 1998. Thisrecommendation determined minimumstandards for external quality assurancesystems for statutory audits in theEU.

The commission published “StatutoryAuditors' Independence in the EU: ASet of Fundamental Principles,2002/590/EC” in May 2002. Thisrecommendation specifies high qualityprinciples and recommends that if

auditors have a customer relationshiprisking their impartiality, auditingmust be forbidden for that auditor.Risks include financial, commercial orother situations where auditors have a‘profit relationship’ with theircustomers. Although the recommendationis not legally binding, it provided aclear criterion for the EU auditsector. The Recommendation didn’tlist the static legal activities as notincluding new developments and tobe inoperative easily. Instead, itdemanded statutory auditors toauthenticate potential risks or threatsrelated to their independence andhedging of these risks. Since theproperties and seriousness of threatsare variable, auditors have differenthedging methods depending on theconditions. Final hedging is not tohave a relationship with thecustomer or to provide some extraservices 22.

The commission continued tocreate a regulatory frame forstatutory audits. In 2003, “Reinforcingthe Statutory Audit in The EU,COM/2003/0286” was published.The initiatives in this statement are:modernization of the Eighth CompanyLaw Directive, reinforcement of theregulatory frame in the EU,reinforcing public audit at the EUlevel, providing acceptance of the

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usage of International AccountingStandards for statutory audits,improvement of disciplinary sanctions,creating the transparency of auditcompanies and networks of suchcompanies, reinforcement of auditcommittees and internal control,reinforcement of auditor independenceand putting ethical rules, facilitationof foundation of companies andinvestigation of auditor responsibilities 23

Consequently, in March 2004,the commission published a proposalcalled “Statutory Audit of AnnualAccounts and Consolidated Accountsand Amending Council Directives,78/660/EEC” in order to guaranteethat investors could fully trust thecorrectness of accounts audited andto protect the EU from scandals incompanies like Parmalat and Ahold.The directive was to replace theEighth Directive, to clear up theduties of auditors, and to specifyethical principles to guarantee theobjectiveness and independence ofauditors. Furthermore, it proposesthe usage of IAS for all statutoryaudits in the EU and providesmeasures to allow cooperation withthird-world regulators like The PublicCompany Accounting OversightBoard (PCAOB) on a balanced andeffective international regulatorybasis 24.

3. Turkish AccountingSystem

The improvement of accountingstandards in Turkey has beenconducted with a pioneeringgovernment. Laws and applicationstaken from the countries with whichwe have both political and economicrelationship have been effective inthe formation of Turkish Accountingliterature and legislation. In accountingpractices France and Germany havebeen primarily and secondarilyeffective respectively. From the1950s onwards, as a result ofincreasing relationships with theUSA, USA accounting practices havehad an effect on the TurkishAccounting System. After 1987,when Turkey applied to the EU forfull membership, the whole world(including our country) has beenaffected by International AccountingStandards together with EU regulationsand the rapid globalizationmovements around the world.

Accounting practices in ourcountry have taken on a shape in theframe of Turkish Commercial Law(Code) and Tax Procedure Law. Insome cases the dictums can’tanswer the demand; institutions likeCapital Markets Board of Turkey(CMB), The Banks Association ofTurkey (BAT) and Turkish

23 Commission of The European Communities, “Statutory Audit of Annual Accounts andConsolidated Accounts and Amending Council Directives,” 78/660/EEC and 83/349/EEC”COM/2004/177 Final, 16/03/2004, Brussels. 24 Frédéric, Gielen Ana Cristina Hirata Barros, Topluluk Müktesebat› ‹çinde Kurumsal SektörMuhasebesi Ve Denetimi 08.02.2005, P. 14.

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25 http://www.istanbulsmmmodasi.org.tr/reparis.asp?id=2359

Accounting and Auditing StandardsBoard (TAASB) have carried outstudies aiming to guide companieswithin the range of activity of theinstitutions mentioned above.

In the presentation of “auditedfinancial statements”, the TurkishAccounting Standards Board (TASB)has been legally authorized as anadministrative and financially autonomousinstitution to provide improvementand adoption of national accountingprinciples and to determine andpublish them for public profit.

In other words, the TurkishAccounting Standards Board (TASB)was founded by Law No 4487 inorder to form and publish accountingstandards. The board has taken thedecision to adopt IFRS to beintegrated with the practices of themodern world and to provideharmonization to EU legislation 25.

It is possible for TurkishAccounting Standards (TAS) to beaccepted in the international arena,i.e. to be accepted as compatible toIFRS, only if the standards in theform of IFRS are practiced. It hasbeen proposed in the agreementconcerning copyright and licensethat TASB should make a translationand this translation should be placedin Turkish legislation. These studieshave been executed by commissionsformed by academicians studyingthe subject, independent companyauditors and specialists preparingfinancial statements according to

IFRS for big companies. Translationsmade have been subjected to cross-control then they have beenpresented to related institutions andcompanies and then published onthe web site of TASB to gather publicopinion, and Turkish accountingStandards have taken their finalstructure by evaluating all opinionsand comments taken from theabove sources.

Paragraph numbers and codeshave been used as they are inoriginal translations in order toprovide parallelism to IFRS and easy-monitoring of referrals to accountingstandards. TASB has published a1162-page book including 6 TFRS,39 TAS and 2 TAS drafts that theboard has published so far. TheTAS/TFRS set is composed ofaccounting standards, reasons forthem, comments, application guide,explanatory examples and appendices.Accounting standards and necessaryappendices have been published inthe Official Gazette on differentdates.

Starting from 2005, Banks andcompanies have been preparingfinancial statements compatible withIFRS. Turkish Accounting Standardsvalid from 01.01.2006 is an up-to-date legislation for these sectors.New Turkish Commercial Law tobecome valid in 2007 brings statutoryobligation for all companies in Turkeyto obey Turkish AccountingStandards which are compatible with

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IAS published by TASB concerningaccounting and financial reporting.

4. The Differences betweenInternational FinancialReporting Standards(IFRS) and Uniform Chartof Account (UCA)

Although IFRS and UCA generallyhave the same main standards, UCAhas tax-centered regulations sinceour accounting system is tax-centered. However, IFRS is based onprimacy of subject and realization.Therefore, the differences betweenInternational Accounting Standardsbased on primacy of subject andrealization and UCA based onpriority of form and revenue are asbelow 26:

4.1. Financial Statements

Financial statements which aredetermined to be the main financialstatements in IFRS and which needto be published in every reportingperiod are: balance statements,income statements, cash-flow statements,equity change statements andexplanatory footnotes. Financialstatements that have to be preparedand published according to UCA arelimited with to: balance statementsand income statements. Furthermore,although companies have to showprofit per simple and reduced shareaccording to IFRS, it is notcompulsory to declare it in UCA.

4.2. Stocks

The valuation measurement forstocks is generally cost. However,determination methods andelements that cost includes are notclear in UCA or tax legislation. Oneof the important differences in thissubject is giving a share to stockcosts (therefore to cost of productsold) from financial costs in UCA.However, IFRS only allows it forspecialty goods (goods which needtime to be prepared for sale). Thissituation causes financial statementsprepared by IFRS to be conservativeand prevents fictitious profitdistributions.

4.3. Contract Progress Cost

Legislation is valid for the topicsince the topic has not beenregulated satisfactorily. “CompletedAgreement” method is used forcontract progress cost. In thismethod, building costs and progresspayments are transferred to finalaccounts and no amount paid isassigned for deficits until the end ofthe project. However, IFRS uses“completion percents” (IFRS 11).Income and cost elements aretransferred to income statements forevery period according to thecompletion percent of the project inthis method and certain amount ofprovision is assigned for deficits asnecessitated by precautionary principles.

26 YEN‹AY, Özer T.; 2004, “Uluslararas› Finansal Raporlama Standartlar›”, s:113

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27 see: Financial Reporting Standards in Hyperinflation Economies according to IFRS

4.4. Provisions

According to the Tax ProcedureLaw, some obligations have beenmade, like the need for a legaldecision for assigning and acceptanceof provisions as cost when there is adecrease in asset value. However,when there is a decrease or aforecast of a decrease in asset value,IFRS assigns provision and records itas a cost element.

4.5. Tangible Non-Current Assets

Tangible assets can also beactivated in later periods after theycome into use. However, if they arespecialty assets, IFRS only allowsfinancial costs of tangible assets tobe activated in the period in whichthe tangible asset is ready to be usedaccording to the conditions dependenton the alternative method allowedwithin the frame of IAS 23. Inaddition, tangible assets are valuedby costs indexed according to IAS 16and 29. According to the alternativemethod allowed in IAS 16, tangibleassets can be valued by their marketvalues. Valuation can not beperformed by using market value ofassets according to UAC.

4.6. Depreciations and Depletions

According to the IFRS, thedepreciation periods and systematicfor tangible assets and depletionperiods and systematic for intangibleassets should be proportional to theperiod of economic use of the asset.In principle, UAC defends the same

opinion and accepts the usefullifespan principle for depreciationand redemption periods. However,tax legislation, in terms of generalapplications, has been formed as theamortization or redemption oftangible and intangible assets in 5years. This situation causes amortizationand depletion of high technologyequipment far beyond their economiclifespan. Another important problemis the amounts of tangible assetswhich should be subjected toamortization. IFRS take the valuesubjected to amortization of tangibleassets into consideration but there isno such application in UAC.

4.7. Revaluation

IFRS allows revaluation of the realvalues of assets when there areimportant differences between realvalues and recorded values andrevaluation can be made for tangibleand intangible assets according totax legislation. Although this applicationseems to be within IFRS content,having applications only aboutcertain assets is considered animportant difference 27 .

4. 8. Subsidiaries

UAC evaluates subsidiaries by theircost of acquisition. IFRS, however,has big differences. IFRS use costbasis if the rate of participation isunder 20%; equity capital method ifit is between 20%-50% and there isno authorization by management;consolidation method if the rate is

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over 50% and there is authorizationby management. UAC has nodecisions about equity capital andconsolidation methods.

4.9. Financial Leasing

The legislation and applicationcontains differences for before andafter July 1st, 2003. Financial leasingagreements signed before July, 7th,2003 do not have a special definition.Therefore, financial leasing has beenconsidered as an ordinary leasingprocess and the amount paid isconsidered to be rent and it hasbeen recorded as expenditure.Furthermore, tangible assets infinancial leasing have been left the infinancial statements of the lesseeand depreciation is assigned by thelessor. However, IFRS evaluatesfinancial leasing agreements not bytheir legal forms but by their subjectand considers the process as only afinancing method. As a result of thisconsideration rentals are depreciatedaccording to efficiency rate andwhile interests are recorded asexpenditure, capitals are droppedfrom financial responsibilities. Accordingto IFRS tangible assets subjected tofinancial leasing are recorded on thefinancial statements of the companyand depreciated by the lessorcompany. In financial leasing agreementssigned after July 1st, 2003 there isno differences as a function of IFRS.So, UAC and IFRS have parallelismand they are evaluated similarly.

4.10. Deferred Tax Debts/Receivables

IFRS proposes that tax expenditures

should be recorded and written offin belonging periods as in allexpenditures. During the formationof differences between commercialprofit and financial profit, temporarydifferences in financial statementsmean deferred tax debt or deferredtax receivables according to IFRS.While IFRS proposes reporting ofthese debts/ receivables in financialstatements, UAC has no regulationabout the issue. According to UAConly the current period can beshown for the tax amount paid.Rescheduled taxes resulting fromtiming differences are notcalculated.

4.11. Employee’s Rights

According to IAC, reduced valueof future responsibility resulted fromseniority pay is assigned byestimation. The responsibility of totalseniority pay necessitated by currentLabor Law is assigned according toUAC. However, this amount to bepaid is not calculated since it is alegally unaccepted value accordingto tax laws.

5. CONCLUSIONThe adoption efforts and full

membership of the EU are the mostimportant targets. Unity andharmony to be provided inaccounting standards in a globalizedworld, implies perceptibility, safetyand transparency for the accountingenvironment. In this sense, both theadoption and betterment effortsperformed through legislation by thelegislative body in our country andthe efforts of institutions like the

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Turkish Accounting and AuditingStandards Board (TAASB) formingaccounting standards, affect our EUadoption plans positively. However,it should be noted that there is along way to go.

Working for harmonization inaccounting standards and efforts forproviding unity brings many middle-term problems especially in taxationpolitics. Specific cultures and businessrelationships of countries, taxationpolitics, creating added value, andeven geographical differences are afew of the difficulties that standagainst avant-gardes trying to catchcommon points in the future. Allthese difficulties require an intenseeducational and informational period topractice common standards of theEU in related countries. Completeinformation services must be executedin every country by founding EUcommunication or education centers.

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