The Ias:Ifrs Standards System and Their Relation With the Communitarian Legislation

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INTERNATIONAL JOURNAL Of ACADEMIC RESEARCH Vol. 2. No. 2. March 2010

THE IAS/IFRS STANDARDS SYSTEM AND THEIR

RELATION WITH THE COMMUNITARIAN LEGISLATION

Bostan I.1, Grosu V.2, Iancu E. 3

1 Department of Law and Economics 2 Department of Economics

3 Department of Computer Science University of Stefan cel Mare, Suceava (ROMANIA)

ABSTRACT The international accounting harmonization process is manifested, in Europe, by an intense convergence process

with the International Accounting Standards IAS/ IFRS, made by the International Accounting Standard Board (IASB). The EU and the International Organization of Security Commissions (IOSCO) have identified, in the accounting standards of the IASB, a potential instrument that is more lucrative in aiming easier and more efficient to the common objective to improve the functioning of capital markets and protect the financial resources of the investors. Therefore, the EU has adopted new stipulations that impose, for the listed companies, making the consolidated balance sheets according to the IAS/ IFRS standards, and here it is all about:

• A directive that introduces the “fair value” as an evaluation parameter for certain balance sheet liability and asset classes (directive no. 65/2001 of September 27th, 2001)

• A regulation that, after an homologation process, recognizes the IASB’s standards as being obligatory in making the annual consolidated accounts of the parent- societies, with titles that are listed at the stock markets in the EU countries (regulation no. 1606/2002 of July 19, 2002).

Key words: communitarian legislation, IAS/IFRS standards system, accounting legislations, EU countries 1. INTRODUCTION The International Accounting Standards (IAS), renamed since 2001 as the International Financial Reporting

Standards (IFRS) represent the last objective reached by the EU within the process of harmonizing the accounting legislations of all member states.

The necessity to create an uniform accounting system takes place because, in order to create a common market, the harmonization process of the national accounting norms must be supported, this allowing comparability and transparency of the economical information supplied by the entities, so improving the quality and utility of such information for the external users.

This harmonization process began in the 70s, then the European Committee has elaborated the 4th and 7th directives, regarding the simple and consolidated annual accounts (1).

But these directives have not produced the expected result; numerous options left to be chosen by the legislators of the member states, and the normative lacks regarding accounting matters not allowing the sufficient uniformity of the various national accounting systems; in fact, Germany has only stipulated the partial applicability of the “true and fair value” principle, which in the opinion of the European legislator, is the main principle in accounting legislation.

The incapacity to face the challenges of the EU accounting systems harmonization process, recorded by the European directives, has highlighted the way this process could not have worked in the communitarian area.

2. METHODS The reasons which have inspired introducing the IAS/IFRS in the communitarian accounting system Therefore, for the companies, is borne the necessity to move own equity across the ocean, because the most

attractive, most developed and convenient market was certainly the North American one. Nevertheless, the legislation which regulates the American real estate market imposed numerous disclosure requests, and interdicted the foreign companies to sell tangible values sale to the American investors, and to list these companies on the American markets in the case where these didn’t make annual accounts according to the USGAAP, or didn’t make a reconciliation of their accounting principles with the American ones.

As a consequence of these limitations, is further born the need to create an accounting system which is to be recognized by the SEC as the “equivalent” of the American one, in order to avoid that the European companies to be burdened by these requests(2).

The possibility to remediate this problem has lead the European Committee to a radical turn; there has been a decision to abandon the directives and use that Regulation (because it is directly applicable and efficient by all its



elements), which gives utility to the international standards elaborated by the IASC, and is characterized by numerous similarities to the USGAAPs.

Such a solution, even if necessary, turned to be painful enough for the mere fact that it was not spontaneous. Despite the marginal role played by the IASC within the harmonization process (because it was too far from the civil law accounting culture), the EU’s incapacity to adopt its own standards which could be convergent with the American ones, has determined a turn towards the London standard setters (4). In order to make this as painless as possible for “the old continent”, there was stipulated a gradual introduction of the new accounting rules, also an establishment of a “homologation” mechanism, which excludes the direct and immediate validity of the IASC approved standards.

Besides the need to harmonize the accounting systems of the Member States with the American model, there still are at least 2 motives which have lead to the adoption of the IAS/IFRS standards.

On one hand, a first- importance objective within the communitarian space, especially after the accounting scandals which took place across the ocean (Enron, WorldCom) is to get to a more efficient communication transparency, capable to supply the stakeholders with useful information regarding the patrimonial statements or the economical result of the company, which are to allow fully- aware economical decisions, for this, tipically to the Anglo- Saxon balance sheets, both for the USGAAPs and the IASC standards.

Second of all, the IAS/IFRS are inserted within the process which may lead to the adoption of the so-called EUCCBT (EU Common Consolidated Base Taxation), which is an unique set of rules meant to determine the common base of company taxation, which are to apply equally to all the member states. It is about a very attractive perspective, but one which is made to confront the rejection of the member states to agree over the reduction of their superiority in what regards fiscality (4). As the things are in present, it would be necessary a thorough review of the actual standards, or other’s predisposition, because the reason which inspires the IAS/IFRS is to assemble a framework of data used by the investors almost incompatible, with the purpose to supply correct and prudent data of financial administration.

3. RESULTS AND DISCUSSION The IAS/IFRS system- a flexible and multi- level system The IAS/IFRS system has a lot of characteristics, it does not refer only to a norm assembly made according to the

“classic” procedures; the norms are in fact of private nature and, even during the applicable procedure, the technical component of homologation has a preponderant role compared to the political component. The particularities of the accounting standards’ formation does not reflect over the juridical efficacy or the pact destined to be adopted, even if in a small proportion. The IAS/IFRS have entered legally in the communitarian legislation as prime- rank juridical norms, contained by the excellent communitarian normative act: the Regulation.

Because of this, it counts less if the procedure to make the Regulations which incorporate the IAS/IFRS standards is enriched by the participation of the subjects to which the endorsement is trusted; the endorsement is placed outside the phase of communitarian normative formation, regulated by the treaties because they are only a variant of the comitology procedure

From the foundation base point of view, the IAS/IFRS system is, without any doubt, richer than the traditional normative- communitarian binomial- the national normative of adoption, applying, coordinating; it is about a flexible and multi- level system.

The IAS/IFRS system is a flexible system because it focuses on coding a homologation procedure which works as a “permanent transformation” of the international accounting practice within the communitarian legislation (16). In fact, the association with the automatic and permanent adaptation refers to the tendency of mechanism repetition, and not its automatic characteristic, which, as already stipulated, is excluded from the communitarian legislation. On the other hand, the system is flexible, but not “open”; the sources and adoption procedures of the IAS/IFRS standards are strictly regulated, at least within the Regulation no. 1606/ 2002, there seems not to be any place for alternative procedures.

The system of the sources making the international accounting standards is multi- level, because it is made of the interaction between various elaboration, approval, revision, interpretation and application levels of these sources: the first level is of technical and extra juridical nature; the second- communitarian; the 3rd level- legislative and national; the 4th level of application is the one taking place both nationally (taking into consideration the interpretative and popular role of the standard setters and the national authorities), but also on a communitarian level The IAS/IFRS system is not in conflict with the one of the accounting directives, which it joined. According to the European Committee, there is no direct interaction between the Accounting Directives and the IAS Regulation: compatibility problems can be solved only by referring to the relation between the IAS Regulation and the national application normative (5).

This affirmation is not surprising, because the general compatibility between the IAS/IFRS and the accounting directives is assured, on one side, by the monitoring and modernization of the EU elaborated accounting directives, and on the other side by the establishment of the fact that the IAS/IFRS system is imposed by respecting the accounting directives. In the following chapters, there will be individualized and described, in short, the normative acts which are placed within the system stipulated by the Regulation no. 1606/ 202, but before the “endorsement” procedure, making the juridical system of the IAS/IFRS accounting sources.

The economical and financial harmonization and the variety of the accounting systems on an

international level The evolution of the internationalization process of the economical entities and globalization of the financial

markets has determined an increase of the demand for information on behalf of these sectors’ operators, which highlight more and more the need for uniform accounting rules, shared internationally. Therefore, the financial and economical



harmonization process has recorded, in Europe, in the last years significant progress, finding its applicability in practice in significant economical domains by adopting the international standards IAS/IFRS by the member states of the EU.

The transition to the IAS/IFRS has determined fundamental changes in the financial reporting system of the entities, generally leading to a deep review of the evaluation and representation criteria of the patrimonial structures in the balance sheet.

One of the objectives of our paper, as previously mentioned, is to investigate several problems that result from this transition to the IFRS, regarding the effects these one bring to the economical performance (15). In many of the European countries, the local legislation allows the adoption of the IAS/IFRS for all the companies, even if they are not listed and do not make consolidated financial statements; in some cases, even for the making of the individual balance sheet of the holdings or company groups.

The obligation to make financial statements according to the IAS/IFRS allows the European groups, with branches in another European country to reduce costs. In fact, instead of multiplying the editing of the accounting data (the balance sheet according to the local national law and the one according to the group norms), it is possible for them to respect the local norms, publishing only the balance sheet according to the IAS/IFRS.(15)

Many of the economical analysts assume that the international comparability of the financial statements heads to using only one set of accounting standards for making the financial statements.

At least 100 countries of the world oblige or allow the use of the IAS/IFRS standards in making the annual accounts. These standards are:

- obligatory in all the EU countries, Norway, South Africa, Hong Kong, Philippines and Australia. - Allowed in Russia, Singapore, New Zeeland (becoming obligatory from 2007) - In process of convergence: USA, Canada, Japan. - Not adopted, but interested, Coreea, Indonezia, Thailand, India. - Included in the convergence program: China, Taiwan (2007), Israel. Everywhere around the world, in the last years, the IAS/IFRS standards were perceived as a possible instrument

more and more efficient in guaranteeing a healthy functioning of the capital market, assuring to the beneficiaries of annual financial statements the necessary information to take the most advantageous economical decisions and protection of their investors, by an efficient comparison of the data supplied by the companies.

Therefore, some states have decided to replace the national standards of accounting with the IAS/ IFRS, or at least to align the national standard’s content with the one of the international ones. Nevertheless, other states have initiated, with the IASB, projects that will allow a careful analysis of the differences between the two standard groups (national and international), in order to make a convergence process between the (18).Therefore, some states have decided to replace the national standards of accounting with the IAS/ IFRS, or at least to align the national standard’s content with the one of the international ones. Nevertheless, other states have initiated, with the IASB, projects that will allow a careful analysis of the differences between the two standard groups (national and international), in order to make a convergence process between the (18).

In 2005, we can affirm that a huge change was made in the EU; according to the disposals included in regulation no. 1606/2002 of the European Parliament and Council, the listed companies were obligated to make annual consolidated accounts according to the IAS/ IFRS for every annual financial statement starting with January 2005. The EU has still allowed, though, the possibility for the member states to extend the adopting of the IAS/ IFRS for other companies that are not specified in the EU Rulebook. Some states have efficiently used this option, such as Italy, where starting with the year 2006 the listed companies had to make the annual balance sheet according to the IAS/IFRS, or Denmark, where the adoption of the IAS/ IFRS has become obligatory starting January 1st, 2009. Nevertheless, some states on the European continent have imposed to the companies the use of the IFRS even before the approval of the EU Rulebook; in Austria, for example, the use of the IFRS in making the consolidated financial statements was allowed since 1988, in Malta since 1995, in Lithuania since 1997. All of these confirm Europe’s ever- felt need to adopt an unique set of rules and common norms that are to allow the harmonization of the economical and financial communication at least on the European territory. This can reflect by quoting the situation in Switzerland, where the local stock market has imposed that all the listed companies, except the banks and foreign companies, are to adopt the IFRS or the American standards since 2005 (6). The importance of the IFRS was gradually perceived in the rest of the world. In Latin America, some countries have accepted a “partial” adoption of the IAS/ IFRS; Peru, for example, has adopted all the standards emitted by the IASB since December 2002, in present times there taking place a real development in what regards the way that country can implement and change the national standards; in Uruguay, in exchange, the IFRS made after May 2004 still have to be incorporated, so do the IFRS 1-7 and the new IFRIC, even if their appliance has not been allowed (13). There are a lot of the Asian states that have not adopted the IFRS as a standard reference set, but have gone to a review of the national accounting standards in order to “align” them to the IFRS.

New Zeeland, for example, has recently approved new standards and has set for a review of the old accounting standards, in order to make them equivalent to the IAS/ IFRS, and obliging their application starting with January 1st 2007.

A similar situation can be found in the Philippines, where the local accounting norms (called the Philippine Financial Reporting Standards) are in perfect harmony to the IAS/IFRS and apply to all the listed companies in order to make the consolidated balance sheet and the annual one. We recall that in Hong Kong standards harmonized with the IAS/IFRS have been adopted too, at the end of a harmonization process that took 6 years; in Malaysia, the local accounting norms have also been perfectly aligned to the IFRS, being called the Financial Reporting Standards and renumbered in order to align them to the IFRS numbering (10).

A similar harmonization process took place in Australia, which has recently adopted the Australian International Financial Reporting Standards- AIFRS, developing based on the IFRS content, even if in this case we can not speak of a total harmony, because some accounting options stipulated by the IFRS have not been adopted by the Australian Boars.



If, in some situations, the adoption of the IFRS is no longer conceived as a “far chimera”, in other countries not only there can not be talked of an adoption of the IAS/ IFRS “tout court”, but the fact that important steps in initiating a convergence process between the national accounting standards and the IFRS can be remarked (14). No doubt, the most important convergence process refers to the IFRS and the USGAAP, process that has determined the necessity to modify the mentioned sets of international accounting standards, on behalf of the IASB and of the FASB. In a meeting dated April 21st, 2005, William Donaldson, the president of the SEC, and Charles McGreevy, the Commissar of the UE Internal Market, Donaldson has not only confirmed his support regarding the on-going convergence process, between the IASB and FASB, but has exposed the road map proposed by the SEC personnel, that wishes to highlight between the international standards regarding the elaboration of the financial reporting IFRS and USGAAP(3).

But this convergence does not only refer to the IFRS norms and the USGAAP, the IASB and Japan’s Accounting Standards Board launching a project to reduce the differences between the IFRS and the Japanese accounting standards; a first stage of a more complex plan is being debated, that will allow a full convergence of the 2 sets of accounting standards.

The first meeting of the 2 organization took place in the first trimester of the year 2005, in Tokyo, where the equivalence between the IFRS and the Japanese accounting standards became a priority for Japan, this convergence process taking into consideration the small existing differences between the two standards categories.

A long time of period is stipulated to make the convergence between the IFRS and the Chinese accounting standards, even if in March 2006, the Chinese Minister of Finances announce the adoption of 38 new accounting standards, that are to reduce the difference to the IFRS, and were applied starting January 1st 2007 by the listed companies (9).

Fig.1. The accounting convergence process on a world level

IAS/IFRS

OBLIGATORY ALLOWED

NOT IMPLEMENTED (INTERESTED)

ON-GOING CONVERGENCE

EU, Norway South Africa Hong Kong

Phipllippines Australia

Russia Singapore

New Zeeland Hong Kong Phillippines

Australia

Korea Indonesia Thailand Malaysia

India

USA Canada Japan

SCHEDULED CONVERGENCE

China Taiwan (2007)

Israel



Convergence projects were also launched by Canada, where a 5-year program was launched to allow the adoption of the IFRS in 2011, but also by Brazil, there a great number of branches belonging to the European companies contributing to raising the interest for the IFRS norms. A review of the standards in the previously mentioned states precisely demonstrates a concrete will, manifested by the majority of the world states to have a set of accounting norms, common for all. With all of this, though, we must be fully aware that the way to make a real “accounting globalization” is a long one. There are, truly, a lot of countries that have never thought of abandoning the national accounting norms, and besides that, it is necessary to conceive the convergence process, in terms of procedure, so that it will be well understood, followed and monitored, in order to avoid a inconsequent and superficial implementation of the accounting standards, but also to allow the companies to answer opportunely and adequate to the changes.

If the way that the convergence process would be a positive one, the benefits that would be obtained would be optimum, from the point of view of the economical and financial communication between the European and American companies (11). Nevertheless, for the foreign companies that would have own listed instruments, according to the American regulation, reconciliation wouldn’t be necessary, between the financial statements made with the IAS/ IFRS and the internal ones, according to the USGAAP.

The diversity of the accounting systems in the world is, therefore, an easily seen fact. We can affirm that the economical evolution, marked by the internationalization of the markets and the companies’ activity, especially the growth of the international direct investments, will determine more and more the nations to try an approach of their accounting systems, an approach that is insistently demanded by the international investors wishing to compare, according to equivalent criteria, the opportunities to place capital.(1)

The IASB considers that the harmonization can progress if it will be concentrated on the financial statements of the companies, that is why the most often accusation for this company is that vedeit suffers of FASB influence, the organization responsible with the American accounting harmonization. The ladder does nothing but highlight the preponderance of the first world economical power, which tends to be the reference point for the capital markets, for the methods and ideas in what regards management. The IASB, following in its logic to create an international doctrine and being inspired of the first FASB works for an accounting theoretic area project, has published in the year 1989 “a frame to prepare and present the financial statements”. Referring to this commitment, we will try a more complete development in another chapter of the paper (5).

The future of the accounting’s international harmonization will be developed in a strengths relation between the professional organizations, the international politic organizations, the great multinational enterprises and the states of the greatly-developed nations’ states.

The increase of the information transparency of the financial statements, together with an increased clarity of the economical strategies have lead to an improvement of the companies’ credibility and their economical value; in fact, a balance sheet according to the IAS/ IFRS can significantly improve the entity’s image on the market.

4. CONLUSIONS The annual balance sheet is a technical and accounting instrument capable to supply, periodically, a synthetic

representation of the patrimonial and financial statement and of the economical result of an entity. In Europe, the financial accounting phenomenon was born in the second half of the 80s, when the legislature started to modify the aspects regarding the procedure to make the balance sheet. Later on, in the beginning of the 90s, computing and accounting techniques studying was begun, by giving birth to a real and true branch of the economical sciences, called „financial accounting”.

For these reasons, the attention was mainly focused on making specific norms, regarding the structure and evaluation of the balance sheet, aiming to limit the liberty enjoyed by the administrators in choosing the rules to adopt in making the balance sheet. The fact that each evaluation of a patrimonial item is changing, varying with the purpose the one that makes the balance sheet proposes to get to by evaluation, has been recognized; therefore deriving the necessity not to let to the administrators the decision regarding the way that the patrimonial elements will be evaluated, a highly- important decision and with a practically relevant impact over the obtained results.

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The Ias:Ifrs Standards System and Their Relation With the Communitarian Legislation

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