Brussels, 09/03/2000 (Agence Europe) - The European Commission has proposed to the Council and Parliament that European accountancy legislation be modernised (as announced in EUROPE of 26 February, p.11). The modification being envisaged would enable Member States to auhthorise, oblige even, companies to include in their balance sheets assets and liabilities "at their fair value" (current market value), as opposed to their "historic value" (initial purchasing cost). It is aimed at taking account developments on the financial markets, notably the growing use of derivative instruments, and international accounting standards.
The Commission proposes aligning the legislation on criteria already adopted by the world accountancy standardisation organisations, like the International Standards Committee and the American Financial Accounting Standards Board, so that the effect of the use of derivative products appear correctly in company balance sheets. The derivative financial instruments (long-term financial contracts, options, swaps) may, indeed, expose the user to great risks and alter the financial situation of a company or its risk profile. Whereas, "in the EU, many of these elements do not appear in company accounts", the spokesperson for Fritz Bolkestein, European Commissioner responsible for the Internal Market, explains. This reform thus tends to render company accounts more transparent, to reassure potential investors and shareholders.
Adoption of this proposal would help European companies draw up financial balance sheets accepted and understood by the whole world. The alignment of accountancy directives on international standards in force authorising "fair value" accountancy would enable these companies to take on their non-European rivals on an equal footing on international capital markets", Mr. Bolkestein commented.
To avoid drawing up a list of elements that could be assessed at their fair value - list that would have to be ceaselessly updated -, the Commission sets out in its proposal those that may not be, which are: a) elements included in the balance sheet that are not financial instruments, b) liabilities, except those that are held in negotiating portfolios, posted as being covered elements or as being part of a derivative financial element. Also planned is that Member States may limit the fair value system to certain categories of companies, like quoted companies, or with group consolidated accounts.
"The draft modification is not intended to replace the historic value as basis for assessment in the accountancy directives, but to add another method, given, notably, that there is no international consensus on the universal application of fair value", the Commission's spokesman stipulates in a note to the press. "Thus, there is still no international agreement on obliging companies to assess their own loan instruments at their fair value or including their own credit risk in calculating this fair value. Thus certain elements like corporal immobilisation (for example, land and buildings, or production installations or equipment) could not be posted at their fair value. Likewise, certain financial instruments, like long-term loan stock, would remain assessed on the basis of their historic value".
The Commission's proposal has to be adopted by the Council and European Parliament. It is an amendment to European legislation in force on the annual accounts of capital companies (fourth directive on company law 78/660/EEC) and on the consolidated accounts of groups of companies (seventh directive on company law 83/349/EEC). It does not, however, concern companies under the directive on annual accounts and the consolidated accounts of banks or other financial establishments, or the directive on the annual accounts and consolidated accounts of insurance companies.
The full text of the proposal is available on internet in all official languages of the EU, at the following address: http: //europa.eu.int/comm/dgs/internal-market