thoritative clarification appears to be required.” The exact legal status of this docu-
ment is not clear, since it does not have the force of amending a directive, and the
Commission specifies that it does not impose any obligation on member states nor
prejudge any interpretation which the European Court of Justice might make.
In February 2000, the Commission published proposed amendments to the Fourth
and Seventh Directives. These were finally passed in the latter part of 2001
(2001/65/EC), and had the limited objective of permitting the use of fair value as a
measurement approach—necessary for the application of IAS 39 on financial instru-
ments.
(d) Second Cycle. The Commission’s second cycle could be said to have got under
way in visible fashion during 2000 also. In April, the Council of Ministers gave ap-
proval to a proposal to develop a single European financial market, and then in June
2000 the Commission announced its new master plan: All European companies listed
on a regulated exchange are to be required to account using International Financial
Reporting Standards (IFRSs)^1 from 2005. This was to be achieved not through a new
Directive (which would have to be enacted in member state law in due course), but
rather through the mechanism of a Regulation. The latter has immediate force
throughout the EU and entirely bypasses national statutes. The EU “Regulation on
IAS” was passed by the Council of Ministers in June 2002, completing its passage
through the EU institutions in record time.
This initiative has so far shown to have consequences in four different areas: (1)
the need for companies to revise their internal systems by the end of 2003; (2) the
need to create a mechanism for the EU to incorporate IFRSs into EU law; (3) revi-
sion at EU and national level of existing accounting rules for unlisted companies, and
(4) the need for a review of compliance control procedures throughout the EU.
The Commission estimates that about 7,000 European companies will be con-
cerned by the Regulation. European stock exchanges (and the IASB) generally re-
quire companies to provide only one year’s comparative figures with the current re-
sult. This means that, outside of those European companies that are Securities and
Exchange Commission (SEC) registrants, companies will have to have systems in
place to capture information for 2004, which can be used to provide the comparatives
for the first year of IFRS reporting in 2005. SEC registrants will have to have sys-
tems in place in 2003. However, a limited number of companies (essentially German
ones such as DaimlerChrysler) that are currently using U.S. generally accepted ac-
counting principles (GAAP) for their main accounts have been given a derogation to
switch in 2007, but will also have to use IFRS from that time. Companies that have
listed debt securities but not equity also benefit from this derogation.
The rules for transition to the use of IFRSs are currently contained in an IASC In-
terpretation, (SIC-8, issued in January 1998). The IASB is, however, preparing a
standard that will replace SIC-8. The proposed standard was issued in exposure draft
form during the second half of 2002. It is expected that the standard will require that
companies that are applying IFRSs for the first time should restate assets and liabil-
17 • 8 EUROPEAN HARMONIZATION(^1) The International Accounting Standards Board (IASB) determined in its 2002 Preface to IFRSthat
the expression “IRFS” should, when used generically, be taken to encompass both the International Ac-
counting Standards (IASs) issued by the International Accounting Standards Committee and the Interna-
tional Financial Reporting Standards issued by the IASB. The EU Regulation refers to IASs, not IRFSs,
but we will use the expression IFRSs.