2.9 The link between the EU financial reporting policy and the financial reporting developments in the US

While in the US, the financial reporting standards were developing, in the EU, the European dual listed multinational companies were increasingly applying the US financial reporting standards, the US-GAAP. Attempting to avoid double financial reporting, using both the US-GAAP and the IFRS, by dual listed multinational companies, the EU developed Accounting Directives during the late seventies and during the eighties.1 This initiative was not as effective as the EU expected, as these directives only harmonized the lowest common denominator. Although the directives were embedded in national accounting legislation and applied by companies, they could not fully harmonize the different national accounting practices. In 1995, the EU understood the low impact of its former accounting initiatives and changed its strategy. The EU decided to support the International Accounting Standards Board’s standards and recommended the member states to apply the International Accounting Standards on a voluntary basis. Afterwards, most of the dual listed EU multinational companies were still applying the US- GAAP, which meant that the EU approach to financial reporting did not achieve the desired outcome.

In 2002, the EU issued a Regulation instead of a Directive.2 Looking back at the Fourth and Seventh Directives, and in avoidance of following the same policy approach, the European Commission opted in 2002 for issuing a Regulation, directly requiring the European listed companies to apply the IRFS on a mandatory basis.3 The European Commission gave the European listed companies three years to adapt their internal policies and management and required the IFRS to be fully in practice by 2005.4 This measure was responsible for mainstreaming the use of the IFRS in all the EU member states, and currently it is applied in more than 100 countries worldwide. Today, the US is one of the few countries not to formally commit to the adoption of the IFRS.5 However, the SEC has declared to be moving towards the IFRS. Since December 2007 the SEC allows foreign companies to submit financial statements using the IFRS and does not require reconciliation of the International Accounting Standards Board’s standards to the US-GAAP.6 On the 14th of November of 2008 the SEC published a “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by US Issuers”.7 This document was published by the SEC for comments and drew the path from the application of the US-GAAP to the IFRS which could be in use by 2014. Although convergence talks between the International Accounting Standards Board and the Financial Accounting Standards Board took place earlier (as it happened in the turning points in 2002, when the European Commission issued Regulation (EC) No 1606/2002 requiring all EU listed companies to apply the IFRS on a mandatory basis, and 3 years later, in 2005, when the IFRS should be fully in practice), since 2010 the International Accounting Standards Board has been meeting regularly with the Financial Accounting Standards Board to discuss a potential convergence of the two financial standards.8 This topic is analyzed further above in section 7.

The fact that the EU had the pressure of the US financial reporting system to be mainstreamed in Europe, it pushed the EU to act. Although the EU company law and the EU capital market’ regulators were never in question as who would regulate, it was no option for the EU to have the US determining how the European companies should report to (US-GAAP or IFRS). The EU did not want the US influence on the EU companies and markets. The development of the US financial reporting standards was decisive and influential on the development and application of the IFRS in Europe.9