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January 14, 2008

EC moves closer to GAAP equivalence

The European Commission has adopted a new regulation that establishes the definition of equivalence between IFRS applied in the EU compared with third-country GAAP. The new regulation, which was adopted on 21 December 2007, also outlines the criteria under which third-country GAAP would be made equivalent to IFRS in the EU.

The EU has defined equivalence as “investor-oriented”, meaning third-country GAAP will be considered equivalent to IFRS if investors are likely to come to the same conclusions irrespective of whether the financial statements are prepared using IFRS or the GAAP in question.

European Commissioner for Internal Market and Services Charlie McCreevy hailed the new regulation as a “crucial milestone towards our objective of promoting the efficiency of capital markets by establishing a common worldwide accounting language”. “Without this regulation in place we would not be able to proceed with this key decision on the acceptability of third-country GAAPs in the EU,” McCreevy said.

Under the EU Prospectus and Transparency Directives, the commission is required to determine, by the beginning of July 2008, whether a given third-country GAAP is equivalent to IFRS. The new regulation is part of the process towards this goal.

2009 goal Using the definition of equivalence and the mechanism established by the new regulation, the EC will be able to move towards presenting proposals to the European Parliament as to which third-country GAAP should be accepted as equivalent with effect from 2009. Through these decisions, foreign issuers listed in the EU will be allowed to continue preparing their accounts using their GAAP rather than reconciling their financial statements to IFRS.

In addition to determining which GAAPs are equivalent, the EC will also make proposals in relation to which countries are converging or are committed to adopting IFRS at some point in the future. In such cases, the commission may propose to allow third-country issuers to use their GAAPs in the EU for a transitional period provided certain conditions are met. The EC is now awaiting technical advice from the Committee of European Securities Regulators on whether US, Japanese and Chinese GAAP could be considered equivalent.

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