European Financial Reporting Adapting to a Changing World

by Flower, John

• ISBN13: 9780333685181
• ISBN10: 0333685180
• Format: Hardcover
• Copyright: 2004-09-04
• Publisher: Palgrave Macmillan

Summary

European Financial Reporting analyzes the revolution that is currently taking place in the financial reporting of the major European companies, following the European Union's decision that from they must present their accounts according to the IASB's standards. The book covers both the theory of financial reporting and its practice at both national and international level. It covers the very latest developments in the EU and the IASB with a detailed analysis of the impact of the Enron scandal.

Author Biography

John Flower is Director, Centre for Research in European Accounting, European Institute for Advanced Studies in Management

Table of Contents

List of Exhibits	xi
Acknowledgements	xii
Foreword	xiii
1 The Enterprises of Europe	1	(28)
1.1 Forms of business organisation	1	(10)
1.1.1 The corporation	1	(4)
1.1.2 Smaller corporations	5	(5)
1.1.3 A third corporate form: the limited partnership	10	(1)
1.1.4 Other corporate forms	11	(1)
1.2 The separation of ownership from management	11	(2)
1.3 The corporation's financial statements	13	(1)
1.4 The top one hundred European enterprises	14	(9)
1.4.1 Data	14	(6)
1.4.2 Analysis of the top one hundred	20	(2)
1.4.3 Comparison of Allianz with DaimlerChrysler	22	(1)
Annex: How to measure the size of an enterprise	23	(6)
2 The Functions of the Financial Statements: Different European Approaches	29	(17)
2.1 The information function of the financial statements	29	(1)
2.2 The maintenance of capital: the regulation of dividends	30	(4)
2.3 The monitoring of management: stewardship	34	(1)
2.4 Information for investors	35	(1)
2.5 Information for the state	36	(2)
2.6 Information for employees	38	(2)
2.7 Information for the general public	40	(1)
2.8 Computation of tax	40	(2)
2.9 Synthesis	42	(2)
2.10 Comparison with the USA	44	(1)
2.11 The preparers' viewpoint	44	(2)
3 Regulation	46	(22)
3.1 Why are rules needed	46	(2)
3.2 The case for the market	48	(2)
3.3 The case against the market	50	(3)
3.3.1 Financial statements as 'public goods'	50	(1)
3.3.2 The problem of insider trading	51	(1)
3.3.3 The supply of information	52	(1)
3.4 The verdict	53	(2)
3.5 Uniform rules versus relevant rules	55	(3)
3.5.1 Uniform rules	55	(2)
3.5.2 Relevant rules	57	(1)
3.5.3 The conflict between uniformity and relevance	57	(1)
3.5.4 Multi-base reporting	58	(1)
3.6 The role of law	58	(2)
3.6.1 The politics of law-making	59	(1)
3.6.2 The advantages of law	59	(1)
3.7 The need for additional rules	60	(1)
3.8 The hierarchy of rules	61	(6)
3.8.1 Law	61	(2)
3.8.2 Delegated legislation	63	(1)
3.8.3 Court judgments	63	(1)
3.8.4 Standards	64	(1)
3.8.5 Rules of other bodies	65	(1)
3.8.6 Writings of private individuals	66	(1)
3.8.7 External bodies	66	(1)
3.9 Conclusion	67	(1)
4 The National System for the Regulation of Financial Reporting	68	(29)
4.1 The state as rule-maker	68	(9)
4.1.1 Commercial codes	69	(1)
4.1.2 National accounting plans	69	(2)
4.1.3 Laws versus decrees	71	(2)
4.1.4 Tax regulations	73	(3)
4.1.5 The courts of law	76	(1)
4.1.6 Common Law versus Roman Law	77	(1)
4.2 Standard-setting bodies	77	(9)
4.2.1 Data	77	(2)
4.2.2 The rules issued by standard-setting bodies	79	(4)
4.2.3 The composition of the standard-setting bodies	83	(2)
4.2.4 The 'free riders': Austria and Ireland	85	(1)
4.3 Other bodies	86	(2)
4.3.1 The stock exchanges	86	(1)
4.3.2 Professional associations	87	(1)
4.3.3 Industrial associations	88	(1)
4.4 Individuals	88	(1)
4.5 The relative importance of laws, standards and other rules	89	(2)
4.6 The historical development of financial reporting	91	(1)
4.7 Concluding remarks: the diversity of national systems	92	(1)
Annex: The accountancy profession of Western Europe	93	(4)
5 The European Union and Harmonisation	97	(32)
5.1 The European Union	97	(1)
5.2 The EU's interest in financial reporting	98	(3)
5.2.1 The common market	98	(1)
5.2.2 The protection of shareholders	99	(1)
5.2.3 Competition: 'the level playing field'	99	(1)
5.2.4 Harmonisation before relevance	100	(1)
5.3 The EU's harmonisation programme	101	(2)
5.4 The Fourth Directive: the accounts of the individual enterprise	103	(1)
5.5 The definition of the annual accounts	103	(1)
5.6 Specified formats	104	(2)
5.7 Valuation	106	(4)
5.7.1 The EU's rules	106	(1)
5.7.2 Prudence in Germany	107	(3)
5.8 The 'true and fair view' rule	110	(10)
5.8.1 The 'true and fair view' rule in Britain	111	(3)
5.8.2 The 'true and fair view' in Continental Europe	114	(6)
5.8.3 The impact of the 'true and fair view' rule on European financial reporting	120	(1)
5.9 Options	120	(1)
5.10 The Seventh Directive: the consolidated accounts	121	(1)
5.11 The banks and insurance directives	122	(1)
5.12 The impact of the EU's directives	122	(4)
5.13 The EU's limitations as a rule-maker	126	(3)
6 The IASB and Globalisation	129	(23)
6.1 The multinational enterprises and globalisation	129	(4)
6.1.1 The problems facing the multinational enterprises	129	(2)
6.1.2 The case of Daimler Benz-	131	(2)
6.2 The IASB's predecessor: the IASC	133	(3)
6.2.1 The IASC's formation	133	(1)
6.2.2 The IASC's objectives	133	(1)
6.2.3 The IASC's characteristics	134	(1)
6.2.4 The need for reform	134	(2)
6.3 Proposals for change	136	(1)
6.4 The International Accounting Standards Board (IASB)	136	(7)
6.4.1 Objectives	136	(1)
6.4.2 Structure	137	(3)
6.4.3 The composition of the IASB's board	140	(3)
6.5 The IASB's operations	143	(2)
6.6 Comments on the IASB's structure	145	(5)
6.7 Conclusions	150	(2)
7 The EU versus the IASB versus the USA	152	(24)
7.1 Why US GAAP is relevant for European enterprises	152	(1)
7.2 US GAAP	152	(3)
7.2.1 How the rules of US GAAP are set	153	(1)
7.2.2 The nature of the rules	154	(1)
7.3 The EU's dilemma	155	(2)
7.4 The IASC-IOSCO agreement	157	(1)
7.5 The IASC-EU agreement	158	(1)
7.6 Recent developments: the IOSCO and the IASC	159	(1)
7.7 Recent developments: the EU and the IASC/IASB	159	(8)
7.7.1 EU-IASC cooperation	160	(1)
7.7.2 Voluntary adoption of the IASC's standards	160	(1)
7.7.3 Compulsory adoption of the IASB's standards	161	(2)
7.7.4 EU endorsement of the IASB's standards	163	(1)
7.7.5 The EU's endorsement mechanism	164	(2)
7.7.6 The reform of the EU's directives	166	(1)
7.8 The IASB and the national standard-setters	167	(1)
7.9 The IASB and the American authorities	168	(2)
7.9.1 The IASB and the SEC	168	(1)
7.9.2 The IASB and the FASB	169	(1)
7.10 The contest between the IASB's standards and US GAAP	170	(6)
7.10.1 The case for US GAAP	171	(1)
7.10.2 The present situation	171	(1)
7.10.3 Possible scenarios	172	(4)
8 Convergence	176	(17)
8.1 Why the IASB seeks convergence	176	(1)
8.2 Convergence in the United Kingdom	176	(12)
8.2.1 The ASB's policy	177	(1)
8.2.2 The magnitude of the task: the gap between UK GAAP and the IASB's standards	178	(2)
8.2.3 Foreign currency translation	180	(3)
8.2.4 Assessment of the significance of the differences	183	(1)
8.2.5 The causes of the differences	184	(1)
8.2.6 Removing the differences	185	(1)
8.2.7 The remaining difference: recycling	186	(1)
8.2.8 An overall evaluation of progress towards convergence in the UK	187	(1)
8.3 The global picture	188	(3)
8.3.1 Inventory	188	(1)
8.3.2 Plant, property and equipment	189	(1)
8.3.3 Financial instruments	189	(2)
8.4 Convergence with US GAAP	191	(1)
8.5 Conclusion	192	(1)
9 The Impact of Enron	193	(33)
9.1 The scandals in the USA	193	(1)
9.2 What went wrong at Enron	194	(8)
9.2.1 Enron: the business	194	(1)
9.2.2 Enron's financial statements	195	(5)
9.2.3 The failure of Enron's corporate governance	200	(2)
9.3 Other scandals	202	(3)
9.3.1 WorldCom	202	(1)
9.3.2 Waste Management	203	(2)
9.3.3 Xerox	205	(1)
9.4 The faults in the American financial reporting system	205	(4)
9.4.1 US GAAP	206	(1)
9.4.2 The accountancy profession	207	(1)
9.4.3 The regulatory authorities	208	(1)
9.5 The reform of the American regulatory system	209	(8)
9.5.1 The Sarbanes-Oxley Act	209	(1)
9.5.2 The supervision of the auditing profession	210	(1)
9.5.3 Auditor independence	211	(4)
9.5.4 Corporate governance	215	(1)
9.5.5 Changes to US GAAP	215	(1)
9.5.6 Principles-based rules: comparison with the UK	216	(1)
9.6 Impact on Europe	217	(3)
9.6.1 European companies listed in the USA	217	(1)
9.6.2 European audit firms	218	(1)
9.6.3 Action by European authorities	218	(2)
9.7 The impact on international standard-setting	220	(1)
9.8 The impact on theory	220	(1)
9.8.1 The efficient market hypothesis	220	(1)
9.8.2 Fair value	221	(1)
9.9 Conclusions	221	(1)
Annex: How a special-purpose entity may be used to manipulate the accounts	222	(4)
10 Europe's Contribution to Financial Reporting	226	(18)
10.1 Europe's past achievements	226	(5)
10.1.1 The invention of double entry book-keeping	226	(1)
10.1.2 The accountancy profession	227	(4)
10.2 The European approach to financial reporting	231	(10)
10.2.1 The great divide: the British approach versus the Continental approach	231	(5)
10.2.2 The reality	236	(1)
10.2.3 The advantages of diversity	237	(2)
10.2.4 The best compromise between flexibility and uniformity	239	(1)
10.2.5 The objectives of financial reporting: shareholders versus stakeholders	239	(1)
10.2.6 The impending triumph of the British approach	240	(1)
10.3 Europe's current contribution	241	(1)
10.4 The future	241	(3)
Index	244