EC adopts an 'equivalence mechanism' to assess non-EU GAAPs

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10 Jan 2008

Following a favourable opinion of the European Parliament, the European Commission has adopted Regulation (EC) No 1569/2007 that sets out the way in which the Commission will assess the equilvalency of 'third-country' (non-EU) GAAPs to IFRSs as adopted by the EU.

If a non-EU GAAP is deemed equivalent, then foreign companies whose securities trade in EU markets would be permitted to use that GAAP in Europe without providing a reconciliation to IFRSs as adopted by the EU. The regulation adopts the following definition of 'equivalence':

Equivalence definition: The GAAP of a third country may be considered equivalent to IFRS adopted pursuant to Regulation (EC) No 1606/2002 if the financial statements drawn up in accordance with GAAP of the third country concerned enable investors to make a similar assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer as financial statements drawn up in accordance with IFRS, with the result that investors are likely to make the same decisions about the acquisition, retention or disposal of securities of an issuer.

The Commission would determine the equivalence of a non-EU GAAP on its own initiative or if requested either by an EU member state or upon application of an authority responsible for accounting standards or market supervision of a non-EU country.

Special provisions through 31 December 2011: The regulation provides that for a limited period ending 31 December 2011, the Commission may continue to accept non-EU GAAPs that are not currently deemed equivalent to IFRSs as adopted by the EU if either:

  1. that country's accounting standard setter has made a public commitment before 30 June 2008 to converge their standards with IFRSs before 31 December 2011 and both of the following conditions are met:
    • that country has established a convergence programme before 31 December 2008 that is comprehensive and capable of being completed before 31 December 2011, and
    • the convergence programme is effectively implemented, without delay, and the resources necessary for its completion are allocated to its implementation.
  2. that country has made a public commitment before 30 June 2008 to adopt IFRSs before 31 December 2011 and measures are in place to ensure a timely transition, or has reached a mutual recognition agreement with the EU before 31 December 2008.
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