Europe's financial markets face the biggest challenge since the launch of the euro as companies prepare to ditch various national bookkeeping rules to embrace common but radically new accounting standards.
In what experts deem a true accounting revolution, thousands of firms in the 25-nation European Union will next year switch to International Financial Reporting Standards (IFRS) to allow investors to compare and contrast financial statements across the bloc.
Experts say IFRS, developed by private standard setters in London, are of better quality than national rules and may help restore investor confidence in a market badly hit by scandals at companies from Ahold to Parmalat. But the EU bid for greater accounting transparency involves high costs and extensive training for firms, auditors and analysts, as in the run up to the euro's introduction in 1999.
"IFRS is the biggest event since the introduction of the euro. Companies are facing a huge challenge, which is still underestimated," said Paul Koster, executive board member of Dutch stock market watchdog Autoriteit Financiele Markten.
Although Britain and Scandinavian countries use rules that resemble IFRS, analysts believe the impact of the switch will be felt across the EU as the rules bring in new concepts. Due to IFRS, geared to provide more input to investors abroad, companies will for the first time disclose information on derivatives and the cost of stock options, they will reveal pension liabilities and change their evaluation of goodwill.
Such information and the ability to compare accounts may encourage investors to seek opportunities outside their national boundaries, helping the EU's capital markets.
"Companies should not compete on accounting. They ought to compete on economics," Ian Wright, IFRS leader at PricewaterhouseCoopers, told Reuters.
"What we need for our market to work efficiently is for the economics to be transparent and not to be clouded by the way national accounting rules are designed and developed."
As markets became increasingly interconnected, regulators realised the intricacies of national bookkeeping did not allow foreign investors to readily assess accounts issued abroad.
With this in mind, the EU embarked in 2000 on a quest for a common accounting language and decided to back the fledgling IFRS, then known as International Accounting Standards.
"Capital markets are increasingly global. It does not make sense for the EU to apply 25 sets of accounting rules," said Jeremy Jennings, head of European government relations for Ernst & Young.
The plan acquired prominence when corporate scandals around the world laid bare the weaknesses of some accounting practices.
The accounting malpractice that led to the 2001 collapse of energy company Enron cast a shadow on US Generally Accepted Accounting Principles, paving the way for the energence of IFRS.
"Until Enron there was a feeling US standards were the best in the world. This has changed," said Stig Enevoldsen, who chairs a committee of accounting advisors to the EU Commission.
In Europe, Italian food group Parmalat folded late last year under a 14-billion-euro debt and is now the target of a fraud probe. A bookkeeping scandal broke in February 2003 at Dutch retailer Ahold, notably involving profit overstatements at its US Foodservice unit.
The EU decision to give full backing to IFRS raised the status of the new standards to the point that today around 90 countries, including Australia, South Africa and Russia, are using or consider using the standards.
"IFRS has become the quality benchmark," said Wright.
Despite the dryness of the subject, the issue became very politicised as EU policymakers realised that standard setters in London were drafting rules that might hinder the banking sectors of their own countries. The dispute, centred around elements of the IAS 39 standard governing derivatives, has involved figures of the calibre of French President Jacques Chirac and European Central Bank President Jean-Claude Trichet.
The row, which lasted two years, was partially solved on October 1 by a compromise between member states, paving the way for adoption of the standards in January.
But some say such disputes could damage the EU reform, confining its results to Europe and undermining global accounting convergence, including that with the United States. "If we allow the IAS 39 event to be repeated it will lead to European IFRS, which in the end defies the whole project, and undermines our position vis-à-vis the US," Koster said.