The European Commission recently adopted Regulation (EC) No. 1569/2007 (the 2007 Regulation), which sets out the procedure for determining which accounting standards of non-EU third countries should be treated as equivalent to International Financing Reporting Standards (IFRS) for the purposes of disclosure obligations under the Transparency Directive. It also allows the Commission to adopt exemptions allowing non-EU issuers to use certain non-equivalent third-country standards for the purposes of the Transparency Directive until the end of 2011. This is of particular interest to non-EU issuers that are subject to the requirements of the Transparency Directive and use third-country accounting standards (such as US GAAP).


The Transparency Directive requires all issuers whose securities are traded on an EU-regulated market to publish annual and sometimes also semiannual financial statements, which must be prepared in accordance with IFRS (as adopted in the EU, the EU IFRS). However, non-EU issuers may be permitted to comply with the obligation by using statements drawn up in accordance with equivalent third-country standards.

Non-EU issuers are currently permitted to use certain third-country accounting standards for financial information required under the Transparency Directives by reason of a transitional exemption. This exemption, which applies to US, Canadian and Japanese GAAPs and to any other third-country standards for which there is a realistic program to converge with IFRS, will expire at the end of 2008.

Exemptions for Non-EU Standards Extended

The 2007 Regulation allows the Commission to permit non-EU issuers to continue using financial statements prepared in accordance with third-country accounting standards that are not equivalent to EU IFRS for the purposes of the Transparency Directive after January 1, 2009 if one of the three following conditions is satisfied:

  • Before June 30, 2008, the relevant standard setter has made a public commitment to converge those standards with IFRS before the end of 2011 and has a comprehensive and properly resourced convergence program
  • Before June 30, 2008, the relevant standard setter has made a public commitment to adopt IFRS before the end of 2011 and takes effective measures to secure the complete transition to IFRS by that date or
  • Before December 31, 2008 the third country concerned has reached a "mutual recognition agreement" with the EU.

Exemptions granted under this provision cannot extend beyond the end of 2011.

Expected Next Steps

By the end of June 2008, the Commission will adopt a regulation establishing which third-country standards are equivalent to EU IFRS, in accordance with the procedure set out in the 2007 Regulation. Equivalence is defined by reference to the ability of investors to make a similar assessment of the issuer and its financial position on the basis of the third-country standards in question.

Using this definition, the Committee of European Securities Regulators (CESR) has indicated that it intends to advise the Commission:

  • That US GAAP should be considered as equivalent to IFRS
  • That Japanese GAAP should be considered equivalent unless the Accounting Standards Board of Japan fails to provide adequate evidence that it will achieve its stated convergence program to timetable
  • That there is not yet sufficient evidence about the application of Chinese GAAP to consider it equivalent, but a transitional exemption would be appropriate until there is sufficient evidence to enable a determination to be made

CESR advice on the equivalence of other GAAPs (including Canadian and Korean) is expected to follow. Measures specifying which non-equivalent third-country standards will benefit from a further exemption will be adopted in the latter half of 2008.

Non-EU issuers can, therefore, be reasonably certain that they will be able to continue to use financial information drawn up in accordance with US GAAP to comply with disclosure requirements under the Transparency Directive after the end of 2008. It is highly likely that the Commission will decide that US GAAP is equivalent to EU IFRS. In the unlikely event that US GAAP is determined to be not equivalent, it would almost certainly be the subject of an extended exemption. This could be based on the convergence work between the IASB and the FASB. Alternatively, an exemption might by justified by a mutual recognition agreement based on the recent change in SEC rules to allow the use of IFRS financial statements by foreign private issuers without reconciliation to US GAAP, although the application of the new SEC rule to IFRS as issued by the IASB, but not necessarily to EU IFRS, might prove an obstacle.