Introduction of the obligation to prepare consolidated accounts according to IAS/IFRS standards

COMMISSION BANCAIRE, FINANCIERE ET DES ASSURANCES Prudential supervision of credit institutions and investment firms Prudential policy 99 Louise Avenue, B-1050 Brussels Telephone +32 (0)2/535.22.11 - Fax +32 (0)2/535.24.96 Brussels, 19 August 2004 Communication to credit institutions and investment firms of Belgian law: introduction of the obligation to prepare consolidated accounts according to IAS/IFRS standards

Madam,
Sir,

Following the consultation organized by the Minister of Finance with the sector and supervisory authorities on the draft Royal Decree imposing on credit institutions and investment firms the obligation to prepare their consolidated accounts according to international accounting standards (IAS/IFRS), the Commission wishes to follow the status of the situation, establishment by establishment.

The Regulation of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards aims at the adoption and application, in the European Union, of International Accounting Standards (IAS, renamed International Financial Reporting Standards or IFRS) and the interpretations relating thereto (SIC/IFRIC interpretations), as well as amendments to these standards and interpretations, as established or adopted by the International Accounting Standards Board (IASB).

For each financial year beginning on 1 January 2005 or after that date, all European companies (including credit institutions and insurance companies) whose securities are listed on a stock exchange in a Member State at the date of closing their balance sheet, are required to prepare their consolidated accounts in accordance with international accounting standards and their interpretations (Article 4).

Article 5 of the Regulation further gives Member States the possibility to authorize or make mandatory the extension of the application of international accounting standards to the statutory accounts of listed companies and/or to the statutory accounts and consolidated accounts of unlisted companies.

In consultation with the sector, the CBFA has drawn up a policy proposal which it has submitted to the Minister of Finance. This proposal provides for the mandatory use of IAS/IFRS standards by credit institutions and investment firms for the preparation of consolidated accounts. To this end, it is proposed to amend the Royal Decree of 23 September 1992 relating to the consolidated accounts of credit institutions and extend its application to investment firms.

COMMISSION BANCAIRE, FINANCIERE ET DES ASSURANCES 2 Obligation of consolidation

The rules relating to the obligation of consolidation are of particular importance for credit institutions and investment firms.

The obligation of consolidation remains governed by the 'national' accounting regulation, namely the aforementioned Royal Decree of 23 September 1992. The provisions relating to the obligation of consolidation are not affected by the adaptations proposed to be made to this Decree.

Their scope of application is nevertheless extended, by virtue of the draft amending Royal Decree, to investment firms.

This interpretation is confirmed by the European Commission's communication of November 2003 on the introduction of international standards, which states that the decision to prepare or not to prepare consolidated accounts must be taken in accordance with the provisions of the Seventh Directive, including sectoral directives: "The question of whether a company must or must not prepare consolidated accounts [will be] resolved by reference to national law transposing the Seventh Directive of the Council … b) (…) The exemptions from the general obligation to prepare consolidated accounts are set out in Article 5 and Articles 7 to 11 of the Seventh Directive."

Scope of consolidation

For the determination of the scope of consolidation and the rules according to which consolidation is carried out once the obligation of consolidation is established, only the IAS/IFRS standards adopted at European level apply.

This position is also supported by the aforementioned European communication, which specifies that "In the affirmative [(i.e. if consolidated accounts must be prepared)], it is however the adopted IAS that dictate the scope of consolidation and, consequently, determine which entities must be included in the consolidated accounts, and how. Consequently, exclusions from the scope of consolidation resulting from accounting directives are not relevant, since the consolidated accounts are prepared in accordance with the adopted IAS."

Furthermore, it is important that establishments which do not currently prepare consolidated accounts keep in mind that a possible modification of the company structure, for example the creation of subsidiaries, could lead to the obligation to prepare consolidated accounts according to IAS/IFRS standards. Independently of this issue, it is also possible that an establishment is currently or in the future part of a group that will require the production of specific data to proceed with its own reporting according to IFRS standards.

COMMISSION BANCAIRE, FINANCIERE ET DES ASSURANCES 3

According to the data currently available to the Commission, your establishment is required to prepare consolidated accounts (from the date of entry into force of the aforementioned draft Royal Decree). We kindly ask you to confirm in writing, after consultation with your auditor, if you share the CBFA's analysis in this matter. Commission staff will in turn contact your auditor and yourself to examine together your project for transitioning to IFRS standards.

According to the provisions of Article 20 of the Law of 22 March 1993 (the Banking Law) and Article 62 of the Law of 6 April 1995 (the Law relating to investment firms, intermediaries and investment advisors), each establishment is indeed required to take timely measures to have an appropriate administrative and accounting organization and internal control for the application of IAS/IFRS.

For credit institutions, it is useful to know that a mixed working group, composed of representatives of credit institutions, the National Bank of Belgium and the CBFA, has developed a draft new Scheme A - consolidated according to IAS/IFRS. The Commission will submit it to the sector for consultation at the beginning of September.

The official European texts can be consulted on the DG Internal Market site:
http://europa.eu.int/comm/internal_market/accounting/

A copy of this communication is sent to your auditor.

Please accept, Madam, Sir, the expression of our distinguished sentiments.

Rudi Bonte, for Peter Praet,
Member of the Management Committee Member of the Management Committee, absent Jo Swyngedouw, Deputy Director

For information: http://europa.eu.int/comm/internal_market/accounting/docs/ias/iasadoption-process_en.pdf