Chapter 1
1.
INTRODUCTION
1.1 BACKGROUND
This work has been undertaken to elucidate the divergence of
European commercial banks' reporting policies and practices. Despite the
presence of a
Basic theoretical infrastructure for uniform reporting,
European banks have different reporting practices. We have been inspired by
the European Community «One Market» philosophy, a philosophy which
has several of us skeptical about its effective applicability in the banking
sector. We regard this sector as special, especially as it is involved in a
more exposed environment full of uncertainty. The presence of a more special
character (culture) has even increased our state of bewilderment as to whether
identical reporting practice would ever exist given the cultural frontier that
will never end within the EU one market area. Because it is very complex to
link cultural policy with economic policy, we have addressed the process and
practice of accounting harmonization with a focus on the European community as
a whole, and at the national level of countries within the European domestic
market, noting that existing cultural diversity on the one hand and company
goals on the other hand could influence reporting standards a great deal.
The focus has been on explaining whether one European banks'
reporting policies and practices meet the requirements of standards, in
relation to the policy and practice of other banks within the European
Community. The standards (Directives) of the EC constitute a benchmark, in view
of the fact that it is not just a recommendation but also a law binding all
banks in member states. It is from this dimension that we have described
cultural differences in both the countries and the industry.
We have adopted the investigator perspective on the effects of
intra-continental accounting differences on the one market philosophy and seek
to provide knowledge potentially relevant to regulators and accounting standard
setters who are concerned with the effects of inter-bank accounting differences
on the operation of the European internal markets. We recognize the importance
of banks and other financial institutions, in terms of their pivotal role in
financial markets and in the overall monetary and economic system of the
internal market (The Commission of the European Communities, June 2000,
Brussels).
1.2
CONCEPTUAL FRAMEWORK
Accounting standards are solid principles for financial
accounting and reporting developed through a structured standard setting
process and issued by a recognized standard setting body (an Accounting
Standards Board). Accounting standards spell out how transactions and other
events are to be recognized, measured, presented and disclosed in financial
statements. The purpose of such standards is to meet the needs of users of
financial statements by providing the information considered necessary to make
informed decisions (Canadian Institute of Chartered Accountants).
We difine disclosure as the value added statements or
additional information given to cover strategic business areas, which are less
covered in the accounts. On the other hand, harmonization reduces the
differences in accounting practices across countries ultimately resulting from
a set of international norms to be followed worldwide. (Doupnik, et al,
1993)
Banks and similar financial institution are business units
whose spectrum of user groups is extensive. Changes in the information
provided in annual reports is even more strategic as they are exposed to many
business risks resulting from a high volatility of their business environment.
The micro and macro economic variables such as interest rates, exchange rates
and inflation or price changes are strategic reporting areas. By transacting
in exchange-traded financial instruments (such as futures and options, swaps,
forwards, and other customized instruments), market participants are able to
transform their risk exposures. In anticipation of movements in interest rates,
(currency) exchange rates, indices of stock prices or groups of produce, and
the prices of various specific commodities, the risk exposures are even better
transformed. For instance, if derivatives are suitably employed will enhance
general economic welfare thus, creating risks transformations that are
pragmatic and cost-effective. Regrettably, current external reporting
requirements for financial assets and liabilities, and for derivatives, are not
only deficient but also inconsistent. The reporting requirements often coax
firms not to hedge important risk exposures and, occasionally, to hedge
accounting in place of economic impacts.
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