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Harmonisation of accounting standards: disclosure policies and practices of european commercial banks

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par Michael Forzeh Fossung
Gothenburg University - Master of Science (MSc) Accounting 2002

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Chapter 1



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).


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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