Italy: International Accounting Standards Help Investors Make Economic Decisions

In recent years, the European Commission (EC) regarded harmonization as a vital element in order to meet the growing need for transparent corporate accounts and the need to compare financial statements thus streamlining the development and efficiency of European financial markets. The principle at the base of the harmonization process is convergence and transparent financial information at an international level. The EC wants to ensure financial statements are no longer merely true and fair pictures of a business’ economic position at a given date but are a financial information tool useful to those who make economic decisions. To achieve this goal, the European Union decided not to issue its own separate principles but rather to implement international standards that are already known and currently used by EU business standards published by the International Accounting Standards Board (IASB). (New standards will be issued by IASB called International Financial Reporting Standards or IFRS.) The European Union implemented IASB standards in order to rely on a consistent and coordinated body of accounting principles recognized worldwide.

International Accounting Standards (IAS), and IFRS in the future, were chosen as an alternative to the U.S. generally accepted accounting principles (GAAP). Although significantly different, they are both a comprehensive body of accounting principles whose main aim is to protect investors. The EU chose to adopt the IASB standards rather than GAAP because of the anticipated difficulties in applying U.S. principles in Europe. GAAP, in addition to specifically addressing the U.S. market, are also exceptionally detailed and analytical. Moreover, the IASB standards were endorsed by the International Organization of Securities Commissions (IOSCO), an organization that groups securities commissions of major world countries, and by the Basle Committee, the international organization of bodies in charge of banking supervision. IOSCO allows listing by companies that adopt international standards, with no need for reconciliation statements. The IASB is also working with the United States to obtain a listing of companies that prepare accounts by applying IAS. At the end of October 2002, the IASB formalized an understanding with the Financial Accounting Standards Board (FASB), the organization in charge of establishing U.S. accounting standards, where the two organizations worked together to remove mutual differences.

Convergence of the IASB and FASB is likely to involve mutual sacrifice in the name of an ambitious goal: worldwide consistency of financial statements and reporting. The convergence process between IAS and GAAP is evolving among politicians who discussed the issue at the TransAtlantic Business Dialogue meeting held in Ireland at the end of June 2004. At the meeting, the European Union and the United States committed to strengthening cooperation in order to provide investors with appropriate guarantees based on one set of accounting standards or on compatible systems.

Applying IAS in the European Union

The application of the IAS is regulated by EC Regulation No. 1606/02, approved in 2002. The EC regulation requires all EU companies listed on regulated markets to prepare consolidated financial statements in accordance with IAS by 2005 at the latest. An extension to 2007 is allowed in the case of companies that are already preparing accounts by applying internationally accepted accounting standards (such as GAAP), and companies with debt instruments (other than shares) traded solely on a regulated market of any member state.

The regulation includes the right for EU member countries to allow or require the adoption of international accounting standards by EU-listed companies, with reference to annual financial statements, and unlisted companies, with reference to annual and consolidated financial statements. The subsequent EC Regulation No. 1725/03 completed the previous EC Regulation No. 1606/02 and adopted all accounting standards issued by IASB (except for IAS 32 and IAS 39), which will need to be complied with when preparing annual and consolidated financial statements.

Employing IAS in Italy

The Italian legislator implemented EU regulations by introducing two measures. The first is EU Law No. 306, dated October 31, 2003. This law identifies the companies required to apply IAS. Italy exercised its right, as stated in the EU regulation, to allow unlisted companies to report by using IAS. The law also mentions listed companies, in drawing up their annual financial statements; companies issuing publicly traded financial instruments, in drawing up annual or consolidated financial statements; banks and financial intermediaries subjected to the supervision of the Bank of Italy, in drawing up their annual financial statements; and insurance companies in drawing up consolidated financial statements and annual financial statements. But, in the latter case, companies are subject to the law only if they are not listed and do not prepare consolidated accounts. Legislative Decree No. 394, dated December 30, 2003, amended clauses of the Italian Civil Code on information disclosed in the supplementary notes to accounts and in the report on the management. It now requires that supplementary notes to accounts contain information on the fair value of financial instruments.

Welcoming New Provisions Introduced by the IAS

New elements are going to be introduced for the preparation of companies’ annual and consolidated accounts by the upcoming adoption of international accounting standards. Their adoption will be a genuine revolution of general principles, specifically for companies with a continental structure that refers to the pivotal "prudence basis" of accounting aimed at preventing any dilution of the corporate capital and the distribution of fictitious profits. An essential difference between the previous European approach and the IASB’s is the purpose assigned to financial statements. According to the IASB, financial statements are the tool that enables investors to make economic decisions.

The substantial approach in the two cases is clearly different: On the one hand, the approach is essentially inspired by the prudence basis, which tends to highlight distributable income and available assets. On the other hand, attention is focused on the valuation of the performance achieved by the company, which is instrumental to making economic valuations. Under this framework, the concepts of capital and income are significantly different. The old European approach tended to identify capital with the concepts of ownership, risk and obligations undertaken toward third parties. The IASB’s approach tends to identify the capital with all the economic resources managed by the company. Based on the EU’s approach, income is "distributable income" and the rules for its determination are strictly connected to limiting the risk of distributing fictitious profits. Based on the IASB’s approach, income is "income earned" and may be influenced by unrealized revenue and proceeds, resulting from the use of current values for the valuation of the business.

A further essential element is the different way to represent operating results. In particular, while the Italian Civil Code merely mentions the reflection of assets and liabilities, the financial statement and the profit and loss account, the IASB standards refer to the statement of assets and liabilities, the profit and loss account and cash flows in the financial position. The dynamic reference to the financial aspect (cash flow) is an additional difference between the old European approach and the IASB’s approach. The IASB standards interpret the financial statements in terms of evolution (dynamically) and, albeit in accordance with the accrual basis of accounting, the operating result is seen as an indication of the future corporate performance. In this respect, the IASB standards are similar to the GAAP, which interpret financial statements in forward-looking terms to give investors the opportunity to appraise the ability to generate future profits and interpret possible investment-related risks, so as to place them in a position to make economic and financial decisions. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions