BusinessWeek Online details the possible effect that the potential activation of new International Fiancial Reporting Standards in 2005 will have on businesses, primarily within Europe. Perhaps this article relates inpart to the concept recently discussed in class which was identified as the "cost principle," which is the idea that assets shown on a balance sheet should reflect their expense to the company, not their current value.

The new rules are part of a decade-long international effort to harmonize financial reporting around the world. They're meant to prevent Enron-style scams by requiring companies to incorporate in their own books the financial results of entities that they control. But unlike in the U.S., the new rules make no distinction between large multinationals with operating subsidiaries and private-equity funds -- financial companies that invest in startups or leveraged buyouts with the idea of selling out later at a profit. "If you control it, you consolidate it -- no ifs, ands, or buts," says Wayne Upton, research director for the London-based International Accounting Standards Board (IASB), the group writing the new standards. The European Union is committed to adopting IASB rules, and eventually they're supposed to converge with America's Generally Accepted Accounting Principles.

Problem is, conglomerates and private-equity firms are different types of businesses. If the accounting rules stick, experts say, financial reports from private fund managers will simply lump together all the losses and all the debts of the companies in the fund, rather than telling investors how much their stakes are estimated to be worth at the moment. The new rules "remove the very information investors most want to see," says Les Gabb, a partner with Advent Venture Partners in London. "It makes them practically useless."