Why? Because if an investor is interested in trading and putting his money which cumulatively accumulates as the region’s capital cannot invest in the member state which has different accounting standards as compared to his state, thus forcing him to invest in his state as he is not able to compare the financials of the other state leading to a non optimal distribution of capital. So for smooth and optimal distribution of capital across the European Union, it decided to go for an all out conversion of accounting standards, making the region more investor friendly and helping its political cause as well (Susanne & Christina, 2003).
Even though standardisation of accounts was a welcome change for investors and industry as a whole, the reason behind the selection of International Financial Reporting Standard (IFRS) promulgated by IASB was questioned. It could be answered in two steps, one which was politically motivated and other which was more accounting standard oriented.
In 1990s there were an increased mergers and acquisitions involving European companies within European Union and out of it, which increased the pressure of having a unified and standardised form of reporting system. Globalisation of capital market and international fund movement was mounting throughout the 90s. EU securities exchange allowed companies to list themselves if they were reported according to GAAP or IAS, the only possible way to remain in the global securities market which was constantly dominated by the United States. The European Union governments feared that this way US GAAP would become the international standard for financial reporting. Therefore, a need for a competing set of standard for reporting financials was deeply felt to counter the US dominance and their dictatorship over the rules of accounts to be followed worldwide. Thus, the option boiled down to two accounting standards: “European” standard or IASB accounting standard. Historical unsuccessful combination