Accounting Rules for the European Communities: A Theoretical Analysis

In the last decade, the European Union (EU) has reformed its accounting system, issuing its own conceptual framework and 18 accounting standards that draw upon the International Public Sector Accounting Standards (IPSAS) issued by the IPSAS Board. The aim of this article is to analyse this renewed EU accounting system that frames and shapes financial accounting and reporting of the European Communities (EC), in order to assess its capacity to “truly and fairly” represent EC economic activity as a non-business entity. The EU accounting rules are analysed from a theoretical perspective that disentangles three different accrual-based accounting representations focusing respectively on wealth (static accounting), cash flow and economic flow (dynamic accounting). Our analysis retains a modified dynamic accounting representation that fits the specific economy of public administration. This modified dynamic accounting representation is then applied to assess the representational quality of the EU accounting system. This legal-economic, normative analysis of consistency with our theoretical model is complemented and somehow corroborated by documental analysis, financial analysis and few semistructured interviews with EU officials. Generally speaking, our analysis shows that the EU accounting system provides a consistent representation of the EC economic and financial activities, although the reference to the IPSAS has somewhat involved the application of a balance sheet accounting approach that is inconsistent with this representation. In particular, the new EU accounting system has improved on some objectives of financial accounting and reporting, such as: the economic function of redistribution related to the economic solidarity between its constituencies (Member States); the prevention of frauds concerned with transfers and financial operations; the accomplishment of intergenerational and transnational equity, through the recovery of incurred expenditures by constituencies (Member States and, indirectly, taxpayers) located in different places at different times. These findings seem relevant not only to assess the quality of accounting representation provided by the EU accounting system but also in the view of its possible influence on the European Public Sector Accounting Standards – making process launched since 2013. This process is expected to reframe and reshape EU Member States’ accounting systems in the near future.