Companies in Europe will be hardest hit by new proposals from the International Accounting Standards Board to rule out merger accounting.

The IASB is setting common accountancy standards, which will come into use by 2005. The new rules will help investors compare companies across countries, and tighten up weaknesses exposed by financial scandals such as the Enron or WorldCom debacles.

Merger accounting has already been outlawed in the US, Canada, Australia and New Zealand, but is still used in Europe and Japan. The IASB has proposed that mergers and acquisitions should be treated as takeovers.

In Britain, merger accounting is only allowed under strict rules but, where it is allowed, it has significant profit-boosting advantages.

Under merger accounting there is no way to treat goodwill - the difference between the asset value of the target business and the amount the acquirer pays for it, often seen as the value of the business as a going concern.

Under UK rules, companies can choose to write down the cost of the difference a little at a time every year for 20 years.

The new proposal, already adopted in the US, would require the company to test the value of the difference every year and account for it accordingly.

According to Sir David Tweedie, head of the IASB and in charge of the global move to harmonise standards, both proposals would be a big improvement.

He believes there are very few real mergers and that companies routinely attempt to flout the rules to their advantage.

Sir David also believes the changes to goodwill accounting will give investors a clearer picture of the health of a company's balance sheet.

However, the Britain's Accounting Standards Board expressed "concern" over the IASB's plan to change accounting rules for mergers and, in particular, over the adoption of the US-style of accounting for goodwill. Ms Mary Keegan, chairman, said: "The IASB has picked a weak standard." - (Financial Times Service)