This article was first published in the February 2014 International edition of Accounting and Business magazine.
The European Union should maintain its current implementation of International Financial Reporting Standards (IFRS) through EU law, and seek broader agreement between national and European interests when seeking to influence forthcoming IFRS standards, EU finance ministers have been advised.
The advice comes from Philippe Maystadt, a former Belgian finance minister and president of the European Investment Bank from 2000 to 2011. The EU is reviewing how it interacts with IFRS and last year charged Maystadt with looking at how the EU adopts IFRS and recommending ways to improve them.
One aim is to increase Europe’s influence on the International Accounting Standards Board (IASB), the body which sets IFRS.
‘The current standard-by-standard adoption procedure, with the flexibility of accepting or rejecting the standards one by one, should be maintained,’ Maystadt told a 2 December workshop organised by the Federation of European Accountants (FEE) and ACCA at the European Parliament in Brussels, hosted by German MEP Wolf Klinz.
The workshop followed Maystadt’s report, released in October 2013, which made comprehensive recommendations on how to improve the way IFRS works for the EU.
Currently, the European Financial Reporting Advisory Group (EFRAG), consisting of private-sector experts, and the EU Accounting Regulatory Committee (composed of EU member states’ representatives), advises EU institutions on whether to accept or reject new IFRSs. EFRAG’s technical working group offers feedback to the IASB throughout its standards development process.
This influence over IFRS development is important because the EU has not given itself much flexibility. It can accept standards fully, partially or not at all, but it cannot deviate from texts published by the IASB.
This has prompted some EU countries to request more room for manoeuvre in IFRS implementation and for Europe’s economic interests to be taken into account. Maystadt said that if the EU did consider giving itself that possibility, it would be done under very strict conditions truly related to European public interests and that qualified majority decisions (essentially a super-majority) by EU ministers would be needed to allow consensus on the issue. He added: ‘The US has already declared that if one day it decides to adopt IFRS, it would in any case keep the possibility to modify these standards.’
Responding to Maystadt’s report, the IASB states: ‘Our research on the jurisdictional adoption of IFRS shows that IFRSs are being used in most jurisdictions without modifications.’
The organisation warns against the introduction of a more flexible endorsement system by the EU as a negative signal to the rest of the world, encouraging deviation from IFRS.
It also rejects a note in Maystadt’s report saying Europe had ceded sovereignty over its accounting standards: ‘The IFRS Foundation does not take the view that the EU’s regulatory sovereignty in accounting was “renounced” because of the endorsement mechanism that is in place.’
The idea of amending IFRS in the EU was met with a wave of disapproval from many of the participants at the workshop. ‘This flexibility would reduce comparability on the global level and between different European reports,’ warned Jella Benner-Heinacher, vice-president at the Brussels-based European Federation of Financial Services Users (EuroFinuse).
Olivier Boutellis-Taft, CEO of the Brussels-based FEE, also warned that ‘Europeanising’ IFRS might drive investors away from the EU at a time when the continent badly needed them. ‘The reality is that we would not have standards at all if we didn’t use IFRS,’ he said, adding that EU states would be unable to agree on accounting standards.
Unable to agree
It is indeed the inability of EU national accounting standard-setting bodies and EFRAG to agree and speak with a united voice to the IASB that is debilitating the EU’s influence on IFRS, Maystadt suggested. ‘If you have an EFRAG position, and another important national standard-setter from an EU country comes with another position, then you weaken the European position, which is not seen as common any more,’ he said.
The EU should try to intervene in the early stages of standard development to influence IFRS, he said – for example, by setting (and perhaps delaying) implementation times. ‘If we are fully involved in the process of the elaboration of a standard within the IASB, we would be the ones setting the delays for the adoption in Europe,’ he said.
But for that to happen, EFRAG would have to be more representative and involve national accounting standard-setters throughout the decision-making process. The group has only a technical role at the moment and so does not consider the wider economic context when adopting a standard, according to the Maystadt report. Maystadt recommended beefing up EFRAG so it could assess the economic impact of each standard.
Doing so would let it apply two additional criteria when assessing a new IFRS: that it should not endanger financial stability, and that it should be in the public interest in the EU.
However, Hans van Damme, acting chair of EFRAG’s supervisory board, speaking at the workshop, said: ‘While EFRAG is in principle not against including such criteria, there is a concern about their application and operability in practice.’
The IASB also warns that such changes may delay the IFRS adoption process in Europe and that it will not extend its consultation deadlines: ‘Other constituents around the world can meet the IASB’s comment deadlines and would not wish to see them being extended to meet a request from Europe.’
The need for the EU to be a leader of the global accounting standard-setting process comes at a time when the US, while it has not yet adopted IFRS, remains a major influence on the process. Furthermore, as more countries adopt the standards, so more countries want a voice in the process, according to Maystadt’s report.
Too much influence
Indeed, the EU may want too much of a say, according to Hilde Blomme, FEE deputy CEO. ‘We believe that there is already a lot of European influence over the IASB,’ she told Accounting and Business, noting that some IASB board members come from Europe. Comment letters from EFRAG to the IASB during the definition of a standard also carry some weight, as other jurisdictions applying IFRS often use them as a benchmark to draft their own input.
‘The IASB is an independent standard-setter – it is not liable to one group or the other to be more influenced by one or the other and take into account certain perceived views,’ Blomme added. ‘It cannot favour the European view if that is to the detriment of the global view.’
The way forward
Looking ahead, Boutellis-Taft told the workshop it was time for the European Commission to respond to the report and make ‘its intentions clear about how this will be taken forward’.
According to one EU official, most of the recommendations of the Maystadt report can be implemented without having to change EU law, which is always a lengthy process. ‘Those are mainly the recommendations on the reform of EFRAG structure and governance, which will be put in place by a reform of EFRAG statutes and rules of procedures,’ the official adds.
Changing the wording of IFRSs and adding new criteria for their endorsement in Europe would, however, require amendments to current legislation. Brussels has not yet decided whether to propose such changes, according to the official.
More details are expected by 31 March, when the European Commission plans to present a report to the European Parliament on reforming the EU’s adoption of IFRS and the restructuring of EFRAG.
Carmen Paun, journalist based in Brussels