THE EC is on collision course with European policymakers over its obligation to launch a full review into the legality of international accounting rules and how the body responsible for setting them is run.
MEPs Syed Kamall and Sven Giegold have raised concerns that Lord Hill, the new EU commissioner responsible for capital markets, appears unwilling to fully review IFRS accounting rules, having previously urged him to investigate “widespread concerns” about conflicts between IFRS and EU law.
The pair wrote to Hill last month to suggest that the EC, which is currently evaluating international accounting standards regulation, has failed to deliver on promises made during negotiations over funding for advisory group EFRAG and the IFRS Foundation, which oversees the work of global standard setter the IASB.
In a series of letter exchanges seen by Accountancy Age, Hill suggested that concerns of widespread confusion over what prudence the ‘true and fair view’ mean in company law and that certain IFRS have become decoupled from key concepts embedded within EU law “have been explicitly taken into account” in the EC’s evaluation.
“The IAS Regulation sets out specific criteria which international standards must satisfy in order to be adopted in the EU. These include an assessment of whether a standard is contrary to the true and fair view,” Hill wrote in response. “The Commission is satisfied this criterion is met, taking into account advice the European Financial Reporting Advisory Group.”
According to Giegold and Kamall, MEP for London and an outspoken critic of IFRS, the evaluation described by Hill “does not appear to be in the spirit” of what policymakers agreed when the European parliament’s influential Economic and Monetary Affairs Committee voted to approve EU funding for the IASB last year. Nor does his response “fully clarify the situation, specifically regarding its reference to the ‘true and fair’ principle”, the MEPs said.
Giegold and Kamall believe the concept of true and fair – whereby directors must consider whether, taken in the round, the financial statements that they approve are appropriate – has become distorted in accounting circles. The dominant view that reaching a true and fair view simply means being compliant with the standards is wrong and that recent ECJ rulings confirm the true and fair view is an “overriding objective that must be achieved regardless of the standards”.
“Despite these clear rulings from the ECJ, it does not appear that EFRAG has ever had any identifiable measure of what the ‘true and fair view’ principle is and so it is difficult to argue that the endorsement procedure has functioned effectively,” they wrote.
At the same time, the pair said the EC must “follow through on its commitment” to undertake a full root and branch evaluation of the IFRS Foundation and whether it was fit for purpose. Under its current structure, it is unclear that the IASB is accountable to policymakers in the same way that other international bodies are and that there “is little clarity” about how it spends EU funds.
“As a recipient of EU funds and as a body responsible for the setting of accounting standards with such far-reaching implications for European companies, it would be appropriate for the commission to follow through on its commitment to assess the functioning of the IFRS Foundation,” they said.
In the short-term, the EC should demand a full disclosure of all costs and expenses incurred by the IFRS Foundation within the last five years, they added.
Last year, Michel Prada, chairman of the IFRS Foundation, said complaints about its governance structure, which emerged following an administrative mistake at Companies House earlier this year, were “difficult to understand”.
“I know of no other organisation with such a transparent governance structure; it is unfair to criticise the governance itself,” he told Accountancy Age in an interview.
The IASB has begun planning an internal review of its structure and effectiveness, to be undertaken during 2015 and has held five separate reviews into its governance, structure and operations since its formation in 2001.
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