THE EUROPEAN COMMISSION’S embrace of International Financial Reporting Standards (IFRS) has been enthusiastically applauded by the accounting industry.
It means the EC has now formally adopted a report on the evaluation of its regulation on the application of IFRS – applicable to the consolidated financial statements of listed EU companies for the past decade.
The adoption of IFRS in the EU was aimed at improving the efficiency of EU capital markets by enhancing levels of transparency and the more meaningful comparisons of financial statements.
Among the report’s key findings were that IFRS was “successful in creating a common accounting language for capital markets” and that “companies were mostly positive about their experience of using IFRS and in most cases, benefits outweighed costs”. It also reported that investors “largely supported IFRS”.
Critically, it found that the majority of stakeholders “considered that the process through which IFRS become part of EU law works well”.
Recent reforms of the European Financial Reporting Advisory Group (EFRAG) – the technical advisor to the Commission in this field, will “strengthen the EU voice in the international standard – setting process”.
Nigel Sleigh-Johnson, head of ICAEW’s Financial Reporting Faculty, said: “This rigorous report is a watershed for IFRS globally. It is to my knowledge the most extensive post-implementation review by a major jurisdiction where IFRS is used – and it has concluded no changes are necessary to the laws around implementation, and that IFRS is a good thing for Europe.
“We are also encouraged to see that the commission found the endorsement mechanism works well, although we agree that the process should be expedited through earlier and better dialogue between the International Accounting Standards Board and European stakeholders”.
The review echoed the results of ICAEW’s own recently published report, IFRS in the EU: Lessons Learned, he added.
“It would seem the commission agrees with us that the evidence suggests that, whilst the adoption of international accounting standards remains controversial in some quarters, IFRS reporting has boosted investment, made doing business internationally easier and reinforced investor confidence. That’s hugely important for the prosperity of Europe and future economic growth.”
But the report also highlighted areas where more need to be done to ramp up the endorsement process and to allow for a more holistic consideration of standards with other aspects of EU law.
The endorsement process is necessary, it stresses, to ensure that standards developed by a private body meet set criteria and are fit for the European economy before becoming law. It also suggested that procedures could be simplified to reduce unnecessary complexity.
Melanie McLaren, the FRC’s executive director codes and standards also welcomed the report.
“The commission concludes that adoption of IFRS has been largely beneficial and contributed to greater transparency, quality and consistency of corporate reporting by companies in Europe, and enabled meaningful comparisons to be made by investors. We agree that the existing scope of the Regulation and the options given to member states are appropriate and support consideration of developing more simplified reporting standards for SMEs, as part of building the Capital Markets Union.
“Improvements to the endorsement process for accounting standards are in train through the reform programme currently being undertaken by EFRAG. The FRC will continue to input to the IASB’s deliberations on its governance and conceptual framework which the commission has identified as being important to underpinning the quality of standards.”
The evaluation is part of the commission’s wider review of existing regulation, known as the Regulatory Fitness and Performance Programme (REFIT), to simplify EU law and slash regulatory costs, in a bid to boost economic growth and jobs.
In march it looked like the EC was on a 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 results of the EC’s evaluation are set to be presented in Latvia on 25 June 2015.
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