Thursday, November 27, 2014

IASB Strongly Defends IFRS as Essential to E.U. Capital Markets Union

The IASB strongly defended IFRS on many fronts in response to an European Commission consultation seeking to determine the impact of IFRS on the E.U. In a letter to Financial Services Commissioner Jonathan Hill, the IASB said that the adoption of IFRS has brought positive effects in terms of the quality, transparency and comparability of financial reporting, not only within the Union, but also globally, with no less than 114 countries now mandating the use of IFRS for all or most public companies and other major economies (notably Japan and the U.S.) permitting its use in certain circumstances. The letter was signed by IASB Chair Hans Hoogervorst and Michel Prada, Chair of the IFRS Foundation.

The new European Commission that takes office on November 1 has a central goal of creating a Capital Markets Union to move the E.U. more towards equity markets and securities financing and away from the current heavy reliance on bank funding. The IASB posits that the use of a single set of financial reporting requirements is essential to the successful achievement of the Capital Markets Union.

Given the global nature of capital markets and the need for comparability within the E.U. market to mirror internationally-accepted best practice, reasoned the IASB, only IFRS can provide those requirements. The transparent financial reporting provided by companies reporting under IFRS helps participants in capital markets make more efficient and informed resource allocation; and makes investment more attractive to capital providers.

The letter also noted that the use of IFRS globally by E.U. companies, without the need for restatement, has provided them with the benefit of achieving improved group reporting and administrative savings through having to report only under one accounting framework.

The Commission consultation also seeks views on whether it should have more leeway to modify IFRS to be adopted for use in the E.U. The letter notes the very real risks of such flexible endorsement, in particular the negative signal that it would send to the rest of the world. Moreover, modified Standards would not be IFRS, warned the IASB, but rather represent a different framework. Such an approach would have disadvantages. The co-existence of different reporting frameworks would be both confusing and costly, as well as making effective supervision and enforcement of financial reporting requirements of public companies more difficult. As a corollary to this, investors would be deprived of comparable accounts and therefore essential information.

In the E.U., IFRS are adopted on a standard-by-standard basis. The process, which typically takes eight months, is as follows: The IASB issues a standard. The European Financial Reporting Advisory Group (EFRAG) holds consultations, advises on endorsement and examines the potential impact. The Commission drafts an endorsement regulation. The Accounting Regulatory Committee (ARC) votes and gives an opinion. The European Parliament and Council examine the standard. The Commission adopts the standard and publishes it in the Official Journal.

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