European Commission Weighs Usefulness of IFRS

The European Commission has issued a report evaluating the use of International Financial Reporting Standards over the past decade in the European Union.

IFRS has been in use for publicly listed companies in the E.U. since 2005, the report noted, and the adoption of IFRS in the European Union was designed to improve the efficiency of the European capital markets by increasing the transparency and comparability of financial statements.

The key findings in the report showed that IFRS was successful in creating a common accounting language for capital markets. Companies were mostly positive about their experience of using IFRS and in most cases, the benefits outweighed the costs. Investors also largely supported IFRS for improving the transparency and comparability of financial statements.

Most stakeholders considered that the process through which IFRS became part of E.U. law works well. The recent reform of the European Financial Reporting Advisory Group, which is the technical advisor to the European Commission in this field, is expected to strengthen the E.U.’s voice in the international standard-setting process.

The report identifies room for improvement in some areas. The collaboration between actors in the endorsement process could be enhanced to improve timeliness and to allow for a more holistic consideration of standards with other aspects of E.U. law. IFRS issued by the International Accounting Standards Board need to be endorsed by the European Commission. An endorsement process remains necessary to ensure that the standards developed by a private body meet certain criteria and are fit for the European economy before becoming part of E.U. law. However, the procedures could also be simplified in order to reduce their complexity for companies.

The European Commission also found that IFRS has increased the transparency of financial statements through improved accounting quality and disclosure, and greater value and relevance of reporting, leading to more accurate market expectations, including analysts’ forecasts. It also led to greater comparability between financial statements within and across industries and countries although some differences persist. Collected evidence suggested that the quality of financial statements prepared under IFRS is good, which implied that the standards are of good quality.

Nevertheless, there were some criticisms involving complexity. The findings suggested most complexity is unavoidable as it arises from the underlying complexity of business. Although the standards are not industry specific, they were considered flexible enough to accommodate most business models, but there was some concern about their suitability for long-term investors and about the volume of disclosures.

In 2002, the IASB and the U.S. standard setter, the Financial Accounting Standards Board, began a program to converge their respective standards, the report noted. “The financial crisis highlighted the importance of this work which was actively supported by the G20 and FSB [Financial Stability Board]. In some areas, however, the boards were unable to achieve common positions.”

The evaluation is part of the European Commission’s broader review of existing regulation, known as the Regulatory Fitness and Performance Program, a program to make E.U. law simpler and to reduce regulatory costs, thus contributing to a clear, stable and predictable regulatory framework supporting growth and jobs. The results of the European Commission's evaluation will be presented at a conference, hosted by the Latvian Presidency, which will be held in Riga on June 25.

In response to the report, Michel Prada, chairman of the IFRS board of trustees, commented, “The trustees appreciate this thorough assessment of the use of IFRS in the European Union and welcome the positive and constructive conclusions of the provisional report. We will study the assessment in detail and I look forward to discussing this further next week at the European conference in Riga.”

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