IFRS – is the world still yours?

The European Commission has issued a consultation document Fitness Check on the EU Framework for Public Reporting by Companies, with responses requested by July 21, 2018.

The objectives of the “fitness check” are as follows:

  • 1) to assess whether the EU public reporting framework is overall still relevant for meeting the intended objectives, adds value at the European level, is effective, internally consistent, coherent with other EU policies, efficient and not unnecessarily burdensome;
  • 2) to review specific aspects of the existing legislation as required by EU law; and
  • 3) to assess whether the EU public reporting framework is fit for new challenges (such as sustainability and digitalization).

The document consists of brief overviews on various aspects of the reporting framework, followed by multiple choice questions. Here’s some of the narrative relating to IFRS:

  • The IAS Regulation adopted in 2005 made the use of IFRS mandatory for the consolidated accounts of listed companies. The Commission Evaluation of the IAS Regulation in 2015 found that the use of IFRS had led to greater transparency and comparability of financial reporting within the single market, but that complexity had increased. It also concluded that the use of IFRS in the EU has significantly increased the credibility of IFRS and its use worldwide.
  • However, the current level of commitment to IFRS by third country jurisdictions differs significantly. Very few of the major capital markets and large jurisdictions have made the use of IFRS as issued by the IASB mandatory. As a result, the level of global convergence achieved is sub-optimal compared to the initial objective on global use.
  • Before becoming EU law IFRSs have to be endorsed to ensure that they meet certain technical criteria, are not contrary to the true and fair view principle, and are conducive to the European public good. The current endorsement process prevents the Union from modifying the content of the standards issued by the IASB. Some stakeholders, as mentioned in the final report of the High-Level Expert Group (HLEG), are concerned that this lack of flexibility would prevent the EU from reacting if these standards were to pose an obstacle to broader EU policy goals such as long-term investments and sustainability.

You’ll note that each of those paragraphs might be regarded as taking a swipe at some aspect of IFRS.  In its commentary, KPMG observes that the process “raises doubt over the EU’s continuing commitment to global standards.” The IFRS Foundation and IASB seem to agree, addressing the consultation at a length sufficient to convey some panic. “It is not clear,” say Chairmen Hoogervorst and Prada, “why the EU would consider departing from this goal (i.e. of a single set of high-quality, global accounting standards) at a time when the EU is rightly concerned about global economic standards being under tremendous pressure more generally.” Indeed, this isn’t a good time for abstract global ideals, or even for abstract European ideals. In the age of Obama, IFRS looked like a collective symbol of mutual tolerance and openness, but in our decaying present moment, those qualities are as likely to be attacked and scorned as to be embraced. The IASB’s website still talks about the reliance of modern economies on cross-border transactions and the free flow of international capital and how in the past “cross-border activities were complicated by different countries maintaining their own sets of national accounting standards,” but if companies are increasingly motivated to assert the existence and meaning of their borders, then maybe IFRS starts to look like a wrong turn. Hoogervorst and Prada suggest that “the introduction of EU carve-ins to IFRS Standards is in many ways a solution looking for a problem,” but since we’re increasingly festooned in proposed solutions to imagined problems (non-existent trade imbalances, fantasy-based immigrant crime waves and the like), that may not help their cause.

The two Chairs are also suspicious of the reference to “broader EU policy goals such as long-term investments and sustainability” noting that these concepts “are sufficiently vague to provide legitimacy for myriad lobbying efforts.” Anyway, among other things of interest to this blog, the paper also asks for input on integrated reporting, noting “there is an ongoing debate on whether and how to integrate financial, non-financial, and other related reports in a meaningful way,” and asking among other things whether such integration could help deliver more efficient allocation of capital, or improved decision-making and better risk management. It also asks a few questions about technology, such as whether “increased digitalization taking place in the field diminishes the relevance of the EU laws on public reporting by companies (for instance, by making paper based formats or certain provisions contained in the law irrelevant)?”

As a next step, the input received “will feed into a Staff Working Document on the fitness of the EU framework for public reporting by companies, to be published in 2019.” I won’t try to guess what the consensus expressed in that document will be…

The opinions expressed are solely those of the author

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