Maystadt Review: ensuring EU influence over global financial reporting standards
The Fédération des Experts comptables Européens and the ACCA held a conference at the European Parliament in Brussels to discuss Philippe Maystadt’s report, which was presented to the ECOFIN Council meeting on 15 November 2013. Wolf Klinz, MEP acted as host for the event and opened the conference.
Presentation by Mr Maystadt
Mr Maystadt presented his recommendations against the background of the acknowledged widespread support for global accounting standards, noting that in the EU there was a very broad consensus that IFRSs were, at present, the best solution to achieve such global standards. He noted also that the report reflected the differing views held within the Union on how IFRSs should be endorsed and the degree of flexibility that endorsement might involve. He had concluded that the present standard-by-standard approach remained appropriate and that this approach balanced EU sovereignty with a commitment to maximum harmonisation in financial reporting standards. He noted that, should the European Commission determine that it was desirable to have the possibility of a carve-in/carve-out, his view was that the bar should be set high and require a qualified majority vote in the Council. He noted the proposed additional/ alternative endorsement criteria: that an IFRS ‘should not endanger financial stability’ and that it ‘must not hinder the economic development of the Union.’
Mr Maystadt went on to outline his recommendations for the reform of EFRAG. He noted that, during the ECOFIN meeting, the balance of standard-setters was among the recommendations criticised, with a preference for at least one more standard-setter from a smaller EU Member State.
Finally, he touched on his proposals affecting the Accounting Regulatory Committee (representing Member States at a political level) and the role of the European Parliament. Both institutions should be involved earlier than at present and specifically be engaged by EFRAG regularly throughout an IFRS-related project.
Mr Maystadt said that the ECOFIN had given his proposals a ‘green light’, with some specific tasks given to the Commission for clarification. While many of the proposals can be implemented without legislative measures, any alternation of the IAS Regulation’s endorsement criteria would need legislative time. [This might prove a challenge in 2014, given the hiatus caused by Parliamentary elections in May 2014 and a new College of Commissioners to be appointed later in the year.]
Richard Martin, ACCA Head of Corporate Reporting, moderated the discussion that followed, noting that the conference would focus on implementing the report.
Global standards and flexible endorsement
Jella Benner-Heinacher (Vice-President, Eurofinuse, representing users) spoke strongly against any flexibility in endorsement and for the current binary approach. She noted that such flexibility would make it harder to reach truly ‘global’ standards and would reduce comparability within the EU and among EU listed entities and their global peers. This, she said, was contrary to the goal of global standards.
Hans Van Damme (Acting Chair, Supervisory Board, EFRAG) noted that the endorsement criteria had already been amended in 2012 to add a condition of ‘respecting the EU public good’. He went on to express concern about placing more stress on ‘prudence and the respect for the public good’, noting that there were differing views on what ‘prudence’ meant and how it should be applied in practice. It was also not clear to him whether the proposed additional endorsement criteria could be made operational. He welcomed the suggestions for more and better cooperation between EFRAG and the ARC and EP.
Agnes Lepinay (Directrice, Economie Finance, MEDEF, representing preparers) supported flexible adoption, noting that other jurisdictions had the option to add or remove requirements (see Maystadt Report, Annex 3).
Mark Vaessen (Chair, Corporate Reporting Policy Group, FEE, representing auditors) responded that FEE does not support flexible endorsement and noted that all jurisdictions with the possibility to add or remove requirements on adoption of an IFRS had made an explicit commitment not to do so.
A participant expressed concern that the proposed additional endorsement criteria were not based on concepts in the IASB’s Framework, and that if these criteria were implemented there was a danger that EU-IFRS would deviate from IFRS ‘as issued by the IASB.’ Mr Maystadt agreed, but noted that he had tried to reflect faithfully the views he had heard. His view was that standard-by-standard endorsement with a binary decision was the preferred solution, but he was bound to present the alternative view.
Another participant spoke strongly in favour of endorsing IFRSs as issued, suggesting that EFRAG’s most fundamental role was to ensure that the development of a new or amended IFRS reflected the best views of the EU Member States.
Mark Vaessen stated that FEE wanted to build on the quality already in EFRAG, while retaining its distinctive public/ private partnership. FEE supported the proposals to transform the present supervisory board into an executive Board, but was concerned that the proposed membership was skewed towards the public sector, with only five of the 17 seats allocated to the private sector. He also criticised the under-representation of users (1/17) and the accounting profession (1/17).
There was a need for a clear profile for Board members, who should have a high level of understanding of financial reporting and respect for the independent standard-setting process. The Board should have an ‘EU mind set’ rather than a nationalistic or sectorial one. He agreed that the Board should decide the key messages and strategic direction, with the Technical Expert Group doing much of the detailed work. He suggested that a nominating committee (perhaps drawn from the EFRAG General Assembly) was necessary to ensure appropriate balance of skills was reflected on the Board.
Melanie McLaren (Executive Director, Codes & Standards, Financial Reporting Council (UK standard-setter)) addressed decision-making by consensus, saying that EFRAG had an important role in supporting active EU capital markets, and that IFRS was central to that success. She endorsed Mr Vaessen’s comments, and noted that consensus was present more often than it seemed to be. Standard-setters often expressed differences of view with greater passion than those views on which they agreed. Ultimately, she reminded the gathering that EFRAG was an advisory body and that EFRAG should be able to communicate areas in which there was unanimity and where views differed.
Ms McLaren also expressed concerns about the under-representation of users.
Ana Martinez-Pina (Chair, Spanish Accounting and Auditing Institute (ICAC – Spanish standard-setter)) addressed the proposed role of the Technical Expert Group (TEG) and in particular how it fitted in with the executive role envisaged for the Board. She also mentioned the need to define the status of the national standard-setters sitting on TEG, which should also be given voting rights.
Agnes Lepinay addressed the funding options proposed in the Report. She noted that MEDEF welcomed the Report and supported many of its recommendations. EFRAG was, she said ‘a special animal in the EU’ and that it was important to preserve this distinctive role in building consensus among EU-level stakeholders. The level and sources of funding would be influenced by the nature and scope of EFRAG’s responsibilities. There was no miracle solution for EFRAG’s funding, but it should be proportionate and commitments must be for a pre-determined period of time.
In response to a question whether the need to build consensus would slow down even further the time taken by EFRAG to endorse an IFRS, Mr Maystadt suggested that Ms McLaren’s comments showed the way forward — noting the fundamental advisory nature of EFRAG. Another questioner noted that real-world time pressures might make consensus-building more difficult. In that case, Mr Mystadt suggested, the Board’s Chairman would ‘just have to work harder’ bringing the consensus.
There was a brief discussion that EFRAG might also take SME financial reporting under its wing, especially in light of the 2013 Accounting Directive, which provided a reporting framework for such entities.
Olivier Boutellis-Taft (CEO, FEE) noted that making EFRAG more influential as a voice in developing global accounting standards was in the EU public interest: it should not be allowed to become a political arena for national standard-setters.
He reiterated FEE’s support for global standards, without carve-ins/-outs, noting that those who want flexible endorsement ignored the experience of the Accounting Directives: even the 2013 Directive has over 100 options available. He said that EU companies think European and global, and that EFRAG should, too.
He criticised the proposed composition of the EFRAG Board, suggesting that it was appropriate for a political planned economy, but not for a dynamic, market-driven capital market.
While noting that disagreement was ‘a European speciality’, the EU needed a way to have a strong voice in IFRS debates. Reflecting the views of all market participants would be the best way to safeguard the EU public interest in financial reporting. He challenged the EU to grasp again the public interest vision of the EFRAG Founding Fathers and put aside national and sectorial interests and work towards an EU that is strong, with dynamic capital markets.