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IFRSs in Europe – Events of 2006

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January 2006: FEE – Reference to reporting framework in Europe

The European Federation of Accountants (FEE) has urged the European accounting profession to use a standard reference to the financial reporting framework in the EU in their audit reports and in the basis of preparation note to financial statements of companies using 'endorsed' IFRSs. FEE notes that the European Commission has adopted the following wording (reported in our news story of 23 December 2005): "in accordance with International Financial Reporting Standards as adopted by the EU" or "in accordance with IFRSs as adopted by the EU". FEE also urges that the following three disclosures be included:

  • It should be strongly encouraged to provide an explanation in the notes to the accounts as to how companies' accounting policies depart from full IFRS to enable investors to compare the results of companies within and outside the EU.
  • It should be encouraged that companies also state that they are in compliance with full IFRS (additional disclosure, not as the legal financial reporting framework).*
  • It should be strongly encouraged to provide an explanation of how companies are in compliance with 'International Financial Reporting Standards as adopted by the EU' or 'IFRSs as adopted by the EU' and full IFRS as issued by the IASB in cases where the two frameworks are recognised to be different.

*In this regard, paragraph 14 of IAS 1 Presentation of Financial Statements as endorsed for use in Europe states: "An entity whose financial statements comply with IFRSs shall make an explicit and unreserved statement of such compliance in the notes." Click for FEE Announcement (PDF 157k).

January 2006: EU bank regulators develop IFRS prudential reporting framework

The Committee of European Banking Supervisors (CEBS) has published guidelines establishing a standardised Framework for Consolidated Financial Reporting (FINREP) for credit institutions operating in the EU. FINREP is designed for credit institutions that use International Financial Reporting Standards (IFRSs) for their published financial statements, and that have to provide similar information in the periodic reports they are required to submit to their supervisory authorities. "The introduction of international accounting and reporting standards provides an opportunity to converge and ultimately harmonise prudential reporting in Europe." The framework is not intended to cover all aspects of IFRSs; rather it focuses on information that is important or relevant for prudential purposes. FINREP is intended to enable credit institutions to use the same standardised data formats and data definitions for prudential reporting in all countries where the framework will be applied. CEBS advises the European Commission on banking policy issues, promotes convergence of supervisory practise across European Union, and fosters consistent application of EC banking legislation. Click to download:

January 2006: CESR statement on IFRS accounting policy disclosures

The Committee of European Securities Regulators (CESR) has issued a public statement to remind European securities issuers using IFRSs of the importance of giving clear and transparent disclosure about (a) their use of any of the accounting policy options available under IFRSs and (b) their decisions regarding the determination of accounting policies in the absence of specific IFRS guidance. CESR highlighted four specific situations where transparent disclosure will be particularly relevant for the 2005 annual financial statements because of first-time adoption of IFRSs:

  • Firstly, the endorsed IAS/IFRS themselves provide several options, in particular on first time adoption of IFRS, between two or more recognition methods and measurement bases. The standards themselves include specific disclosure requirements which have to be followed, notably on the use of options.
  • Secondly, there are areas that are not currently specifically dealt with under IFRSs (e.g. accounting for service concession arrangements, emission rights, puts on minority interests). A transparent disclosure explaining the accounting treatment selected would provide meaningful information to the users of the financial statements (see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraph 10 and seq.).
  • Thirdly, particular situations may arise where IAS/IFRS have not been fully endorsed for application in the EU. This is currently the case for some of the provisions of IAS 39 Financial Instruments: Recognition and Measurement that are directly related to the accounting treatment of portfolio hedging. These provisions have not been adopted for mandatory use in the EU pursuant to the Commission Regulation (EC) No 2086/2004 of 19 November 2004 (the so-called 'carve out' of IAS 39). It can therefore be expected that a number of companies will choose to apply the full version of IAS 39, while others may apply the amended standard endorsed by the EU. As it is likely that companies will use different accounting approaches in the area of hedge accounting and effectiveness, issuers should be transparent in explaining their policies and all the more so where the 'carve out' is used.
  • Finally, there is always a time lag between the issue of IFRS by the IASB and their mandatory application in the EU as a result of the EU endorsement process. The European Commission recently informed Member States that Regulations endorsing IFRS published in the Official Journal and entering into force after the balance sheet date but before the date the financial statements are signed, can be used by companies (but they are not obliged to) where early application is permitted in the Regulation and the related IFRS.

Click for Full Text of CESR Statement (PDF 104k).

February 2006: EU regulators will study reporting requirements

The three main committees of European Union financial regulators – the Committee of European Securities Regulators (CESR), the Committee of European Banking Supervisors (CEBS), and the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) – have published a common cross-sector work programme for 2006. The main goal of this supervisory cooperation is to enhance consistency in implementing EU legislation across financial sectors. The work programme includes an examination of reporting requirements, including IFRSs:

The Committees will request input from relevant market participants to take stock of potential inconsistencies in reporting requirements stemming from sectoral EU directives applying to European supervised entities and market participants, taking into account IFRS. The Committees aim at presenting a first result of this inventory within the second half of 2006. Based on this inventory, future work may be proposed.

Click for:

CESR, CEBS, and CEIOPS are sometimes referred to as the '3 Level 3' regulators or '3L3'.

February 2006: CESR studies public access to IFRS reports

The Committee of European Securities Regulators (CESR) is studying the appropriate mechanism for making the financial reports of European listed companies available electronically throughout the European Union. Such reports would include annual, semi-annual, and other interim reports (which include IFRS financial statements), as well as reports of major holdings and insider information. Adoption of such a pan-European storage and retrieval mechanism is part of the process for implementing the 'Transparency Directive'. CESR will make a recommendation to the European Commission, with a goal of having an interim system in place by January 2007. CESR has issued:

Responses to the Consultation Document are due by 31 March 2006 via CESR's Website. CESR will hold an open hearing on the issues on 2 March 2006 at CESR's office in Paris.

February 2006: EFRAG urges comprehensive measurement debate

The Technical Expert Group of the European Financial Reporting Advisory Group (EFRAG) has written to IASB Chairman Sir David Tweedie recommending that the IASB organise a comprehensive global debate on measurement. An excerpt from the letter:

Measurement issues are at the core of many of the longer-duration projects on which the IASB is now working (including, for example, the projects considering revisions to IFRS 3 and IAS 37, and the fair value measurement guidance project). Many of these projects will determine the direction in which accounting will develop. We think it would be inappropriate for the IASB to publish any major new proposals or standards on measurement before the comprehensive measurement debate has taken place. Although we have argued before that the IASB should resolve framework issues before bringing forward proposals for standards that make assumptions about how those framework issues will be resolved, we understand that the IASB does not agree with this point of view. However, on measurement the issues involved are so fundamental and the concerns, misunderstandings, etc so great that we suspect that it would not be possible for the IASB to win acceptance for any such proposals or standards until the underlying fundamental issues have been resolved.

Click to Download EFRAG's Letter (PDF 95k).

February 2006: Impact of IFRSs on European bank regulatory capital

A study by the Committee of European Banking Supervisors (CEBS) has found that the guidelines it has published in December 2004 for adjustments to IFRS financial data reported by European banks for the purpose of determining banks' 'own funds' (equity capital for regulatory purposes) have satisfactorily addressed concerns of bank supervisors. Supervisors were concerned that the introduction of IFRSs might:

  • "Jeopardise the criteria that regulatory own funds have to fulfil, namely that they be (i) permanent, (ii) readily available for absorbing losses, and (iii) reliable as to their amounts."
  • "Introduce volatility into institutions' financial statements and, more particularly, into regulatory own funds, in ways which might not reflect the economic substance of institutions' financial positions."

The CEBS compared the 31 December 2004 national-GAAP balance sheets of banks in 18 European countries with their IFRS balance sheets at 1 January 2005. CEBS found that "the overall effect of transition to IAS/IFRS and of the application of the prudential filters results in a moderate decrease in 'Total Eligible Own Funds': 2% in the aggregate sample." CEBS concludes that:

  • The analysis of the aggregate sample data confirms that the Guidelines neutralise the negative impact on credit institutions' regulatory own funds that IAS/IFRS were observed to have at transition.
  • The results of this analysis – together with the conclusions of a survey that CEBS conducted in 2005 on the implementation of the Guidelines, which indicated that participating CEBS members complied satisfactorily with the Guidelines' recommendations – should help to mitigate supervisors' concerns.

Click for CEBS Report (PDF 165k).

March 2006: FEE urges mutual recognition of IFRSs and US GAAP

The European Federation of Accountants (FEE) has published a position paper on Financial Reporting: Convergence, Equivalence and Mutual Recognition. FEE notes that "the only way for Europe to make a real input to global convergence in standards is to be co-ordinated in its approach.... It is only through substantive European input to the IASB work programme, enhanced coordination and greater transparency and consultation that real progress can be achieved." In launching this paper, FEE President David Devlin said:

The time is right for the acceptance of IFRSs as truly global financial reporting standards. The European accountancy profession welcomes the recent confirmation of the European Commission's and the SEC's commitment to global accounting convergence and to eliminating reconciliation requirements. It is of crucial importance that a specific level of convergence is not needed for mutual recognition of IFRS and US GAAP.
Click to download:

April 2006: Commissioner McCreevy's comments on convergence

Charlie McCreevy, the EU Commissioner for Internal Market and Services, spoke about Global Convergence of Accounting Standards: The EU Perspective (PDF 77k) at the IASCF 'convergence conference' in Frankfurt earlier this week. The three areas on which he spoke were:

  • Application of existing IFRS in the EU
  • What does 'convergence' mean?
  • Beyond convergence
Commission McCreevy's overall conclusion:

High quality financial reporting is fundamental for an integrated European capital market which operates effectively, smoothly and efficiently. Europe made a visionary step to require the use of IFRS: now we must see to it that they are consistently applied and interpreted across the EU so that companies can reap maximum benefit. I am a firm believer in truly global accounting standards that serve efficient capital markets around the world and we have an opportunity at the moment to ensure that the momentum towards convergence is maintained so that these benefits can be felt, not just for companies within the EU, but also for companies across the globe.

April 2006: EC Cites Luxembourg for noncompliance with IAS Regulation

The European Commission has brought infringement actions against 19 Member States for failure to implement in national law one or more of eight different Internal Market Directives. Among those actions, the Commission has decided to refer Luxembourg to the European Court of Justice over its "non-implementation of Directive 2003/51/EC on accounting rules". The Commission's Announcement (PDF 108k) said:

Directive 2003/51/EC amends Directives 78/660/EEC, 83/349/EEC, 86/635/EEC and 91/674/EEC on the annual and consolidated accounts of certain types of companies, banks and other financial institutions and insurance undertakings. These Directives define which types of companies have to produce accounts, establish which format should be used for the profit and loss account and the balance sheet and lay down which valuation principles should be applied. The Directives also impose disclosure requirements.

The IAS Regulation, adopted in June 2002, requires all EU companies listed on a regulated market - or those with listed debt instruments - to use IAS from 2005 onwards and allows Member States to extend this requirement to all companies. Where IAS are not applied, the 4th and 7th Company Law Directives (78/660/EEC and 83/349/EEC), also known as the Accounting Directives, will continue be the basis of EU accounting requirements and may therefore remain applicable to up to five million companies in Europe. They needed to be modernised.

Directive 2003/51/EC brought EU accounting requirements into line with modern accounting theory and practice. It allows Member States which do not apply IAS to all companies to move towards similar, high-quality financial reporting. In doing so, all inconsistencies with International Accounting Standards (IAS) have been eliminated.

April 2006: New Auditing Directive adopted in the EU

On 25 April 2006, the Council of the European Union adopted a new directive on the audit of company accounts. The directive broadens the scope of application of existing EU legislation (directive 84/253/EEC) by specifying the duties of statutory auditors, their independence, and ethics. It introduces requirements for external quality assurance and public oversight of the auditing profession. The new law also amends directives 78/660/EEC and 83/349/EEC on accounting. The directive's main provisions are as follows. Click for EU Council Press Release (PDF 123k):

  • Statutory auditor and audit firm. Clear definition of 'audit firm'. Many of the new provisions deal specifically with audit firms.
  • Public reports of audit firms. Firms that audit public interest entities must provide a detailed public report that gives an insight into the audit firm and the network to which it belongs, including information about quality assurance reviews, policies on continuing education, and a fee break-down.
  • Independent audit committees. Required. They must monitor the financial reporting process and the statutory audit.
  • Registration of auditors and audit firms. Member states must ensure that each statutory auditor and audit firm is identified in an electronic public register and that the registration information is kept updated. For audit firms, the register must show size of the firm and owners and members of the management of the audit firm.
  • Independence. Clearly defined. Auditor/firm can not be involved in any way in decision-making of the audited entity.
  • Quality assurance and auditing standards. All statutory auditors and audit firms are subject to a system of quality assurance and subject to public oversight.
  • Audit standards. Statutory audits must be carried out in accordance with international standards on auditing.
  • Investigations and sanctions. Member states must organise effective systems of investigation and sanctions, which may be civil, administrative, or criminal.
  • Competent authorities. Member states must designate competent authorities responsible for approval, registration, quality assurance, inspection, and discipline for the purposes stipulated by the directive. They must cooperate with each other.
  • Public oversight. Member states must handle this with integrity and independence.
  • Appointment, dismissal, and communication. Various principles established, including one whereby the statutory auditor or audit firm can only be dismissed if there is a significant reason why the statutory auditor cannot finalise the audit. The reasons for dismissal or resignation must be disclosed.
  • Registration of non-EU audit firms. Auditors and/or audit firms from non-EU countries that issue audit reports in relation to securities traded in the EU must be registered in the EU and be subject to member state systems of oversight, quality assurance, and investigations and sanctions. Only auditors or audit firms that meet quality criteria equivalent to the directive can be registered. The directive allows for exemption from registration, oversight, quality assurance, and investigations and sanctions only if audit firms from non-EU countries are subject to equivalent systems of registration and oversight.
  • Fees. Audited companies must disclose total fees paid to the statutory auditor or audit firm, broken down by fees for audit services, other assurance services, tax services and other non-audit services.
  • Local adoption. Member states are required to adopt provisions to comply with the new directive within two years of its entry into force. The directive comes into force 20 days after its publication in the Official Journal of the EU.

May 2006: EC Regulation adopting amendments to IAS 21 and IFRIC 7

The European Commission has approved Regulation (EC) No 708/2006 (PDF 55k) adopting, for use in Europe, amendments to IAS 21 The Effects of Changes in Foreign Exchange Rates – Net Investment in a Foreign Operation and IFRIC 7 Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary Economies.

May 2006: EC Roundtable on Consistent Application of IFRSs

Earlier this year, the European Commission agreed to form a Roundtable on Consistent Application of IFRSs. The purpose of the Roundtable is to identify cases where the accounting treatment in Europe under IFRSs is so divergent, significant, and widespread as to warrant 'common concern' among the different groups of participants (preparers, auditors, national standard setters, regulators). When such issues of common concern are identified, the Roundtable will generally recommend referring them to IFRIC, though circumstances could also arise where the matter should be addressed directly to the IASB Board. The Roundtable itself will not make any interpretations. We have formed a Roundtable Web Page on IAS Plus that includes background information and summaries of Roundtable meetings.

The Roundtable held its first meeting on 17 May 2006. We have links to the meeting summaries on our Roundtable Web Page.

June 2006: CESR report cites 'concerns' about IFRSs

The Committee of European Securities Regulators (CESR) has published its report on CESR's 'Wholesale Day' (PDF 78k), which took place in CESR's offices in Paris on 20 February 2006. A wide range of securities industry representatives met with CESR to identify and discuss current major trends in the European wholesale markets and to assess whether any regulatory or supervisory implications exist. One of the "main conclusions of the discussion by market participants" related to IFRSs:

There are concerns on International Financial Reporting Standards (IFRS), which seem to result in EU issuers seeking listings in non EU exchanges or in the "unregulated" EU markets in order to avoid the application of IFRS. The same applies to non-EU issuers, who are facing uncertainty on whether and when the European Commission is going to consider US, Canadian, and Japanese GAAP equivalent for the purposes of the Transparency Directive.

June 2006: EU Ministers discuss IASB funding

At the 7 June 2006 meeting of the EU Economic and Finance Ministers Council in Luxembourg, the Agenda for the Meeting (PDF 115k) indicates that EU ministers will discuss ideas for funding of the IASB, as well as issues relating to IASB's governance. An excerpt from the EU's announcement:

Finally, also over lunch, the Council is expected to have a first discussion on the current funding arrangements of the International Accounting Standards Board (IASB). Continuation of the current system of funding after 2007, relying on only a small number of voluntary contributions, is believed not to be sustainable in the light of increasing global application. This would not enable the international standard setting body to be independent and sufficiently resourced to conduct its work in a timely fashion. Therefore, a new system is needed with a proper allocation between geographical areas. Commissioner McCreevy is expected to outline that a clear political signal to the IASB and the outside world, via a Declaration at the level of the Ecofin Council, appears the most appropriate means to contribute to the implementation of a reasonable and workable solution in the short term. In such a Declaration, a strong message should be included on the longer-term objective to improve IASB's governance by further developing its approach to consultation, feedback and due process.

June 2006: New EU Statutory Audit Directive becomes law

The European Union's new Directive 2006/43/EC on Statutory Audits of Annual Accounts and Consolidated Accounts, (PDF 218k) was published in the Official Journal of the European Union on 9 June 2006, bringing it into law, For a summary of the new directive, see our story of April 2006 (above) when the Directive was passed.

June 2006: CEBS annual report cites benefits of IFRSs

The Committee of European Banking Supervisors (CEBS) has published its Annual Report for 2005 (PDF 1,386k). The report discusses a number of implementation and regulatory issues relating to the adoption of IFRSs by European banks, including the following:

  • IFRS "provides CEBS with a unique opportunity to promote greater consistency in supervisory approaches across the EU"

  • "On 16 December 2005, CEBS published final guidelines establishing a standardised framework for consolidated financial reporting for credit institutions (FINREP). The framework has been designed for banks that use IFRS for their published consolidated financial statements and that have to provide similar information in the periodic reports... The introduction of IAS/IFRS has been a source of concern to supervisory authorities, notably because of concerns that these standards could jeopardise the criteria that regulatory own funds have to fulfil. CEBS subsequently undertook an analysis of a sample of institutions' financial data... The analysis of the aggregate sample data confirmed that the Guidelines neutralise the negative impact on credit institutions' regulatory own funds that IAS/IFRS were observed to have at transition."

  • "CEBS has now published most of the guidelines related to the implementation of the CRD and IFRS. When all of these guidelines have been finalised, CEBS will compile a compendium or Guidebook of standards, guidelines, advice, and other CEBS work. This Guidebook will be aimed at both supervisors and market participants, with the principal objective of promoting consistent implementation of EU legislation and convergence of supervisory practices."

June 2006: EU Council amends 4th and 7th Directives

The Council of the European Union has adopted revisions to the EU's existing directives on the annual and consolidated accounts of European companies. The new directive modifies the 4th and 7th company law directives ('accounting directives' 78/660/EEC and 83/349/EEC), and also the accounting directives for banks (86/635/EEC) and insurance undertakings (91/674/EEC). It establishes collective responsibility of board members for the financial statements and annual reports, enhances transparency in related parties' transactions and off-balance sheet arrangements, and, for publicly traded companies, introduces a requirement for a corporate governance statement. The size thresholds for exempting small and medium-sized entities from specified accounting and auditing rules were also raised. The new directive must be signed by the Presidents of the Council and the European Parliament, and then will take effect 20 days after publication in the Official Journal of the EU. EU member states will then have two years to enact the provisions of the new directive into their national legislation. Click for Press Release (PDF 117k).

July 2006: EC's Accounting Regulatory Committee July 2006 agenda

The Accounting Regulatory Committee, which makes recommendations to the European Commission on accounting matters, will meet in Brussels on 7 July 2006. The Agenda (PDF 17k) includes the following IASB-related items:

July 2006: 'Convergent enforcement' of IFRSs in Europe

The Committee of European Securities Regulators has published its Annual Report for 2005 (PDF 2,181k). The report notes that one of CESR's key objectives for 2006 is "facilitating convergent enforcement of IFRSs for all listed companies in Europe". CESR's work in the area of financial reporting in Europe is coordinated by CESR-Fin, a permanent operational group within CESR chaired by John Tiner, Chief Executive of the UK Financial Services Authority. Writing in CESR's 2005 report, Mr. Tiner states:

Since January 2005 we have seen International Accounting Standards (IAS/IFRS) adopted for all EU listed groups – the most radical and important change in financial accounting since the introduction of the 4th and 7th Company Law Directives. With the introduction of IFRS in Europe, the vision under the Financial Services Action Plan of a single set of financial statements for listed companies is now becoming a reality, the primary objective being to allow community companies to compete on an equal footing for financial resources available in the capital markets. In this context, the next two years will be crucial as IAS/IFRS are applicable to nearly 8,000 listed group companies across the EU.

CESR was closely associated to the process that led to the introduction of the standards in the EU, notably through its monitoring work on the development and adoption of the EU standards, or with the publication of additional recommendations accompanying the transition to IFRS, but also with the advice given in June 2005 to the European Commission on the equivalence between certain third country GAAP and IFRS. Now that we are starting to see IFRS information and the process becomes more real, we must move on to think about consistency of application and interpretation.

CESR-Fin has already taken the initiative to help with the development of robust and coordinated enforcement across the EU by establishing a framework for discussion and information sharing among European enforcement agencies. It is in everyone's interests for the standards to be applied, interpreted and enforced consistently in all major capital markets, and for investors to have confidence in financial information from listed companies. In this context, the coordination of enforcement activities and consolidation of our relationship with third-countries' enforcement agencies will be high on the agenda of CESR-Fin for the near future.

July 2006: ECOFIN's conclusions on IASB funding

At its meeting on 11 July 2006, the Economic and Financial Affairs Council (ECOFIN) of the European Union discussed the funding of the International Accounting Standards Board and adopted the following conclusions. Click for Full Text of Provisional Report of the Meeting (PDF 240k):

The Council emphasises the importance of high quality financial statements for the development of the EU financial markets; and acknowledges the role of the International Accounting Standards Board (IASB) in producing International Financial Re porting Standards (IFRS), as well as interpretations of these standards. The Council notes that the current funding scheme of the IASB expires at the end of 2007, and considers that stable and secure financing must be ensured in order for the IASB to fulfil its function.

The Council welcomes the current private sector efforts to create a broad-based voluntary financing system for the IASB and recognises the need to finalise the financing system in order to prevent any disruption of the operations of the IASB. The Council stresses the importance of the following factors, which must be taken into account in structuring a future financing system of the IASB:

  • the financing system would benefit from a very broad base of contributors and the involvement of stakeholders from all parts of the world so as to avoid possible conflicts of interest;
  • financing allocations should be clearly determined for all categories of contributors taking into account the precise financing need; and they should be based on objective criteria for contributors from different geographical regions or jurisdictions;
  • stakeholders benefiting from the use of IFRS financial statements should be the primary contributors to the financing of the IASB;
  • the relevant parties are urged to co-operate in their jurisdictions in relation to the practical modalities relating to the funding of the IASB. The Commission is invited to monitor this process inside the EU and provide its assistance, if needed;
  • a financing system based on voluntary contributions should be reviewed after three years of operation in order to see if the system has fulfilled its objectives. The possibility of funding the IASB partly through public means remains to be examined;
  • in more general terms, the IASB should continue to:
    • 1. strengthen its governance structure...;
    • 2. strengthen its due process with stakeholders...; as well as
    • 3. ensure that stakeholders are adequately represented in the IASC Foundation, IASB and International Financial Reporting Interpretations Committee (IFRIC) governing bodies, bringing additional technical expertise.

August 2006: SEC and CESR launch joint financial reporting work plan

The US Securities and Exchange Commission and the Committee of European Securities Regulators (CESR) have released a joint work plan on financial reporting. The main focus of the plan is the application by internationally active companies of International Financial Reporting Standards and US Generally Accepted Accounting Principles in the United States and the European Union, respectively. The plan envisions cooperation by the staffs of the SEC and CESR on the modernization of financial reporting and disclosure information technology, and regulatory platforms for risk management. The stated goal of the staff cooperation is to promote:

  • the development of high quality accounting standards;
  • the high quality and consistent application of IFRS around the world;
  • full consideration of international counterparts' positions regarding application and enforcement; and
  • the avoidance of conflicting regulatory decisions on the application of IFRS and US GAAP.
Regarding the use of IFRSs and US GAAP by internationally active issuers, the SEC-CESR plan envisions, among other things confidential protocols for timely alert and exchange of information between the SEC staff and CESR-Fin (the financial reporting group within CESR), as follows:
  • The SEC staff and CESR-Fin will share views on the future development of IFRS and US GAAP including priorities, timetables and developments related to convergence. Further, they will discuss perspectives and efforts to facilitate consistent interpretation and application of IFRS across jurisdictions.
  • The SEC staff will apprise CESR-Fin of policy developments related to the elimination of the need for foreign private issuers filing in the United States to reconcile IFRS financial statements to US GAAP by 2009 at the latest.
  • CESR-Fin will apprise the SEC staff of policy developments related to the acceptance of US and the other national GAAPs in the European capital markets under the EU Transparency and Prospectus Directives.
  • The SEC staff and CESR-Fin (or its relevant member) will exchange information relating to the topical areas within IFRS and US GAAP that their experiences and issuer review work have shown to be the most troublesome in terms of high quality and consistent interpretation and application.2 These matters may be candidates for referral items to IFRIC.
  • As needed, CESR-Fin may raise for discussion with the SEC staff issues arising in the US GAAP financial statements of non-US issuers whose securities are listed in the EU.
Click to download:

August 2006: EC Standards Advice Review Group established

The European Commission has established a Standards Advice Review Group (SARG) in the area of accounting "to ensure objectivity and proper balance of the European Financial Reporting Advisory Group's (EFRAG) opinions". The Group will be composed of independent experts and high-level representatives from National Standard Setters whose experience and competence in accounting are widely recognised. The Group's task will be to assess whether the endorsement advice given by the EFRAG is well balanced and objective. The group will deliver its advice normally within three weeks. The final advice will be published on the Commission's website. EC Internal Market and Services Commissioner Charlie McCreevy said:

The Standards Advice Review Group will be an important element of the EU's accounting standards architecture. By delivering independent advice on EFRAG's recommendations it will give extra assurance that the accounting standards adopted in the EU are of the highest quality.
Click for EC Announcement (PDF 82k). We have created a new IAS Plus Web Page for the SARG.

August 2006: Changes to CESR structure; new CESR-Fin chairman

The Committee of European Securities Regulators (CESR) has amended its Charter (PDF 82k) to enable it to "shift its priorities to more operational tasks so as to deliver effective supervisory convergence across the EU". Changes include:

  • a more straightforward decision making procedure, including the possibility to vote;
  • a mediation mechanism between members to facilitate a rapid outcomes;
  • the integration of the Review Panel into the Charter, which will permit a more thorough cross-examination of the way in which members apply the new legal framework;
  • a commitment to respect data protection rules when developing databases;
  • greater legal certainty of confidentiality to allow the secretariat to fully assist the members on operational issues.

CESR has also updated the Terms of Reference of CESR-Fin (PDF 103k). CESR-Fin is the body within CESR that coordinates the operational activities of EU Member States for enforcing compliance with IFRSs. Also, John Tiner, Chief Executive of the UK Financial Services Authority, has stepped down as chairman of CESR-Fin. The new Chairman is Paul Koster, a member of the Executive Board of the Netherlands Authority for the Financial Markets. Here is the Press Release (PDF 82k).

August 2006: Implementation of CESR's financial information standard

In March 2003, the Committee of European Securities Regulators (CESR) published its Standard No. 1 Financial Information (PDF 151k). CESR Standard 1 is aimed at developing and implementing a common approach to the enforcement of International Financial Reporting Standards (IFRSs) throughout the EU. It sets out 21 high level principles that define enforcement and describes the principles that EU member states should adopt in enforcing IFRSs, including structure of their enforcement authority; selection of financial information to be reviewed for enforcement purposes; actions available to enforcers (including, in particular, asking for public correction); cross-border coordination; and reporting by enforcement agencies. CESR's Review Panel has now completed and published its first Review of Implementation of CESR Standard 1 in CESR's jurisdictions (PDF 2,630k). The Panel concludes that:

  • Full implementation of CESR Standard No 1 has occurred in Belgium, Denmark, France, Greece, Italy, Norway, Portugal, and United Kingdom.
  • Partial but significant implementation has occurred in Cyprus, Ireland, Malta, Spain, and Finland.
  • Partial implementation, but with a significant majority of principles not fully implemented, has occurred in Czech Republic, Estonia, Germany, Luxembourg, Poland, Slovenia, and Slovakia.
  • Standard 1 has not been implemented in Hungary, Netherlands, Latvia, Sweden, and Austria.
  • Lithuania and Iceland did not submit a response to CESR's enquiry.
The Review Panel identified a number of specific implementation problems, which are enumerated in the report.

August 2006: Call for applications for SARG membership

By Decision of 14 July 2006 (PDF 42k), the European Commission established the Standards Advice Review Group (SARG). SARG's role is to advise the Commission in the endorsement process of IFRSs including IFRIC Interpretations. The SARG will "assess whether EFRAG's opinions on endorsement of IFRSs and IFRICs are well-balanced and objective". The SARG will have a maximum of seven members appointed by the Commission. The Commission has now published a Call for Applications for SARG Membership (PDF 22k). The Commission intends to take the following criteria into account when assessing applications:

  • proven competence and technical experience, including at European and/or international level, in the accounting area, in particular in financial reporting;
  • independence (that is, a person not directly involved with a private entity, organisation, association or other entity using, advising on, auditing IFRS financial statements or representing the interests of users and preparers);
  • the need for balanced composition in terms of geographical origin, gender, the functions and size of entities concerned.

SARG members will be appointed in a personal capacity and must advise the Commission independently of any outside influence. The members may not participate in the work of EFRAG either before appointment to the SARG or during their term of office. Members will be appointed for a three-year renewable term. Applications are due by 29 September 2006. We have created a new SARG Page on IAS Plus.

September 2006: Accounting Regulatory Committee upcoming meeting

The European Commission's Accounting Regulatory Committee will meet in Brussels on 26 September 2006 to discuss a range of issues relating to IFRSs. The Agenda (PDF 16k) includes:

  • Roundtable on Consistent Application of IFRSs (report on 20 September 2006 roundtable)
  • IFRIC working procedures and due process (draft EC comment letter)
  • Equivalence between IFRS and third country GAAP, in particular US GAAP (discussion of Draft Regulation (PDF 34k) and Draft Commission Decision (PDF 36k))
  • Relationship between the IAS Regulation and the 4th and 7th company law Directives (meaning of 'annual accounts in accordance with adopted IASs')
  • IFRIC 10 Interim Financial Reporting and Impairment (endorsement)
  • Standards Advice Review Group
  • Project of consolidation and language revision of endorsed IFRSs

September 2006: EC regulation adopting IFRIC 8 and 9

The European Commission has published, in the Official Journal of the European Union, Regulation (EC) No 1329/2006 (PDF 52k) of 8 September 2006 adopting, for use in Europe:

September 2006: EC will assess economic impact of IFRSs

In 2007, the European Commission will begin a comprehensive evaluation of the economic impact of its Financial Services Action Plan (FSAP). The FSAP includes the adoption of International Financial Reporting Standards for listed companies throughout Europe. To plan the impact assessment, the Commission will convene a workshop on methodology on 25 October 2006 in Brussels. "Economic experts representing the financial services industry, supervisors, consumers, and the academic world have been invited to present their views on how best to carry out the evaluation of such a complex programme." Background documents for the workshop include:

October 2006: Update on corporate governance and accounting in the EU

Charlie McCreevy, the European Commissioner for Internal Market and Services, spoke about Corporate Governance and Accounting – Where We Stand in the EU (PDF 73k) at the EU Business Leader Forum of the Association of Chartered Certified Accountants of Ireland in Dublin on 29 September 2006. An excerpt:

I believe that we are standing on the threshold of a new era. In accounting, for listed companies, the beginning of 2005 saw the introduction of the IAS Regulation and its requirement that around 8000 European listed companies have to prepare their consolidated financial statements using IFRS. Initial studies show that the implementation of IFRS has generally been successful. I am aware that accountants and auditors have done extensive work in order to achieve these results. At the same time, more work needs to be done on consistent application of the standards across Europe. Several parties have a role to play in this area. CESR, the Committee of European Securities Regulators, is playing a leading role: it has created several working groups in order to coordinate enforcement decisions in different jurisdictions. In the interest of transparency, there will also be a public database of decisions taken. Accountants and Auditors can help to improve consistent application, by improved communication among themselves.

Commissioner McCreevy also addressed the IASB's project to develop an IFRS for Small and Medium-sized Entities (SMEs). An excerpt from his comments:

I have repeatedly stated that accounting for SMEs must be simplified and that the level of accounting complexity should be aligned with the nature of the activities of these companies. We have to identify SME's real needs and those of their financiers and use them as the basis for deciding on their future accounting requirements.

I am aware that this is a politically sensitive issue - so there will be extensive consultation with all stakeholders. We will listen very carefully to the concerns of SMEs before taking any decision.

As you know, the IASB intends to publish an exposure draft on accounting standards for SMEs. There will be a period of consultation afterwards. I have made it clear already that only simple, easy-to-apply standards will be acceptable to us. Nobody should assume that the standards will be automatically transposed into European law.

October 2006: Study of auditors' liability in the EU

The European Commission has published an independent study on the economic impact of current EU rules on auditors' liability regimes and on insurance conditions in EU member states. The study analyses the structure of the auditing market and its possible development in the future, describes the existing limitations in the insurance market for international audits, examines the economic needs for limiting auditors' liability, and compares several possible methods for limiting liability.

Key conclusions of the study (not necessarily the views of the Commission) are:
  • The international market for statutory audits of large and very large companies is highly concentrated and dominated by the Big-4 networks. The likelihood of new entrants into this market is very limited in the coming years. Additionally, under the current circumstances, middle-tier firms are unlikely to become a major alternative if a Big-4 network fails.
  • The level of auditor liability insurance available for higher limits has fallen sharply in recent years. The remaining source of funds to face claims may essentially be the income of partners belonging to the same international network. Constantly large claims might therefore put at risk an entire network.
  • The failure of a network could lead to difficult consequences for the wider economy like a significant reduction in large company statutory audit capacity possibly creating serious problems for companies whose financial statements need to be audited.
  • A limitation on auditor liability would reduce this risk. While there exist a number of variants of statutory audit liability limitation, the diversity of circumstances in terms of both audits and company size is such that it is unlikely that a one-size-fits-all EU-wide approach is the most useful.
The Commission intends to issue a report based on this study before the end of 2006, and to invite comments. Click for:

October 2006: 'An EU Integrated Globalised World'

In a speech titled Building an EU Integrated Globalised World (PDF 80k) before the World Congress of Financial Executives in Berlin, EU Internal Markets Commissioner Charlie McCreevy touched on several IFRSs-related matters. He noted that Japan is making progress in convening its accounting standards with IFRSs. And he mentioned that the European Commission will be addressing implementation of global standards including IFRSs and Basel II.

October 2006: Commissioner McCreevy's remarks on globalised auditing

In a speech titled EU Audit Regulation and International Cooperation, EU Internal Markets Commissioner Charlie McCreevy focused on the implementation of the EU Directive on statutory audit and the attention is being paid to international issues within this process. An excerpt:

Companies and audit firms have long since gone global. It is us – the legislators and regulators – who have to adapt to this fact. When we design the regulatory framework in our own jurisdictions we also have to think about the effects this will have on others. We live in a world of spill-overs. Rules passed in the EU affect US business and vice-versa. This insight has to be part of the regulatory process right from the start.
Click for:

October 2006: Summary record of ARC 26 September 2006 meeting

The European Commission has posted the summary record of the 26 September 2006 Meeting of the Accounting Regulatory Committee (PDF 43k). Matters discussed included the following:

  • Roundtable on Consistent Application of IFRSs At the 20 September 2006 Roundtable meeting, three matters of 'common concern' were identified.
    • Reassessment of embedded derivatives (broadening of IFRIC 9) – expected to be referred to IFRIC
    • De facto control – to be raised with the IASB
    • Common control transactions – to be raised with the IASB
  • IFRIC working procedures and due process (draft EC comment letter)
  • Equivalence between IFRS and third country GAAP, in particular US GAAP (discussion of Draft Regulation (PDF 34k) and Draft Commission Decision (PDF 36k))
  • Relationship between the IAS Regulation and the 4th and 7th company law Directives (meaning of 'annual accounts in accordance with adopted IASs'). Issues raised included:
    • Which accounting rules apply to separate company financial statements
    • Whether a company preparing both consolidated and individual IFRS financial statements could issue its individual statements before the consolidated
    • Whether listed companies that do not prepare consolidated financial statements because they have no subsidiaries must follow IFRSs
    • How to determine whether an issuer on a regulated market is required to prepare consolidated financial statements, including materiality of subsidiaries
  • IFRIC 10 Interim Financial Reporting and Impairment – endorsement will be considered at the 24 November 2006 ARC meeting
  • Standards Advice Review Group – update on recruitment
  • Project of consolidation and language revision of endorsed IFRSs

November 2006: Commissioner McCreevy's comments on IFRSs

Charlie McCreevy, the European Commissioner for Internal Market and Services, spoke recently on Setting the Stage for Competitive EU Financial Services Markets before the Association of Corporate Treasurers in the UK. Among other things, Commissioner McCreevy addressed IFRSs, the US SEC reconciliation requirement, and continued use of 'third country' GAAP by non-EU companies trading on EU regulated securities markets. Click to download Commissioner McCreevy's Remarks (PDF 79k). An excerpt:

In the field of accounting, significant steps forward have been taken. In April 2005, the Securities and Exchange Committee (SEC) staff proposed a 'roadmap' towards eliminating the need for reconciliation to US GAAP for European firms by 2009. This roadmap, together with a joint work plan recently published by CESR and the SEC on the consistent application of accounting standards, go a long way towards the goal of removing the reconciliation to US GAAP requirement for EU issuers in the US.

On this side of the Atlantic, the European Parliament and the European Securities Committee (ESC) have recently approved the Commission's proposal that will enable US GAAP, Japanese GAAP, Canadian GAAP and other third country accounting standards that are converging towards IFRS to continue to be used for another 2 years in the EU. This brings the deadline to 2009, and thus aligns the EU and US timetables on this issue. This will also give recognition to other countries' efforts to converge towards IFRS, thereby promoting use of the international standards globally.

In the slightly longer term, both sides agree on the need for continued progress on the technical convergence of IFRS and US GAAP. If we can succeed in abolishing accounting reconciliation requirements, we will greatly reduce costs for transatlantic listed companies and create a more open transatlantic capital market. The success of the accounting standards convergence project will be an acid test for the EU-US relationship in financial services because it will test the fundamental proposition of whether we can converge our regulatory systems or not.

November 2006: New EU procedure for endorsing IFRSs

A new step has been added to the procedure for endorsing IFRSs (including Interpretations) for use in Europe. The European Commission will be required to submit its endorsement proposals to a Committee of the European Parliament, known as the Regulatory Procedure with Scrutiny Committee. That Committee will give its opinion on endorsement to the Commission within a time frame determined on a case by case basis. If the Committee agrees with the Commission's recommendation, the recommendation goes to the European Parliament and Council for approval, as at present. If, however, the Committee does not agree with the Commission's recommendation, the matter will go directly to the Council. If the Council supports the Commission's recommendation, the matter will go to Parliament for action. If the Council does not support the Commission's recommendation, the Commission will be asked to reconsider the matter and submit a new recommendation. Click for:

November 2006: Commissioner McCreevy comments on accounting issues

In a presentation titled Rewarding Excellence in Legibility of Accounts: Meeting the IFRS Challenge (PDF 72k), Charlie McCreevy, the European Commissioner for Internal Market and Services, commented on a number of IFRS-related issues:

  • Readability. "IFRS aim to give increased transparency in accounts. But this must not be at the expense of legibility. Preparers have been grappling with the novelties of IFRS. Companies and investors will take some time to absorb and digest them. That is why I have repeatedly said we need a period of relative stability to let the new standards bed down."
  • Information overload. "The world's biggest accounting firms have recently joined forces to call for a radical overhaul of how companies report. They have called, in particular, for two changes. The first is that there should be a move to real-time, internet-based accounting, instead of quarterly statements. The second is that more non-financial information should be provided to give a fuller picture of companies' performance. The accounting firms are right to provoke a debate. But I wonder whether a flood of information is really the answer. Of course, we must make use of new technological tools. Yet often the real problem in the digital age is how best to sift the mass of information that is available. How to find the needle in the haystack. Too much information may mean many investors will have to rely more heavily on professional analysts. In fact, I have to tell you that I am very glad we didn't go for quarterly reporting in Europe."
  • IFRS for SMEs. "The Commission is working to identify areas of EU accounting and company law which can be simplified for SMEs. Important work on SME accounting is also going on at the International Accounting Standards Board (IASB). I have already made clear to that board that if this work is to be useful, it must be kept simple. This is the clear test that I will apply in determining whether it is worthwhile making use of the results of the IASB's work at EU level."

December 2006: CESR report on auditor oversight in the EU

The Committee of European Securities Regulators (CESR) has published a Report on the Role of Securities Regulators in Auditor Oversight in the European Union (PDF 117k). The report examines the relationship between the securities regulators, the auditors, and their oversight system. The report generally reflects the auditor oversight structure in the EU/EEA member states as of 1 October 2005, with two exceptions. In the Netherlands, on 1 October 2006, the Dutch securities regulator took over the oversight of auditors and increased its powers in this area. Also, in Italy, in December 2005, a new law was passed that strengthened the powers of CONSOB (Italian securities regulator) in respect of auditor oversight. The report notes that "with the enactment of the 8th Directive on Statutory Audit which will be implemented in member states by mid-2008, each member state has to establish an auditor oversight body. Some member states are still in the process of establishing these auditor oversight bodies, so the situation as set out in this report is likely to change over the next two years."

December 2006: Non-EU issuers may use national GAAP two more years

After receiving positive votes of agreement from the European Securities Committee and the European Parliament, the European Commission has adopted measures extending by two years the transitional exemption granted to foreign companies presenting financial statements prepared in accordance with national accounting standards for the issuing of securities on EU stock markets. Under these measures, 'third-country' (non-EU) issuers are not subject to restatement obligations until 31 December 2008 if:

  • the financial information contains an explicit and unreserved statement that it complies with IFRSs; or
  • the financial information is prepared in accordance with Canadian GAAP, Japanese GAAP, or US GAAP; or
  • the financial information is prepared using a third-country GAAP in relation to which the following conditions are met:
    • the third-country authority responsible for that GAAP has made a public commitment to converge it with IFRS; and
    • that authority has established a work programme that demonstrates progress towards convergence before 31 December 2008; and
    • the issuer provides satisfactory evidence to the relevant competent authority demonstrating that the conditions in the above two points have been met.
A decision on the equivalence of third-country GAAPs with IFRS is expected to take place before the end of 2009. The measures also require the Commission Services to adopt a definition of equivalence and an equivalence mechanism before 1 January 2008. Click for:

December 2006: Regulation of financial reporting in the EU

Charlie McCreevy, the European Commissioner for Internal Market and Services, spoke on Financial Reporting in the EU: Striking the Right Regulatory Balance (PDF 81k) at a conference organised by the European Accounting Federation (FEE) in Brussels. Here are excerpts on several matters:

Fair value reporting. "Today's Conference will explore, in particular, whether principles-based fair value reporting poses a conflict between transparency and stability. It will also consider whether greater access to information over the internet is an opportunity or a risk. The accounting firms are right to provoke a debate on this. Personally, I am sceptical about the benefits, but I will be interested to hear the outcome of your discussions."

Implementation of IFRSs. "I think there is a feeling out there that the investment was worth it and that the benefits outweigh the initial costs. However, we still need to maintain our focus so that further improvements can be made. In particular, more consistency and more coherence still need to be developed. We can debate the theoretical value or not of fair value reporting until the cows come home but if there are big differences of approach across the EU, then this will certainly not contribute to financial stability and transparency."

Statutory audit. "The Commission has wide powers to deliver implementing measures under the new statutory audit directive, but I will follow my motto of 'less is more'. Implementing measures will be adopted only after their usefulness is fully demonstrated. Two issues need to be addressed as a matter of urgency. Firstly, how to deal with third country auditors. The Commission will launch a consultation early next year on this. We want, above all, to avoid duplication. The starting point for cooperation between oversight bodies should be the home country principle. This is why I have suggested to the US PCAOB that we should develop a roadmap towards future cooperation between US and EU oversight bodies. This has been done in the accounting field and it should be done for auditing, too. Secondly, we need to consider what should be done about the adoption of the IAASB's International Standards on Auditing, the so-called 'ISAs'. I envisage that we might also launch a consultation on this in the course of next year."

IFRS for SMEs. "Work is also going on within the IASB on SME accounting. Again, I would repeat that what are needed are simple, easy to apply standards that help business. From what I have seen up to now, I have doubts whether the IASB standards will be able to achieve that. And I am very well aware that many in business share this concern."


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