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January 2008: CESR consultation on equivalence of national GAAPs and IFRSs
The Committee of European Securities Regulators (CESR) has launched a consultation on the equivalence of Chinese, Japanese, and US GAAPs to IFRSs. The Consultation Paper includes CESR's draft conclusions on such equivalence. Responses to the consultation are requested by 25 February 2008. CESR will hold an open hearing on the issue at its offices in Paris on 21 January 2008. CESR will consider the views received in developing its advice to the European Commission, which CESR expects to submit by 31 March 2008. The Commission plans to make its decisions by 1 July 2008 regarding the equivalence of third country (non-EU) GAAPs under the Prospectus and Transparency Directives. Click for:
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Overview of CESR's draft conclusions
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United States GAAP. CESR believes US GAAP and IFRS are converging and will continue to evolve on a combined basis to an extent where they are effectively equivalent to each other and would therefore recommend that the Commission finds US GAAP equivalent to IFRS for use on EU markets.
Japanese GAAP. CESR does not necessarily believe itself in a position to comment on the [Accounting Standards Board of Japan's work] programme but has no reason to doubt that the ASBJ may well be able to achieve this objective. It is clear that if the ASBJ is successful in achieving its objectives there is no reason that CESR should not agree to Japanese GAAP being considered equivalent as at that stage all the issues identified in its 2005 advice will have been addressed. Consequently, CESR would recommend that, come June 2008, the Commission should consider Japanese GAAP equivalent, unless there is no adequate evidence of the ASBJ achieving to timetable the objectives set out in the Tokyo Agreement.
Chinese GAAP. CESR would recommend that the Commission postpones a final decision on Chinese GAAP until there is more information on the issues outlined above [essentially, assessment of implementation of new Chinese standards in 2007], because CESR believes that evidence of adequate implementation is important in the context of an outcome-based definition of equivalence.
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January 2008: EC adopts an 'equivalence mechanism' to assess non-EU GAAPs
Following a favourable opinion of the European Parliament, the European Commission has adopted Regulation (EC) No 1569/2007 that sets out the way in which the Commission will assess the equivalency of 'third-country' (non-EU) GAAPs to IFRSs as adopted by the EU. If a non-EU GAAP is deemed equivalent, then foreign companies whose securities trade in EU markets would be permitted to use that GAAP in Europe without providing a reconciliation to IFRSs as adopted by the EU. The regulation adopts the following definition of 'equivalence':
Equivalence definition:
The GAAP of a third country may be considered equivalent to IFRS adopted pursuant to Regulation (EC) No 1606/2002 if the financial statements drawn up in accordance with GAAP of the third country concerned enable investors to make a similar assessment of the assets and liabilities, financial position, profit and losses and prospects of the issuer as financial statements drawn up in accordance with IFRS, with the result that investors are likely to make the same decisions about the acquisition, retention or disposal of securities of an issuer.
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The Commission would determine the equivalence of a non-EU GAAP on its own initiative or if requested either by an EU member state or upon application of an authority responsible for accounting standards or market supervision of a non-EU country.
Special provisions through 31 December 2011:
The regulation provides that for a limited period ending 31 December 2011, the Commission may continue to accept non-EU GAAPs that are not currently deemed equivalent to IFRSs as adopted by the EU if either:
- that country's accounting standard setter has made a public commitment before 30 June 2008 to converge their standards with IFRSs before 31 December 2011 and both of the following conditions are met:
- that country has established a convergence programme before 31 December 2008 that is comprehensive and capable of being completed before 31 December 2011, and
- the convergence programme is effectively implemented, without delay, and the resources necessary for its completion are allocated to its implementation.
- that country has made a public commitment before 30 June 2008 to adopt IFRSs before 31 December 2011 and measures are in place to ensure a timely transition, or has reached a mutual recognition agreement with the EU before 31 December 2008.
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February 2008: EU Parliament committee report on the IASB
At its meeting on 29 January 2008, the Committee on Economic and Monetary Affairs of the European Parliament adopted a Report on International Financial Reporting Standards (IFRS) and the Governance of the IASB (PDF 177k). Among the conclusions in the report are:
EU involvement in standard setting
- The tools the EU has for making its views known to the IASB (ARC and EFRAG) "do not allow it to deal on an equal footing" with countries with more centralised structures (FASB and the SEC in the United States and the ASBJ and FSA in Japan). Accordingly the report calls on the Commission to put forward a proposal for creating a more streamlined EU structure, including possibly abolishing some existing bodies.
- The European Parliament should be involved earlier in the process for endorsing IFRSs for use in Europe.
- Carve-outs should be a 'last resort'.
IASB structure and due process
- 'The IASCF/IASB lack transparency, legitimacy, accountability and are not under the control of any democratically elected parliament or government'. The report recommends that 'a debate should be launched on the conditions for integrating the IASCF/IASB into the system of international governance' such as the IMF, World Bank, or OECD.
- A public oversight body should be established to oversee the IASCF and the IASB. It should involve 'all IASCF/IASB public stakeholders including in particular legislators and supervisors'. That group would report annually 'on the functioning of international accounting standard setting' and would appoint IASCF trustees.
- The IASB should strengthen its due process 'so that the views of all IFRS users and investors are taken into account'.
- The process for appointing members of the IASB, SAC, and IFRIC must be improved.
- Carve-outs should be a 'last resort'.
IASB standard setting
- IASCF trustees should be more involved in supervising the IASB and its work plan.
- The European Parliament should be involved 'in drafting the work plan and in setting the priorities and direction of new standard setting projects'.
- The IASCF constitution should 'ensure that the IASB develops accounting solutions that are not only technically correct but also reflect what is necessary and possible from the point of view of all users (investors and supervisors) and preparers'.
- IASB should carry out impact assessments for all projects.
- An accounting standard 'should be drawn up or modified only when 'it has been ensured that there is a clear and beneficial need for it.
- There are a number of technical issues on IASB's agenda that are of particular concern to the Committee (the report comments on these individually).
- The IASB should limit the scope of fair-value principle.
- The proposed IFRS for SMEs 'is far to complicated for SMEs'. The Commission should undertake a comprehensive consultation process to assess the appropriateness of applying the IFRS for SMEs in Europe.
- The chairpersons of the IASCF and the IASB should report to the European Parliament at least once a year on such matters as work programme, staff decisions, funding, and controversial standards.
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February 2008: CEBS finds Swiss and US bank supervision equal to Europe's
The European Union Capital Requirements Directive and the Financial Conglomerates Directive require EU member states' supervisors to assess whether the third country parent institutions of EU subsidiaries are subject to supervision that is 'equivalent' Europe's. To avoid duplication of work, the European Commission asked the Committee of European Banking Supervisors (CEBS) together with the Committee of European Insurance and Occupational Pensions (CEIOPS) to assess the equivalence of certain third country supervision. CEBS and CEIOPS have completed their assessments of the Swiss and United States financial regulatory authorities. The report on Switzerland concludes that the Swiss supervisory system is equivalent to Europe's. The report on the United States concludes that the banking supervisory system is equivalent to Europe's. However, because insurance regulation is at the State level in the USA, "EEA supervisory authorities must therefore conduct all equivalence assessments on a State by State and firm by firm basis". Click for:
February 2008: EC Single Market Newsletter - 'equivalence'
The European Commission has posted on its website the electronic English language version of its newsletter Single Market News 1Q 2008 (link to EC website). One article in that newsletter may be of particular interest to IAS Plus visitors: Adoption of 'Equivalence Mechanism' Paves the Way for Decisions on Third Country Accounting Standards (PDF 113k).
Updated survey on extended use of IFRSs in European Union
The European Union Accounting Regulation requires that European companies listed in a European securities market must use IFRSs to prepare their consolidated financial statements starting in 2005. The Regulation gave EU member states the option to:
- Require or permit IFRSs for unlisted companies
- Require or permit IFRSs in parent company (unconsolidated) financial statements
- Permit companies whose only listed securities are debt securities to delay IFRS adoption until 2007
- Permit companies that are listed on exchanges outside of the EU and that currently prepare their primary financial statements using a non-EU GAAP (in most cases this would be US GAAP) to delay IFRS adoption until 2007.
The European Commission has updated its earlier survey of EU member states and the three EEA member countries concerning their decisions regarding the four options above. Click to download the results of the updated survey:
March 2008: CESR report on GAAP equivalence to IFRSs
On 31 March 2008, the Committee of European Securities Regulators published its advice to the European Commission on the equivalence of Chinese, Japanese, and US GAAPs to International Financial Reporting Standards. CESR's recommendations are:
- CESR recommends the Commission find US GAAP equivalent to IFRS for use on EU markets.
- CESR recommends the Commission consider Japanese GAAP equivalent, unless there is no adequate evidence of the Accounting Standards Board of Japan (ASBJ) achieving to timetable the objectives set out in the Tokyo Agreement.
- CESR recommends the Commission postpone a final decision on Chinese GAAP until there is more information on the application of the new Chinese accounting standards by Chinese issuers. CESR points out that the first complete reporting period under the new Chinese standards will only be for 2007 accounting periods. Consequently there is as yet no evidence available concerning the concrete implementation of the standards by companies and auditors. CESR believes that evidence of adequate implementation is important in the context of an outcome-based definition of equivalence. However, if the Commission were minded to allow Chinese issuers to use Chinese GAAP when accessing EU markets, CESR would recommend the Commission consider accepting Chinese GAAP according to article 4 of the Commission Regulation on the mechanism, until such time as there is adequate evidence to enable a decision to be made under article 2 thereof.
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April 2008: European responses to financial markets turmoil
In his report on 1 April 2008 to the European Parliament's Committee on Economic and Monetary Affairs, Charlie McCreevy, the European Commissioner for Internal Market and Services, discussed the Latest Developments on Policy Response to Financial Turmoil (PDF 82k). He addressed a range of issues, including supervisory convergence across Europe, changes to the bank Capital Requirements Directive, and some accounting-related issues. Here are excerpts:
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The issues [causing the turmoil] are known: weak internal valuation models, opaque securitisation process, business models that were built upon disproportionate maturity mismatches between assets and liabilities, weak internal controls and poor disclosure standards, to name but a few.
Improving valuation standards, in particular for illiquid assets. This work is done at international level. It has recently intensified. We are happy to hear that the International Accounting Standards Board (IASB) will present a discussion paper including considerations on fair value measurement this month. In May, a task force of the International Organisation of Securities Commissions (IOSCO) will also present its findings. This is good news. We will continue to closely monitor progress. There is a growing debate on whether fair value and mark to market measurements may have aggravated the crisis by bringing pro-cyclicality in financial statements. I want to make it clear that I believe that there are some real accounting issues and anomalies to examine, including the interface with the Capital Requirements Directive, such as the consolidation of special purpose entities or the measurement and information disclosed on risk exposures. Clearly, these and other issues – such as the impact of mark to market valuation when markets generally become illiquid and irrational – must be thoroughly analysed.
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April 2008: IASC Foundation Chairman speech to EU Parliament committee
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On 8 April 2008, Gerrit Zalm, Chairman of the International Accounting Standards Committee Foundation, under which the IASB operates, spoke before the Economic and Monetary Affairs Committee of the European Parliament. Among other things, his presentation outlined the Trustees' plans for a new Monitoring Group that would Monitoring Group to end the practice of self-appointment IASCF Trustees and to create a formal link to public authorities, including the European Commission. He also outlined the Trustees' plans to expand the IASB to 16 members. Click for Mr Zalm's Prepared Statement (PDF 52k). |
April 2008: Third EC report on IASB and IASCF governance developments
In July 2006, the Economic and Financial Affairs Council (ECOFIN*) of the European Union asked the European Commission to monitor the governance of the IASB and IASCF and to report to ECOFIN on a regular basis. The European Commission has released its Third Report on Governance Developments in the IASB and the IASCF (PDF 51k, March 2008). The report covers developments between July 2007 and January 2008. The report comments favourably on progress that has been made in improving the governance structure, funding arrangements, due process, and representation of stakeholders in the structure. Here is an excerpt:
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During the period since the publication of the Commission services's 2nd report, the IASCF and IASB have made important announcements that, if fully and effectively implemented, will enhance the accountability of the IASCF/IASB to their stakeholders and enhance the transparency of their activities.
Most significantly, there is now broad-based agreement to establish a formal public oversight structure for the IASCF. This will also lead to a reform of the appointment process for Trustees, thus abolishing the self-appointment mechanism by granting an external, independent oversight body the power to decide upon the appointment of Trustees.
The Commission services welcome the decisions taken by the IASCF to strengthen the IASB's due process, in particular by carrying out ex ante impact assessments and ex post reviews of new standards and interpretations, as well as by publishing feedback statements. The Commission services are encouraged by the project summary and feedback statement published for the Business Combinations – Phase II project and encourage the Trustees and the Board to pursue their work in this area, in particular by ensuring that impact assessments are carried out earlier in the development of standards and interpretations.
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Here are links to the two earlier governance reports:
* ECOFIN comprises the Economics and Finance Ministers of the EU Member States, as well as Budget Ministers when budgetary issues are discussed. It meets once a month. It develops EU policies for capital markets and economic matters, among other things.
April 2008: European Parliament adopts report on IASB and IASCF
On 24 April 2008, by vote of 373 in favour to 21 against with 13 abstentions, The European Parliament adopted a report calling for improvements to the governance of the IASB and the IASCF "to address concerns that they may lack transparency and accountability since they are not under the control of any democratically elected parliament or government". The report was previously approved by the Parliament's Committee on Economic and Monetary Affairs in February 2008. The Parliamentary resolution adopting the report welcomes steps already taken by the IASB and the IASCF to address these issues but argues that there is more to be done. The report calls for "a debate on integrating the IASB into the system of international governance with the IMF, OECD and World Bank". That process has already begun. The Trustees of the IASCF, at their March 2008 meeting, agreed to propose creation of a Monitoring Group as a way of putting in place 'structured contacts' with public authorities with a legitimate interest in accounting standard setting:
The IASCF Monitoring Group would be responsible for approving all Trustees. Consultation international organisations would be required. It is likely that the proposed Monitoring Group would be composed of:
- four members of the International Organization of Securities Commissions (IOSCO), represented by the Chairman of the Japan Financial Services Agency, the Chairman of the US Securities and Exchange Commission, the chair of the IOSCO Emerging Markets Committee, and the chair of the IOSCO Technical Committee;
- the responsible member of the European Commission [currently the Commissioner for Internal Market and Services];
- the managing director of the International Monetary Fund; and
- the president of the World Bank.
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May 2008: EC report on IFRSs to European Council and Parliament
The European Commission has submitted to the European Council and European Parliament a Report on the Operation of Europe's IAS Regulation (PDF 181k). That regulation, adopted in 2002, (a) required IFRSs in the consolidated financial statements of all companies listed on regulated European securities markets starting in 2005 and (b) gave member states the option to require or permit IFRSs in separate company (legal entity) statements and in the consolidated or separate statements of unlisted companies. The report contains an updated table of member states' uses of these options. The Commission analysed the consistency of application of the endorsed standards/interpretations in the EU for 2005 and reached a number of conclusions, summarised here:
- Overall, application of IFRSs has been a challenge for all stakeholders, but it has been achieved without disrupting markets or reporting cycles.
- There is a general perception among preparers, auditors, investors and enforcers that application of IFRSs has improved the comparability and quality of financial reporting and has led to greater transparency.
- Most stakeholders believe that the understandability of financial statements has generally improved, except for certain areas, where there seems to be room for improvement, notably on financial instruments, business combinations and share-based
payments.
- IFRS accounts are still influenced by national accounting traditions.
- The IFRS recognition and measurement provisions appear to have been applied more consistently and clearly than certain disclosure requirements.
- Options allowed by IFRSs, including those related to employee benefits, borrowing costs, and joint ventures, have been used in diverse ways by companies. Options in IFRSs for early application have also been widely used. However, options to widen application of fair value measurement have not been extensively used and use of the carve-out in IAS 39 is limited to very few banks. Enforcers have expressed concern and wish the number of options available in IFRSs to be reduced in the future.
The report also includes an analysis of the functioning of the endorsement process and related administrative requirements. The report concludes with this observation:
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In order to maintain the current high acceptance of IFRSs in the EU, it is important that stakeholders feel that the work programme of the IASB is addressing the right issues and that future standards/interpretations will provide suitable accounting solutions. Some stakeholders have expressed doubts about some of the accounting projects currently being prepared by the IASB. It is therefore crucial that EU institutions, Member States and stakeholders become involved in the standard-setting process as early as possible, as this enhances the quality of the work and increases the legitimacy and acceptance of future standards/interpretations. The way the IASB undertakes impact assessment in future will also be monitored carefully.
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May 2008: European Commission recommendation on auditor oversight
The European Commission has issued a recommendation on 'external quality assurance for statutory auditors and audit firms auditing public interest entities'. It provides guidance to Member States for establishing an independent and effective system of inspections on the basis of the Directive on Statutory Audit.
The recommendation suggests:
- Strengthening the role of the public oversight authorities in inspecting audit firms
- Strengthening the independence of the inspection system and inspections teams
- Policies and procedures for ensuring that inspectors, experts, and the management of the quality assurance system are objective and independent
- Enhance transparency on the outcome of the inspections
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May 2008: European Commission recommends endorsement of revised IAS 23
The European Commission has published the Effect Study Report: Endorsement of IAS 23 Borrowing Costs (PDF 151k). The Commission did this study under its agreement with the European Parliament that 'effect studies' should be prepared for new accounting standards and interpretations up for endorsement in the European Union. The study is a combination of a survey of opinions expressed to the IASB, EFRAG, and the Commission and a staff analysis of the costs and benefits of applying the capitalisation model that is mandated by the revised IAS 23.
With respect to preparer opinions the report states:
- A majority of respondents prefer the capitalisation method and/or support the endorsement of the standard.
- Even among capital intensive companies that would be affected most by the revised IAS 23, the EC's consultation and other reports reveal that these companies generally prefer to apply the capitalisation method.
Benefits of the capitalisation model include:
- Increased comparability because one of the current options is eliminated
- Including borrowing costs in the cost of the assets is a better conceptual approach than expensing
Costs of adopting IAS 23 Revised:
- For those European companies currently expensing borrowing costs, the revised IAS 23 will impose an added cost and complexity.
- However, this affects a relatively small percentage of companies because most do not have any qualifying assets. 'The capitalisation of borrowing costs is of relevance only for those companies that are asset capital-intensive.' And 'the main part of these costs will be related to the first implementation of the revised standard and therefore not recurring.'
Commission conclusion and recommendation:
- The revised IAS 23 should be endorsed in the European Union as the benefits of its endorsement will outweigh the costs.
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June 2008: Proposal regarding 'third country' GAAPs in the EU starting 2009
The European Commission has proposed to amend the European Directive (law) on prospectuses to require that, starting 1 January 2009, 'third country' (non-European) issuers whose securities trade in a European securities market shall present their historical financial information in accordance with one of the following four sets of accounting standards:
- International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No 1606/2002 (known as 'IFRSs as adopted by the European Union').
- IFRSs as adopted by the IASB, provided that the notes to the audited financial statements that form part of the historical financial information contain an explicit and unreserved statement that those financial statements comply with IFRSs in accordance with IAS 1 Presentation of Financial Statements.
- Generally Accepted Accounting Principles of Japan;
- Generally Accepted Accounting Principles of the United States of America.
GAAPs of China, Canada, and South Korea are also acceptable until 2011. The Regulation would be immediately binding in all Member States. Click for Proposed Amendment (PDF 23k).
June 2008: EC recommendation on limiting auditor liability
The European Commission has issued a recommendation to limit civil liability for auditors and audit firms carrying out a statutory audit of the consolidated annual accounts of a European company whose securities are admitted to trading on a regulated market in a Member State. The stated aim of the recommendation is to encourage new entrants into the audit market, and to protect European capital markets by ensuring that audit firms remain viable in an environment where there is an increasing trend towards litigation and a lack of sufficient insurance cover. This recommendation identifies three methods of limitation and principles to be followed by Member States when adopting the recommendation. The three methods, all of which are actually used by Member States today, are a statutory monetary cap on liability, proportionate liability, and contractual limitation. Any other equivalent method might also be used. The liability limitation would apply in the case of negligent behaviour but not in the case of intentional misconduct by an auditor.
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Deloitte responds to European Commission audit liability recommendations:
Deloitte Touche Tohmatsu commends the European Commission (EC) for its intensive consideration of the complex issue of limiting civil liability for statutory auditors and audit firms. According to the Commission’s statement, the recommendation aims to encourage new entrants into the audit market and to protect European capital markets by ensuring that audit firms remain viable in an environment where there is an increasing trend towards litigation and a lack of sufficient insurance cover in the sector.
This recommendation also proposes principles to be followed by member states when adopting the recommendation, including limitations not applying in the case of intentional misconduct on the part of the auditor and a right to fair compensation by damages parties.
Deloitte believes the European Commission gave very careful consideration to issuing this recommendation, and it will help achieve the Commission’s goals and objectives.
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Click for the following from the European Commission:
June 2008: EC 'effect studies' on IFRIC 14 and IAS 1 recommend endorsement of those pronouncements
The European Commission has published 'effect studies' of the impact of two IASB pronouncements awaiting endorsement for use in Europe:
The Commission's effect studies relied, in turn, on effect studies undertaken by EFRAG. The Commission Services (EC staff) concluded that both pronouncements will have positive cost-benefits effects and that they should, therefore, be endorsed in the EU without delay.
June 2008: EU bank regulators report on valuing instruments in illiquid markets
The Committee of European Banking Supervisors (CEBS) has published a report on issues relating to the valuation of complex and illiquid financial instruments. The report puts forward a set of issues that should be addressed by institutions and accounting and auditing standard setters in order to improve the reliability of the values ascribed to these instruments.
The analysis focuses on the following valuation related aspects:
- challenges for the valuation of complex financial instruments or instruments for which no active markets exist;
- transparency on valuation practices and methodologies as well as related uncertainty; and
- auditing of fair value estimates.
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July 2008: ECOFIN will discuss IASB governance and 'credit crunch'
The Council of European Finance Ministers (ECOFIN) will meet in Brussels on 8 July 2008. Their agenda includes discussion about IASB governance, and also about accounting and disclosures by financial institutions. Click for the Background Paper (PDF 166k). Here is are two excerpts:
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International accounting standards – IASB Governance
The Council should adopt the conclusions on the reform currently taking place in the International Accounting Standards Board (IASB), following the public consultation launched at the end of May (11183/08). It has already considered the governance and financing of the IASB, and adopted conclusions on this subject in July 2006 and July 2007.
There are two reasons why conclusions must again be adopted this year:
- the IASCF, the foundation responsible for appointing the members and the financing of the IASB, launched a process of constitutional review last May with a view to enhancing its own governance and that of the IASB; it proposes inter alia to set up a Monitoring Committee within the IASCF which would be responsible for ensuring that the public interest and prudential concerns are better taken into account when accounting standards are being drawn up;
- recent financial turbulence has demonstrated the need for a reliable mechanism for drawing up international accounting standards.
Against this background, the Council aims to express a firm European position, focused in particular on the principles identified by the draft conclusions.
Financial markets – Implementation of current initiatives
The Council will review developments on current initiatives, in accordance with a 'road map' adopted at its meeting last October in order to deal more effectively with the turmoil on financial markets since August 2007.
The Council should adopt conclusions on two issues in particular:
- progress in the transparency of banks and other financial institutions regarding the valuation
of their risk assets;
- the line to be followed in Europe and at world level regarding rating agencies (11229/08).
The draft conclusions stress that prompt and full disclosure by financial institutions of their
exposure to distressed assets and off-balance sheet vehicles and of their write-downs and losses is
essential to bring back confidence in the markets.
The Committee of European Banking Supervisors recently drew up recommendations to give
guidance to banks in evaluating their assets. According to the draft conclusions, this is a very
important factor in ensuring greater consistency in the practices of financial institutions, which is
essential for restoring confidence in the real situation of the market.
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