January 2009: Most EU financial institutions have not reclassified assets
A study by the Committee of European Securities Regulators (CESR) has found that many banks in the European Union have chosen, up to now, not to use the option that the IASB added to IAS 39 in October 2008 to permit reclassification of some financial instruments out of the fair-value-through-profit-or-loss and available-for-sale categories. CESR reviewed the application of the reclassification amendment by financial institutions within the EU in their third quarter interim financial statements and interim management statements. CESR's analysis covered all 22 financial institutions in the FTSE Eurotop 100 index and 78 other financial institutions. The 100 companies are based in 21 EU member states. CESR found:
- More than half of the financial companies concerned did not reclassify any financial instruments in their 3rd quarter 2008 financial statements.
- For the companies in the FTSE Eurotop 100 index almost two thirds of these companies did not reclassify any financial instruments in any of the categories.
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CESR's report also responds to a request from the European Commission for CESR's views on accounting issues in addition to reclassification:
- Fair value option. CESR believes that 'there is a need to examine the effects of the use of the fair value option in more detail within a short timeframe', including whether reclassification should be permitted for financial assets measured using the fair value option.
- Embedded derivatives. CESR welcomes the IASB's recent ED on amendments to IFRIC 9 and IAS 39 and encourages the IASB and the FASB to work together to assess whether further
clarification is needed relating to embedded derivatives. 'Furthermore, CESR would recommend that the IASB provides guidance on the main types of synthetic structures covered and on which factors are important for issuers in determining whether an embedded derivative exists and if so, whether it should be measured separately. This clarification should also state that embedded financial guarantee-types do not need to be separated out.'
- Impairment of available-for-sale items. CESR recommends the IASB examines the issues surrounding impairment for available for sale financial instruments.
CESR's report also recommends that 'the IASB should develop due process procedures – including public consultation – that, in rare circumstances, would enable it to 'amend its standards in response to emergency circumstances'. Click to Download the CESR Report (PDF 97k).
January 2009: EU formally adopts 'puttable instrument' amendments
The European Union has published the Commission Regulation (EC) No 53/2009 endorsing the amendments, adopted by the IASB on 14 February 2008, To IAS 32 and IAS 1 titled Puttable Financial Instruments and Obligations Arising on Liquidation. Here is the Announcement in the Official Journal (PDF 100k).
January 2009: EU proposes funding for IASCF, PIOB, and EFRAG
The European Commission has issued proposals that would strengthen the financial supervisory structure in Europe and provide an allocation of the EU Budget to provide direct funding of the IASCF, IFAC's Public Interest Oversight Board (PIOB) and the European Financial Reporting Advisory Group (EFRAG) – all private-sector bodies involved in the setting of accounting and auditing standards. Under the new rules, the three committees that supervise, respectively, the securities, banking and insurance sectors – CESR, CEBS, and CEIOPS – will benefit from a 'clearer operational framework and more efficient decision-making processes', as well as enhanced funding.
The proposal for financial support, which totals €36.2 million, now goes to the Council and the European Parliament for joint decision. Under the proposals:
- The IASCF would receive €5 million a year for three years 2011, 2012, 2013
- EFRAG would receive €3 million a year for four years 2010-2013
- The PIOB would receive €300 thousand a year for four years 2010-2013
- CESR, CEBS, and CEIOPS would receive €2 million a year for four years 2010-2013
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The proposal will now enter the co-decision procedure with a view to adoption by the European Parliament and the Council.
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January 2009: EU commissioner supports 'dynamic provisioning'
In a speech at the 7th Annual Financial Services Conference in Brussels on 27 January 2009, Charlie McCreevy, the
European Commissioner for Internal Market and Services, discussed a range of issues relating to prudential supervision of European financial institutions. He suggested that accounting rules should allow banks and other financial institutions to use 'dynamic provisioning', by which loan loss provisions would be measured based on expected losses over the life of the loans rather than on actual losses incurred to date. Both IAS 37 and IAS 39 follow an incurred loss model. Click to Download Commissioner McCreevy's Speech (PDF 88k). An excerpt:
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Linked in to bank capital requirements also is the issue of accounting policies: If these are not soundly based there will clearly be consequences for the soundness of the assumed level of bank capital itself. That's why Member States voted unanimously on 15 October on changes proposed by the Commission to accounting regulation – including more guidance on fair value and more flexibility to reclassify financial instruments from the trading book to the banking book. Aside from this issue I am concerned about other pro-cyclical elements that impact on the bank capital requirement regime, and in particular the issue of dynamic provisioning which enabled banks under the old accounting rules to build bigger buffers in good times in anticipation of portfolio impairment which invariably rises materially in less benign economic circumstances. The notion that the creation of these buffers is a denial of shareholder rights is, in my view, utter nonsense.
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February 2009: McCreevy seeks loss provisioning reforms
In a speech on 9 February 2009 titled 'The Credit Crisis – Looking Ahead', Charlie McCreevy, the European Commissioner for Internal Market and Services, offered views on the causes of the current problems in the global financial markets. He cited two accounting issues – mark-to-market measurements and prohibition of 'dynamic provisioning' (recognition of expected, rather than incurred, loan losses) – as factors that contributed to the problems of financial institutions in Europe. Click to Download Commissioner McCreevy's Speech (PDF 77k). Here is an excerpt on accounting:
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I turn now to accounting standards and capital requirements. These have also exacerbated the markets' recent problems because of rules that are 'pro-cyclical'. When market liquidity becomes tight as of now – sales decisions and valuations based on the so-called 'mark-to-market value' reinforce the downward spiral: They result in further forced sell-offs, which in turn reinforce and amplify the falls in mark-to-market prices. That is why I recently brought forward a measure to provide firms with more flexibility on the mark to market requirements and to facilitate asset transfer from the trading to the banking book.
Dynamic provisioning served many banks well in the past. In this turmoil it has served the Spanish banks well and I would like to see a return to it more broadly. A system that introduces significant counter-cyclicality, requiring banks to build up more substantial buffers in good times so that they can let them run down in bad times, makes sense not only from a micro viewpoint – reducing the risk of bank failure – but from a macro viewpoint too: It serves to restrain excessive expansion during booms. And it reduces the likelihood of a much diminished capital base in recessionary times which makes it more difficult for banks to lend, thereby preventing the kick-starting of sustainable recovery.
Ideally, we should get international agreement on such a revised regime and I will be pushing for it.
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February 2009: Mutual recognition of audit oversight
Charlie McCreevy, the EU Commissioner for the Internal Market and Services, has issued a Statement (PDF 17k) expressing concern that the United States has not yet agreed to a system of mutual recognition of national oversight of the auditing profession. An excerpt:
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The EU's aim has always been to move towards full reliance on the audit inspections of the public oversight bodies in these third countries. In practice, this would mean that audit firms from these countries would no longer have to be inspected by European public oversight bodies, as we in the EU could rely on the audit inspections that were carried out by their counterparts in these countries. In return, of course, EU oversight bodies would expect the same treatment for EU audit firms. Putting in place this model of cooperation would go a long way towards restoring the confidence of investors. But of course, it has to be based upon mutual trust.
Whilst some of our trading partners, notably Canada and Japan, seem to be open towards such an agenda, the same is not true for the United States. As things stand at the moment, the EU will commit itself to facilitate United States' inspections but we currently have no guarantee that the United States will do the same for us. This is not good for the confidence of our investors here in the EU. Nor does it send the right signal for the EU's own oversight bodies which we here in the EU have worked hard to put in place.
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February 2009: EC guidance on impaired assets of European banks
On 25 February 2009, the European Commission published a Communication with guidance on the treatment of impaired assets in the EU banking sector. While the guidance covers measurement and disclosure of impairment, it also encompasses management of impaired assets, including state aid and relief schemes, The guidance is based on a number of principles:
- Full transparency and disclosure of impairments, which has to be done prior to government intervention.
- Coordinated approach to the identification of assets eligible for asset relief measures through development of eligible categories of assets.
- Coordinated approach to valuation of assets ex-ante, based on common principles such as valuation based on real economic value (rather than market value), implemented by independent experts and certified by bank supervisors. This valuation is for the purpose of providing government aid to banks (for instance, troubled asset purchase or insurance programmes). The Communication does not appear to address financial reporting issues.
- Validation by the Commission of the valuation of the assets, in the framework of the State aid procedures on the basis of uniform assessment criteria.
- Adequate burden-sharing of the costs related to impaired asset between the shareholders, the creditors and the State.
- Adequate remuneration for the State, at least equivalent to the remuneration of State capital
- Coverage of the losses incurred from the valuation of the assets at real-economic-value by the bank benefiting from the scheme.
- Aligning incentives for banks to participate in asset relief with public policy objectives, through an enrolment window limited to six months during which the banks would be able to come forward with impaired assets.
- Management of assets subject to relief so as to avoid conflicts of interests.
- Appropriate restructuring including measures to remedy competition distortion, following a case by case assessment and taking into account the total aid received through recapitalisation, guarantees or asset relief, with a view to the long-term viability and normal functioning of the European banking industry.
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February 2009: EC plans to strengthen supervisors and standard-setters
On 25 February 2009, the European Commission adopted measures to strengthen the supervisory framework for EU financial markets and to provide funding for bodies involved in financial reporting standards at the EU and international levels, including the IASB.
Strengthening CESR, CEBS, CEIOPS
Under the new rules, the three committees that supervise the securities, banking, and insurance sectors will benefit from a clearer operational framework and more efficient decision-making processes. The committees are:
The Commission's action contains a non-exhaustive list of tasks that the Committees are expected to perform and introduces qualified majority voting when consensus cannot be reached. Measures adopted by the Committees remain non-binding. However, member states that do not follow measures adopted by the Committees must be prepared to present the reasons for this choice.
Funding IASB/IASCF, EFRAG, PIOB, and CESR, CEBS, CEIOPS
The Commission is proposing that the three committees, as well as the following three bodies involved in the standard-setting process for financial reporting and auditing at both EU and international level, should be provided with financial support from the EU budget:
Total funding of the six groups would amount to €36.2 million over the period 1 January 2010 until 31 December 2013, as follows:
| Recipient | 2010 | 2011 | 2012 | 2013 | Total |
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| IASCF | €0 | €5,000 | €5,000 | €5,000 | €15,000 |
| EFRAG | €3,000 | €3,000 | €3,000 | €3,000 | €12,000 |
| PIOB | €300 | €300 | €300 | €300 | €1,200 |
| CESR, CEBS, CEIOPS Combined | €2,000 | €2,000 | €2,000 | €2,000 | €8,000 |
The funding proposal now passes to the Council and the European Parliament for consideration. Click for:
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February 2009: EC proposes to reduce accounting burden for micro entities
On 26 February 20909, the European Commission sent to the European Parliament and the Council of Ministers a proposal to exempt 'micro entities' from the accounting and financial reporting requirements of the 4th Company Law Directive, commonly known as the Accounting Directive. Micro entities are the smallest companies. For this proposal they have to meet two of the three following criteria:
- A balance sheet total of not more than €500.000;
- A net turnover of not more than €1.000.000;
- Not more than ten as average number of employees during the financial year.
Currently, the Accounting Directives require around five million limited liability companies in Europe to prepare financial statements and, in many cases, have them audited. The Commission's proposal acknowledges that the Accounting Directives 'have led to improved financial reporting environment in the EU'. At the same time, though, the Commission has concluded that the Directives impose a burden on micro entities that can be reduced. Under the Commission's proposal, EU Member States would decide whether to retain the requirements of the Accounting Directives for micro entities or to exempt micro entities from them. Of course, apart from the Directives, EU Member States generally have their own national financial reporting requirements. The proposal would not affect those. Member States could keep their existing requirements or design simplified rules for micros. Click for:
March 2009: EC consults on revisions to 4th and 7th Directives
The European Commission has invited comments on simplification of the 4th and 7th Company Law Directives for small and medium-sized entities (SMEs), Concurrently the Commission has proposed giving Member States an option to exempt micro-sized SMEs from the 4th Directive altogether (see News Item Above). The current consultation aims at raising issues relating to the modernisation and simplification of the Accounting Directives. The kinds of issues on which comments are requested include:
- Structure of the Directives
- General principles of accounting recognition and measurement
- Size criteria for micros, small, medium, and large entities
- Which financial statements should be required for each category
- Electronic filing
- Financial statement formats
- Footnotes
- Valuation (measurement) issues
- Consolidation requirements
Comments are requested by 30 April 2009. The Commission expects to complete its analysis of the comments and to present proposed revisions to the Directives to the European Parliament by the end of 2009. Click to download the EC Consultation Document (MS Word DOC 561k).
March 2009: EU supervision report criticises IASB
The 'High-level Group on Financial Supervision in the EU' has published its Report that makes 18 detailed recommendations to strengthen supervision of the EU's financial institutions and markets. The report addresses:
- how to organise the supervision of financial institutions and markets in the EU
- how to strengthen European cooperation on financial stability oversight, early warning, and crisis mechanisms; and
- how EU supervisors should cooperate globally.
Throughout the Report, accounting is cited as one of the causes of the current global financial crisis. The Report urges that the IASB or supervisors set limits on mark-to-market accounting:
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To ensure convergence of accounting practices and a level playing-field at the global level, it should be the role of the International Accounting Standard Board (IASB) to foster the emergence of a consensus as to where and how the mark-to-market principle should apply – and where it should not. The IASB must, to this end, open itself up more to the views of the regulatory, supervisory and business communities. This should be coupled with developing a far more responsive, open, accountable and balanced governance structure. If such a consensus does not emerge, it should be the role of the international community to set limits to the application of the mark-to-market principle.
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The following is Recommendation #4 of the Report:
Recommendation 4: With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed and in particular recommends that:
- expeditious solutions should be found to the remaining accounting issues concerning complex products;
- accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment;
- the IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to-market cannot be applied;
- the IASB further opens its standard-setting process to the regulatory, supervisory and business communities;
- the oversight and governance structure of the IASB be strengthened.
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March 2009: CEBS invites comments on financial reporting
The Committee of European Banking Supervisors (CEBS) has invited comments on proposed amendments to the Guidelines on Financial Reporting (FINREP). Comments are due 10 June 2009. CEBS will hold a public hearing on 27 May 2009 at its offices in London. The original FINREP was issued in December 2005 with the goals of increasing the comparability of financial information reported to different supervisors within the EU, increasing the cost-effectiveness of supervision across the EU, reducing reporting burden on cross-border credit institutions, and removing a potential obstacle to financial market integration. CEBS is proposing to amend FINREP to 'streamline financial reporting and achieve a greater degree of harmonisation'. Click for CEBS Press Release (PDF 20k). Information about the current version of FINREP may be found in our July 2007 Europe News.
March 2009: European consultation agenda includes mark-to-market
The European Commission has begun a consultation on the improvement of supervision for the European financial services sector. As a first step, the Commission is inviting comments (due by 10 April 2009) on the Report of the High-level Group on Financial Supervision in the EU chaired by Jacques de Larosiere. The Commission has already endorsed the key principles in the report and intends to put forward, in June, a detailed plan for revising the European supervisory architecture. In the autumn, the Commission intends to bring forward legislative proposals on the new supervisory framework. Click for:
The report makes the following recommendation with respect to accounting:
Recommendation 4: With respect to accounting rules the Group considers that a wider reflection on the mark-to-market principle is needed and in particular recommends that:
- expeditious solutions should be found to the remaining accounting issues concerning complex products;
- accounting standards should not bias business models, promote pro-cyclical behaviour or discourage long-term investment;
- the IASB and other accounting standard setters should clarify and agree on a common, transparent methodology for the valuation of assets in illiquid markets where mark-to market cannot be applied;
- the IASB further opens its standard-setting process to the regulatory, supervisory and business communities;
- the oversight and governance structure of the IASB be strengthened.
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In support of the recommendation, the report states:
The mark-to-market principle
73) The crisis has brought into relief the difficulty to apply the mark-to-market principle in certain market conditions as well as the strong pro-cyclical impact that this principle can have. The Group considers that a wide reflection is needed on the mark-to-market principle. Whilst in general this principle makes sense, there may be specific conditions where this principle should not apply because it can mislead investors and distort managers' policies.
74) It is particularly important that banks can retain the possibility to keep assets, accounted for amortised cost at historical or original fair value (corrected, of course, for future impairments), over a long period in the banking book - which does not mean that banks should have the discretion to switch assets at will from the banking to the trading book.
The swift October 2008 decision by the EU to modify IAS-39, thereby introducing more flexibility as well as convergence with US GAAP, is to be commended. It is irrelevant to mark-to-market, on a daily basis, assets that are intended to be held and managed on a long-term horizon provided that they are reasonably matched by financing.
75) Differences between business models must also be taken into account. For example, intermediation of credit and liquidity requires disclosure and transparency but not necessarily mark-to-market rules which, while being appropriate for investment banks and trading activities, are not consistent with the traditional loan activity and the policy of holding long term investments. Long-term economic value should be central to any valuation method: it may be based, for instance, on an assessment of the future cash flows deriving from the security as long as there is an explicit minimum holding period and as long as the cash flows can be considered as sustainable over a long period.
76) Another matter to be addressed relates to situations where assets can no longer be marked to market because there is no active market for the assets concerned. Financial institutions in such circumstances have no other solution than to use internal modelling processes. The quality and adequacy of these processes should of course be assessed by auditors. The
methodologies used should be transparent. Furthermore internal modelling processes should also be overseen by the level 3 committees, in order to ensure consistency and avoid competitive distortions.
77) To ensure convergence of accounting practices and a level playing-field at the global level, it should be the role of the International Accounting Standard Board (IASB) to foster the emergence of a consensus as to where and how the mark-to-market principle should apply – and where it should not. The IASB must, to this end, open itself up more to the views of the regulatory, supervisory and business communities. This should be coupled with developing a far more responsive, open, accountable and balanced governance structure. If such a consensus does not emerge, it should be the role of the international community to set limits to the application of the mark-to-market principle.
78) The valuation of impaired assets is now at the centre of the political debate. It is of crucial importance that valuation of these assets is carried-out on the basis of common methodologies at international level. The Group encourages all parties to arrive at a solution which will minimise competition distortions and costs for taxpayers. If there are widely variant solutions – market uncertainty will not be improved.
79) Regarding the issue of pro-cyclicality, as a matter of principle, the accounting system should be neutral and not be allowed to change business models – which it has been doing in the past by 'incentivising' banks to act short term. The public good of financial stability must be embedded in accounting standard setting. This would be facilitated if the
regulatory community would have a permanent seat in the IASB (see chapter on global repair).
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March 2009: CEBS report on valuations of financial instruments
The Committee of European Banking Supervisors (CEBS) has published a report titled Assessment of Measures Taken with Respect to the Issues raised in the CEBS June 2008 Valuation Report (PDF 257k) evaluating the measures taken by the IASB and by banks 'to improve the valuation of complex and illiquid financial instruments with the aim to enhance the quality and the comparability of banks' financial statements'. With respect to measures taken by the IASB, the report concludes that:
- as a priority, the IASB should aim to address wider valuation-related issues such as impairment measurement of available-for-sale assets, treatment of Day 1 profits and losses and the determination of the effect of own credit risk and related disclosures;
- it should further clarify particular aspects of fair value measurement guidance; and
- clarifications should also be provided regarding all aspects of the reclassification of instruments containing embedded derivatives.
CEBS intends to review European banks' 2008 preliminary year-end financial reports and publish a report, by the end of March 2009, on the transparency of its accounting and adequacy of disclosures.
March 2009: European Council comments on IFRSs and IASB
The European Council (the heads of state or government of the European Union member states) met in Brussels on 19-20 March 2009. The Report of the Meeting (PDF 216k) includes the following comments on IFRSs and the IASB:
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The magnitude and the underlying causes of the ongoing global financial and economic crisis demonstrate the need to reshape macroeconomic global management and the regulatory
framework for financial markets. Prudential rules, crisis management arrangements and the supervisory framework must be strengthened at the national, European and global levels.
Financial regulations should dampen rather than amplify economic cycles. The European Council urges the FSF, Basel Committee on Banking Supervision and Commission to accelerate their work and to swiftly submit appropriate recommendations. This should be complemented with a strong EU initiative in reviewing international accounting standards....
Improve prudential rules and accounting standards to mitigate their pro-cyclical effects and enhance the accountability of the International Accounting Standard Board, by further
reforming its governance and mandate.
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March 2009: CEBS finds no improvement in bank transparency
A study by the Committee of European Banking Supervisors (CEBS) about banks' transparency about exposures affected by the financial crisis concludes that the 'disclosures made by 19 banks in their last quarter (4Q) and preliminary year-end (YE) reports do not show significant improvements compared to the information provided in the 2008 interim results'. There is still 'room for improvement' in qualitative disclosures about business models and risk management. And the study found that quantitative disclosures by some banks were 'somewhat less detailed than previously'. Click to Download the Report (PDF 125k).
March 2009: CESR publishes 5th batch of summaries of IFRS enforcement decisions
The Committee of European Securities Regulators (CESR) has published its fifth batch of extracts from its confidential database of enforcement decisions taken by EU national enforcers of financial information. From time to time, CESR publishes extracts of selected decisions as a source of information to foster appropriate and consistent application of IFRSs in the EU. Topics covered in batch #5 of CESR's extracts:
- Reclassification [the October 2008 reclassification amendment to IAS 39]
- Share based payment – fair value of employee share purchase plans
- Consolidation and control [also discontinued operations]
- Control by agreement
- Business combinations – reverse acquisitions
- Equity instruments [minority put options re financial liability]
- Equity instruments, preference shares [fair presentation override rejected]
Click to download this and earlier decision summaries:
March 2009: IFRIC 12 on service concessions endorsed for use in the EU
The European Commission has endorsed IFRIC 12 Service Concession Arrangements for use in the European Union. In doing so, however, the mandatory effective date was changed from annual periods beginning on or after 1 January 2008 in IFRIC 12 to an entity's first financial year starting after 29 March 2009 in the EU-endorsed version, but with earlier adoption permitted. The endorsed version was published in the Official Journal of 26 March 2009 (PDF 73k).
April 2009: FEE views fair value measurement
FEE, the Federation of European Accountants, has submitted its response to the Financial Crisis Advisory Group's 11 March 2009 Invitation to Comment. With regard to fair value measurement of financial instruments, FEE states:
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FEE believes strongly that financial reporting based on IFRS, and notably fair value accounting for financial instruments, has revealed the economic reality of market participants' positions at an earlier stage than otherwise would have been the case under a more cost basis driven model. In our view, the requirement to account for certain financial instruments at fair value has not caused the financial crisis nor has it been a significant contributing factor. Nevertheless, practice has shown that fair value accounting is more difficult to apply in illiquid markets and preparers and auditors have had to use significant judgments to arrive at consistent valuations in difficult market circumstances. Preparers would benefit from additional guidance on fair value measurements when observable market prices are not available.
Financial reporting under IFRS did show that financial institutions were highly geared. The introduction of IFRS 7 further improved risk disclosures on financial instruments. As 2007 was the first year that IFRS 7 was required to be applied and this gave greater scope to risk disclosure, it is expected that risk disclosures will further improve as more experience with the standard is being gained. The Financial Stability Forum disclosure requirements have also enhanced the risk disclosures.
The financial crisis has accelerated the discussion on the need to introduce anti-cyclical measures to the global system of financial regulation and to a certain extent also to financial reporting. Financial reporting has been blamed by some commentators for its pro-cyclical influence, thus aggravating the situation in markets that have become distressed or illiquid. We are of the opinion that the effects of the current market volatility are captured, but not caused by fair value accounting. Fair value provides a timely and relatively objective measure of existing value. Failure to report such values would leave investors and policy decision makers less aware or even unaware of credit and liquidity challenges. The accounting policies need to indicate carefully on which basis the fair values concerned have been determined.
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Click to download the FEE Response to FCAG (PDF 84k)
April 2009: EU ministers urge IASB to adopt recent FASB fair value decisions
Following their informal meeting in Prague on 3 and 4 April 2009, the EU Finance Ministers and Central Bank Governors (ECOFIN) issued a statement urging the IASB to adopt the conclusions on fair value measurement in illiquid markets and on impairment of financial assets that were approved by the US Financial Accounting Standards Board last week. Our News Story of 3 April 2009 explains the FASB decisions. Click to Download the ECOFIN Statement (PDF 20k). Here is an excerpt.
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The US standard setting authority is in the process of adopting new accounting guidance, with the aim of accurate valuation of assets in illiquid markets which are not functioning properly, which could provide their financial institutions with much more flexibility to move away from using distressed prices in these circumstances. They also propose amendments to current US GAAP impairment rules. These changes could result in a significant divergence of international accounting practice for financial instruments.
Ministers therefore call on the IASB to cooperate closely with the FASB in order to immediately address these issues, with the aim of achieving equivalent treatment and application of parallel standards in the IFRS and US GAAP systems, in order to avoid risks of competitive distortions emerging.
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May 2009: Study of IFRS implementation in Europe in 2006
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The European Commission has published Evaluation of the Application of IFRS in the 2006 Financial Statements of EU Companies. This is a study, conducted by a consulting firm, of the 2006 IFRS consolidated financial statements of 270 groups whose shares trade on a regulated exchange in Europe. This study is similar to a Study of 2005 IFRS Financial Statements conducted for the European Commission by the Institute of Chartered Accountants in England and Wales in March 2007. The new study (dated December 2008 but released in May 2009 by the European Commission) is published in two parts:
Below is an excerpt from the executive summary.
There is significant support for this overall IFRS initiative and its accompaniment from the sample of stakeholders that we have canvassed, for example:
- 'Our national GAAP were well engineered, but nobody could understand them beyond our country'.
- 'Our clients now make more easily cross border investments since they understand the figures'.
- 'Cooperation and exchange of information through CESR is boosting the enhancement of enforcement of regulations'.
As our analysis of the 270 financial statements has shown, the quality of disclosure by preparers improved in 2006, although further efforts are needed to attain full compliance.
Additional efforts are also needed to further enhance the level of enforcement. As stated in paragraph 3.1 the level of enforcement varies widely between the 25 member states and the CESR identified in 2006 only 10 countries fully compliant with enforcement standards.
There are a number of issues to address with certain of the standards to simplify, adapt and/or make clearer the financial information reported as set out on paragraph 3.3.
Difficulties we encountered during our analysis of financial statements, and comments made by enforcers and other stakeholders, indicates that the issue of how far to go in standardising presentation formats for ease of reading and comparability needs to be addressed. This topic could potentially be examined in liaison with developments on potential computerisation and coding of financial statement disclosures.
During interviews with national stakeholders, it became clear that the implementation of IFRS in the European Union has changed and somewhat diminished their roles. These changes in roles and focus of national stakeholders need to be examined more fully in order to ensure that there is optimisation of all efforts of each of the national stakeholders in promoting, assisting in implementation and ensuring compliance with the IFRS as endorsed by the European Union.
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May 2009: Deloitte response to EC Directives consultation
The Deloitte member firms in the European Economic Area have jointly submitted a Response to the European Commission Proposals (PDF 7,765k) to update the 4th and 7th Directives – known as the Accounting Directives. The EC Directorate on Internal Markets and Services launched a Consultation on the Proposals in March 2009. The consultation invites comments on a range of issues including:
- Structure of the Directives
- General principles of accounting recognition and measurement
- Size criteria for micros, small, medium, and large entities
- Which financial statements should be required for each category
- Electronic filing
- Financial statement formats
- Footnotes
- Valuation (measurement) issues
- Consolidation requirements
The Commission expects to complete its analysis of the comments and to present proposed revisions to the Directives to the European Parliament by the end of 2009. Here are two excerpts from the Deloitte letter:
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Comment with regard to accounting options and national 'add-ons' to the Directives
In our view, the Directives should, in principle, not provide Member State options concerning pure accounting (ie, the recognition and measurement of assets and liabilities). The harmonisation of accounting within the European Union benefits users (increased comparability of accounts within the EU) and preparers (reduced costs for groups of companies and economies of scale generally), and generally facilitates cross-border trade and services, including accounting and audit. However, we recognise that Member States use accounting information in different ways and so the need to provide certain options may continue as regards additional information that may be required under tax or corporate governance law or practices or requirements that can be deemed to depend upon the specific business environment of a Member State. The onus will be on Member States to justify the additional costs to business of making use of these options, or providing additional requirements to those set out in the Accounting Directives, upon the basis of the specific Member State context.
Comment with regard to the IFRS for Small and Medium-sized Entities
In the short and possibly medium term, the (revised) Accounting Directives will continue to form the European legal accounting framework for non listed companies. However, we do not believe this should remain the case in the long term as by their nature Directives are not flexible enough to rapidly reflect changing economic needs and do not necessarily reflect views from beyond Europe. We support convergence toward a single set of high-quality global accounting standards, adapted as required for entities that are not publicly accountable and SMEs, prepared through a robust and independent standard-setting process, and that maintaining a parallel European framework for the long term would not be a good use of resources or benefit European preparers and users.
We ask that the Commission work towards providing a mechanism for Member States to opt to use directly the forthcoming standard from the IASB on accounting for non-publicly accountable entities. This mechanism should be based on the test that the accounting requirements of the Directives are met through use of that simplified IFRS.
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May 2009: Commissioner McCreevy's comments on IFRSs and IASB
Charlie McCreevy, the European Commissioner for Internal Market and Services, addressed a range of issues relating to IFRSs and the IASB in his keynote address at the European Commission's conference on Financial Reporting in a Changing World in Brussels yesterday. He cited the benefits of IFRSs for Europe and urged countries that have not yet adopted IFRSs, including the United States, to make the move. He cited recent progress in improving the IASCF's governance structure but said more action is needed regarding the geographic composition of IASB, due process, and balancing the Board with members with more practical experience. He urged the IASB to accelerate its work on issues identified as a result of the global financial crisis, including fair value measurement, aligning the IASB's impairment rules with those in the United States, and loan loss provisioning. Click to Download Commissioner McCreevy's Remarks (PDF 73k).
June 2009: IASB Chairman's statement to ECOFIN
IASB Chairman Sir David Tweedie met on 9 June 2009 with the Economic and Financial Affairs Council (ECOFIN) of the European Union to discuss how the IASB is responding to issues arising from the financial crisis. He noted that the IASB has focussed its response on three areas identified by the Financial Stability Forum and four issues raised by the European Commission. The Financial Stability Forum's areas are:
- the application of fair value in illiquid markets.
- accounting for off-balance sheet items.
- disclosures related to risk.
The four issues raised by the European Commission in the fourth quarter of last year were:
- the need for guidance about fair value measurement in illiquid markets – guidance has been issued.
- the desire for clarification regarding whether credit derivative obligations (CDOs) include embedded derivatives to ensure consistency between IFRSs and US GAAP – FASB is working on a clarification that will be in place for 2009 financial reports.
- the existing impairment rules related to available-for-sale instruments – IASB will issue an exposure draft in July 2009, two-month comment period, final revisions to IAS 39 in place and available for 2009 financial reports.
- the possibility of reclassification out of the fair value option into other categories – IASB will issue an exposure draft in July 2009, two-month comment period, final revisions to IAS 39 in place and available for 2009 financial reports.
The Chairman also noted that the Board is working on other issues relating to the financial crisis, including hedge accounting and provisioning.
Click to download
June 2009: Two CEBS reports on European bank disclosures
The Committee of European Banking Supervisors (CEBS) has published two reports assessing banks' disclosures (a) in their 2008 audited annual reports on activities and exposures affected by the financial crisis and (b) under Basel Committee Pillar 3 (market discipline).
- Assessment of 2008 annual report disclosures. The analysis covers 23 large banks with cross-border activities. CEBS found 'a significant increase of disclosures compared to the previous analyses.... At the same time CEBS identifies a number of areas within the CEBS good practices – mostly in the context of accounting-related disclosures – where disclosures could be further improved, including disclosures on fair value measurement and related methodologies'. CEBS intends to develop a set of high-level disclosure principles to help banks prepare disclosures covering areas or activities that warrant particular attention or that are under stress.
- Assessment of 2008 Pillar 3 disclosures. CEBS analysed the Pillar 3 disclosures provided by 25 banks relating to a bank's risk profile and capital adequacy. CEBS found that 'banks have notably enhanced the level of quantitative and qualitative information regarding credit risk and securitisation activities; however there are specific areas where further improvements could be made':
- the composition and characteristics of own funds
- the back testing information for credit risk and market risk
- the quantitative information on credit risk mitigations and counterparty credit risk
- the granularity of information on securitisations
Click to download:
June 2009: Commissioner McCreevy comments on accounting and financial crisis
Charlie McCreevy, the EU Commissioner for Internal Market and Services, spoke on issues relating to the economic and financial crisis before the Institute of Chartered Accountants in Ireland in Dublin on 26 June 2009. Click to Download Mr McCreevy's Remarks (PDF 56k). His comments on accounting included the following:
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As you all know, the role of accounting rules has become the subject of heated debate. But we remain convinced that the international standard-setting system is the best way forward. And this is not solely an EU view. It is also the view of the G-20. Accounting rules did not cause the crisis but it is fair to ask did they amplify it? We need to look at what has happened and see if the rules need to be adjusted so as to strengthen financial stability. I am pleased that at last the IASB plans to complete its fundamental revision of IAS 39 by the end of this year. This is an ambitious agenda for such a complex standard. I know there are many financial institutions in the EU who will want to have the revision of the impairment rules in place for the year end accounts. ECOFIN ministers have conveyed their intentions in this regard.
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June 2009: EC consults on International Standards on Auditing
On 22 June 2009, the European Commission (EC) launched a public consultation to determine whether International Standards on Auditing (ISAs) issued by the International Auditing and Assurance Standards Board (IAASB) should be adopted in the European Union for the statutory audits of EU private entities. In the EU, the conduct of statutory audits is governed by Directive 2006/43/EC (the 'Audit Directive'). The objective of the Audit Directive is to enhance the quality of statutory audits in the European Union. The Directive empowers the Commission to adopt implementing rules at European level by regulation. Introduction of a common set of auditing standards could, therefore, be done by regulation. As part of its consideration of adopting ISAs in the EU, the EC commissioned the University of Duisburg-Essen to conduct an independent study of the costs and benefits that would result from an adoption of ISAs in the EU. The study, Evaluation of the Possible Adoption of ISAs in the EU, analyses the impact such an adoption may have on audit firms, their clients, investors and audit regulators. The study concludes that, on balance, adoption of the ISAs in the EU would result in quantitative and qualitative benefits for companies, investors and regulators and that the benefits would outweigh increases in audit costs. Click to download:
The Commission invites responses to the consultation by 15 September 2009.
July 2009: Proposed changes to European banking regulations
Some aspects of the European Commission's revisions to the Directive on capital requirements for financial institutions may have financial reporting implications. Among other things the proposal calls for enhanced public disclosures about the level of risks to which banks are exposed in securitisations in both their trading and non-trading portfolios. It would also make clear that the provisions on prudent valuation in the existing Directives should apply to all instruments measured at fair value, whether in the trading book or non-trading book of institutions. The proposal acknowledges that there may be differences in fair value measurements for accounting and regulatory purposes: "Where the application of prudent valuation would lead to a lower carrying value than actually recognised in the accounting, the absolute value of the difference should be deducted from own funds." EU member states would be expected to adopt the new requirements by the end of 2010. Click to download:
July 2009: CESR report on reclassification of financial instruments
The Committee of European Securities Regulators (CESR) has completed a study of the application of the amendments to IAS 39 and IFRS 7 regarding Reclassification of Financial Instruments in 100 large EU financial companies' annual financial statements for 2008. The objectives of the study were (a) to consider how financial companies in Europe applied the reclassification amendments and (b) to analyse whether companies have complied with the related disclosure requirements in IFRS 7. The 100 companies consisted of the 22 financial companies included in the FTSE Eurotop 100 index and 78 other financial companies across Europe. CESR found:
- 61% of all the companies analysed used the option to reclassify in the annual financial statements for 2008.
- 68% of the FTSE Eurotop companies used the option to reclassify in the annual financial statements for 2008 compared to only 36% in the interim financial statements for the 3rd quarter of 2008.
- The impact of the reclassifications was positive on the profit and loss account and on other comprehensive income. If no reclassifications had been made, the total amount reported in the profit and loss account and in other comprehensive income would have been 28 billion Euros lower than the figures actually reported.
- Inadequate compliance with the disclosure requirements in IFRS 7 when a reclassification took place:
- 40% of all companies analysed (and around one third of the FTSE Eurotop companies) did not disclose the fair value gain or loss on the reclassified financial asset (whether recognised in profit or loss or in other comprehensive income) prior to the reclassification (IFRS 7.12A (d)).
- Around half of all companies analysed (and around one quarter of the FTSE Eurotop companies) did not disclose the effective interest rate and the estimated amounts of cash flows that they expected to recover (IFRS 7.12A (f)).
CESR's report expresses concern about the lack of disclosures.
CESR plans to review other aspects of the application of IFRS 7 in 2008 in light of the financial crisis and expects to publish the results of that analysis later in 2009. Click to download CESR Statement on Application of and Disclosures Related to the Reclassification of Financial Instruments (PDF 191k).
July 2009: CESR's review of IFRS enforcement in Europe
The Committee of European Securities Regulators (CESR) has published reports of a self-assessment and a peer review of the enforcement of IFRSs and other financial disclosure requirements (such as in prospectuses) by 29 'national enforcers' across Europe. Enforcement in Europe is governed by two related standards: CESR Standard No 1 Enforcement of Standards on Financial Information in Europe (March 2003, PDF 151k) and CESR Standard No. 2 Coordination of Enforcement Activities (PDF 92k, April 2004). Many of the principles in Standard 1 relate directly to IFRSs, including, for example, principle 20:
Principle 20
In order to promote harmonization of enforcement practices and to ensure a consistent approach of the enforcers to the application of the IFRSs, coordination on ex-ante and ex-post decisions taken by the authorities and/or delegated entities will take place. Material controversial accounting issues will be conveyed to the bodies responsible for standard setting or interpretation. No general application guidance on IFRSs will be issued by the enforcers.
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CESR's 2009 review was conducted in two stages:
- First, CESR members self-assessed their application of each of the four principles of CESR's Standard No. 2 by answering questions that have been established for each principle against a set of benchmarks.
- Second, CESR's peer pressure group, the Review Panel, conducted a peer review of how National Enforcers applied the Standard.
Among the findings:
- The self-assessment showed that less than half (45%) of CESR's members fully apply the Standard in their day-to-day enforcement.
- The peer review by the Review Panel revealed that slightly less than one-third of CESR members were fully applying the Standard, and that significantly more than half of the CESR members did not apply the principles overall
Click to download:
July 2009: FEE urges new approach to setting global standards
FEE (Federation des Experts Comptables Europeens – Federation of European Accountants) has issued a policy statement on financial reporting confirming its views that a single set of global accounting standards is needed, but concluding that convergence should no longer be a key driver in the financial reporting debate. FEE believes that:
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We are now in a period of diminished returns from further convergence due to the rapid increase in complexity, without hardly any additional benefit to investors that arises when seeking to eliminate increasingly smaller differences between IFRSs and other standards. The IASB should now change its strategy and concentrate exclusively on major improvements and simplifications in IFRS over the medium term. To this end, it should work together with standard setting bodies from around the world, so that all stakeholders can be fully engaged and ensure that the quality of IFRS is not compromised.
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August 2009: CESR publishes summaries of IFRS enforcement decisions
The Committee of European Securities Regulators (CESR) has published its sixth batch of extracts from its confidential database of enforcement decisions taken by EU national enforcers of financial information. From time to time, CESR publishes extracts of selected decisions as a source of information to foster appropriate and consistent application of IFRSs in the EU. Topics covered in batch #6 of CESR's extracts:
- Impairment of Available-for-Sale Equity Instruments
- Accounting Policies for Impairment of Available-for-Sale Financial Assets
- Impairment of Available-for-Sale Financial Assets
- Cash Flow Statements
- Classification and Valuation of Written Puts on Minority Interests
- Disclosure of Key Management Personnel Compensation and Related Party Transactions with Key Management
- Contingent Liabilities
- Disclosures Regarding Share Capital
Click to download this and earlier decision summaries:
September 2009: 'Eligible hedged items' endorsed in the EU
The European Union has endorsed the amendment to IAS 39 Financial Instruments: Recognition and Measurement titled Eligible Hedged Items for use in the European Union. Click for Commission Regulation No 839/2009 of 15 September 2009 as published in the Official Journal (PDF 820k).
September 2009: EU memo for G20 addresses IFRSs
The European Commission has released a memorandum in conjunction with the upcoming meeting of G20 leaders titled European Commission Calls for United EU position for G20 Summit in Pittsburgh (PDF 21k). On IASB-related issues, the Commission noted:
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"The EU should also seek a renewed commitment from the G20 to accelerating the pace of delivery on accounting standards and non-cooperative jurisdictions. It is vital that the IASB delivers on appropriate reform of the accounting rules to ensure that financial stability concerns are fully taken into account to reduce pro-cyclicality in the system. Convergence to high quality accounting standards remains a top priority of the EU, in particular as regards financial instruments. The EU therefore needs to secure a strong political commitment to balanced convergence towards high quality standards no later than 2010. Regarding non-cooperative jurisdictions, a roadmap should be agreed to complete the work, including clear milestones for evaluating their compliance."
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September 2009: Proposed financial supervision reforms in EU
On 23 September 2009, the European Commission proposed legislation intended to significantly strengthen the supervision of the financial sector in Europe. Specific goals of the proposals are:
- to sustainably reinforce financial stability throughout the EU;
- to ensure that the same basic technical rules are applied and enforced consistently;
- to identify risks in the system at an early stage; and
- to be able to act together far more effectively in emergency situations and in resolving disagreements among supervisors.
The proposal notes that "the current financial crisis has highlighted weaknesses in the EU's supervisory framework, which remains fragmented along national lines despite the creation of a European single market more than a decade ago and the importance of pan-European institutions". The proposals are intended to address those weaknesses by creating:
- a European Systemic Risk Board (ESRB) to monitor and assess risks to the stability of the financial system as a whole ('macro-prudential supervision'). The ESRB will provide early warning of systemic risks that may be building up
and, where necessary, recommendations for action to deal with these risks.
- a European System of Financial Supervisors (ESFS) for the supervision of individual financial institutions ('micro-prudential supervision'), consisting of a network of national financial supervisors working in tandem with new European
Supervisory Authorities, created by the transformation of existing Committees for the banking securities and insurance and occupational pensions sectors. The three European Supervisory Authorities would be:
- European Banking Authority (EBA)
- European Insurance and Occupational Pensions Authority (EIOPA), and
- European Securities and Markets Authority (ESMA).
If adopted, the proposals would result – for the first time ever – in certain financial markets supervisory powers being given to pan-European authorities. Click for the European Commission's Draft Legislation (PDF 24k). The proposal is supported by the three existing EU financial supervisory bodies, the CESR, CEBS, and CEIOPS, which would be replaced by the three new European Supervisory Authorities. Click for their CESR-CEBS-CEIOPS Joint Release (PDF 45k). The European Commission is urging swift approval by the Council and European Parliament so the new structure could begin functioning in 2010.
September 2009: IASB Chairman meets with EU Parliament committee
On 28 September 2009, Sir David Tweedie, Chairman of the International Accounting Standards Board, met with the Economic and Monetary Affairs Committee of the European Parliament on 28 September 2009 to discuss the IASB's response to issues arising from the financial crisis. His remarks focussed, in particular, on the IASB's response to issues raised by EU institutions. Click to download Sir David's Statement (PDF 27k). Here is an excerpt:
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Actions taken to respond to global concerns
From the outset of the crisis, the IASB has worked on a defined programme with time lines to address issues arising from the financial crisis. Our initial focus was on the three areas identified by the Financial Stability Forum: (1) the application of fair value in illiquid markets; (2) accounting for off balance sheet items; and (3) disclosures related to risk. On all three points, we have acted urgently.
On fair value in illiquid markets, we produced a report in October 2008 that the European Commission praised. We have consistently stated that IFRS and US guidance are consistent in this important area. I know that there was concern that the recent FASB Staff Position on fair value measurement might have created a new unlevel playing field. It is for this reason that immediately after the FASB's publication, we posted a press release reiterating that our approach was consistent with the FASB's. As an extra precaution to ensure that global consistency is maintained, on 28 May 2009 the IASB published an exposure draft on fair value measurement that directly incorporates the relevant FASB guidance.
On off balance sheet items, the G20, the Financial Stability Forum, and this Council have all emphasised the need for more transparency in the accounting for these items. There is some evidence that IFRSs have held up relatively well on this issue, but we have now proposed tightening our rules further.
On risk disclosures, in March 2009 the IASB published improvements to the disclosure requirements for fair value measurements and reinforced existing principles for disclosures about the liquidity risk associated with financial instruments.
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October 2009: CEBS consults on bank disclosures
The Committee of European Banking Supervisors (CEBS) has published a consultation paper proposing disclosure guidelines intended to help financial institutions improve their risk disclosures in the wake of the financial crisis. The disclosure guidelines are divided into three different parts, discussing respectively:
- general principles to be applied to high quality disclosures
- principles dealing with the content of disclosures on areas or activities under stress, in particular business models, impacts on results and risk exposures, impacts on financial positions, risk management, and sensitive accounting issues
- guidance on presentational aspects of disclosures
Regarding sensitive accounting issues, the proposed disclosure guidelines state:
11. Financial institutions should be as specific as possible with regard to sensitive accounting issues. Disclosures should cover:
- an adequate description of the accounting policies that are of particular relevance for the activities in question;
- details of relevant changes, if any; and
- detailed information where significant judgement has been applied.
Financial institutions are encouraged to highlight accounting policies that are of particular relevance for the areas or activities under stress. Such descriptions are most valuable when they focus on the specificities of the situation faced by the institution, rather than recycling generic descriptions.
Especially in a period of turbulence, when market confidence may be faltering, clear information on the management judgements affecting accounting figures is of the utmost importance since these can significantly affect the amounts recognised in the financial statements. For instance, judgement is called upon for fair values for financial instruments (especially when marking to model), impairment of financial and intangible assets and defined benefit pension schemes.
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Comments are requested by 15 January 2010. CEBS intends to hold a public hearing in January 2010 in London, inviting supervised institutions and other market participants to present their views. Click to download:
October 2009: Responses to EC review of accounting directives
The European Commission has published a report on the approximately 100 responses received to the Commission's consultation paper on review of the Accounting Directives: Cutting Accounting Burden for Small Business–Review of the Accounting Directives. Click to Download the Report (PDF 309k).
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For the modernisation and streamlining proposal there was wide support. Creating a separate section of the directive outlining core accounting principles was also supported. Respondents were in favour of retaining prescriptive layouts as a way of increasing comparability and transparency, however a reduction in the detail and number of layouts was commonly suggested, as was a simplification of disclosures in the notes to the accounts. A modernisation of valuation rules was widely supported.
Considerable support was expressed for the idea of following a 'bottom-up' approach to the revised Accounting Directives. This would involve separately setting out all the accounting requirements for small companies first, and adding further separate requirements for both medium and large companies. There was also support for the preparation of cash flow statements by medium and large companies. Respondents also welcomed the ideas of electronic publication and the creation of a common accounting taxonomy.
Respondents had mixed views on the current Member State options allowing preparation of abridged accounts for small and medium-sized companies. Similarly, there was no clear position on whether the separate line items for 'extraordinary items' should be removed from the face of the profit and loss account.
There was little support for reducing the number of company categories or for a possible publication exemption for small companies. However, there was general satisfaction with current size criteria and threshold levels. A radical simplification proposal to require only key accounting figures from small companies was also met with scepticism.
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In response to an open-ended invitation to comment on the long-term role of the Directives, commentators made the following comments about IFRSs:
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There were 29 suggestions for closer alignment with IFRSs whilst 9 respondents were against such an approach.
On the question of IFRS for SMEs 20 respondents expressed support for it, commenting that as European medium-sized and large companies expand their cross-border activity there is an increasing need for a standardised financial reporting language. They argued that comparability is not possible under the current Accounting Directives due to Member State options and 'gold-plating'. Others (12 responses) saw the IFRS for SMEs as burdensome and inappropriate for EU SMEs. They questioned its usefulness in calculating tax liabilities and distributable
profits.
Some said that the Accounting Directives should be a real alternative to IFRS and should therefore be more prescriptive and detailed. They thought that creditor protection should remain the fundamental principle and the Accounting Directives should focus on private companies' user needs. They were also in favour of increased harmonisation within the Directive, which they argued, could be achieved by eliminating the numerous current options.
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November 2009: CESR finds noncompliance with IFRS disclosures
The Committee of European Securities Regulators (CESR) has analysed the 2008 financial statements of 96 European listed banks and insurers, including 22 companies from the FTSE Eurotop 100 index, to assess compliance with the disclosure requirements of IFRS 7 Financial Instruments: Disclosures. CESR found that "in some areas a significant proportion of European financial companies failed to comply with mandatory disclosure requirements relating to financial instruments". Examples of noncompliance included disclosures about the use of valuation techniques and about relationships with special purpose entities (SPEs). CESR's analysis is reported in a CESR Statement titled Application of Disclosure Requirements Related to Financial Instruments in the 2008 Financial Statements. CESR's statement notes that "CESR would have expected a higher level of compliance with mandatory requirements, particularly in light of the market conditions that existed during the second half of 2008 and the beginning of 2009." Click for:
November 2009: We encourage European support of IFRS 9
In a Letter to the European Commission (PDF 64k), Deloitte Touche Tohmatsu has recommended the endorsement of IFRS 9 Financial Instruments, relating to the classification and measurement of financial instruments, for use in the European Union. We had previously made a similar recommendation to the European Financial Reporting Advisory Group supporting its draft endorsement advice to the Commission (see our News Story of 8 November).
November 2009: EFRAG decides to defer endorsing IFRS 9
In our News Story of 4 November 2009 we reported that the European Financial Reporting Advisory Group (EFRAG) had posted on its website an Invitation to Comment on its Draft Endorsement Advice (Word DOC 179k) relating to the endorsement of IFRS 9 for use in the European Union. EFRAG consulted both on its assessment of IFRS 9 against the EU endorsement criteria and on its initial assessment of the costs and benefits that would arise from the implementation of IFRS 9 in the EU. Comments were requested by 13 November 2009. In that Draft Endorsement Advice, EFRAG's overall tentative conclusion was that the information provided by IFRS 9 would be relevant, reliable, understandable, and comparable. "IFRS 9 satisfies the criteria for EU endorsement and EFRAG should therefore recommend its endorsement". However, EFRAG has now decided that "more time should be taken to consider the output from the IASB project to improve accounting for financial instruments. Therefore, at this stage, EFRAG has decided not to finalise its endorsement advice on IFRS 9. EFRAG is currently considering how it will proceed in its work to address the package of standards that are expected to replace IAS 39." Most likely, EFRAG's deferral means that IFRS 9 will not be available for use in Europe for 2009 year-ends.
November 2009: Update on IFRS endorsements in Europe
At its meeting on 11 November 2009, the European Commission's Accounting Regulatory Committee voted in favour of the adoption of the following IFRSs for use in the European Union:
- Annual improvements 2009
- Amendments to IAS 32 Classification of Rights Issues
- Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions
ARC also decided to postpone its consideration of endorsement of IFRS 9. EFRAG has updated its endorsement status report to reflect the ARC recommendations. Click for EFRAG Endorsement Status Report of 13 November 2009 (PDF 120k).
November 2009: EC letter to IASB on IFRS 9
The European Commission has posted on its website a letter from Jorgen Holmquist, Director-General of the Internal Markets and Services Directorate, to IASB Chairman Sir David Tweedie, indicating that the Commission has concerns about IFRS 9 and
encouraging the IASB to 'revisit the key elements of its proposal having a more direct impact on the right dividing line between 'fair value' and 'cost' accounting and on financial stability (in areas such as the key role of business model, the scope of the OCI category and the recycling of gains/losses, and the prohibition of bifurcation of embedded derivatives)'. Click to Download the Commission's Letter (PDF 139k). Here is an excerpt:
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Overall, we take note of a number of changes addressing issues raised in our letter of 15 September. However, it would seem that the current draft may not yet have struck the right balance between 'fair value accounting' and 'amortised cost accounting', and may lead to more instruments being classified at fair value through profit or loss compared to the existing IAS 39, thus potentially exacerbating income volatility – even if the impact will vary from one entity to another, depending on their business model and the type of financial instruments in their balance sheet. Concerns therefore remain about the way in which the IASB has defined the classification criteria set out in the draft.
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November 2009: European consultation on IFRS for SMEs
The European Commission has launched a consultation on the International Financial Reporting Standard for Small and Medium-sized Entities. The objective of the consultation is to gain an understanding of EU stakeholders' views on the IFRS for SMEs. The Commission is especially interested to receive comments from the users of accounts, such as businesses, banks, and investors. The consultation period is from 17 November 2009 to 12 March 2010. The Commission said that the responses will assist the Commission in its ongoing review of the Accounting Directives. Click to download:
The Commission has indicated that French and German translations of these two documents will be available by the end of November 2009.
November 2009: Exchange of letters on IFRS 9
The IASB has posted on its website an exchange of letters between the Trustees of the IASC Foundation and the European Commission regarding the Commission's concerns about IFRS 9 and its decision to postpone considering the Standard for endorsement.
- The Trustees' letter states: "You would not expect the Trustees to be anything but surprised and disappointed at the deferral. However, we appreciate the Commission's continuing commitment to International Financial Reporting Standards (IFRSs). We acknowledge the supportive statement that your office made regarding IFRSs following the announcement and that the decision regarding timing does not prejudge the ultimate endorsement of IFRS 9."
- The Commission's response states: "The European Commission remains fully committed to IFRS as the single set of globally accepted accounting standards. Moreover, EU stakeholders unanimously support the general approach based on a mixed attribute measurement model used by the IASB in IFRS 9. The decision not to seek accelerated endorsement of IFRS 9 at this stage reflects the changed economic outlook and market improvements."
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November 2009: Revised IFRS 1 endorsed for use in Europe
The European Commission has completed the process of endorsing, for use in Europe, the November 2008 restructured version of IFRS 1 First-time Adoption of IFRSs. Click for the Commission Regulation (EC) No 1136 (PDF 908k), the endorsement Regulation published in the Official Journal of the European Union on 26 November 2009.
November 2009: IFRIC 17 endorsed for use in Europe
The European Commission has completed the process of endorsing, for use in Europe, the November 2008 restructured version of IFRIC 17 Distributions of Non-cash Assets to Owners. Click for the Commission Regulation (EC) No 1142 (PDF 836k), the endorsement Regulation published in the Official Journal of the European Union on 26 November 2009.
November 2009: Michel Barnier to be new EU Internal Market Commissioner
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José Manuel Barroso, President of the European Commission, has announced that Michel Barnier of France will be the next European Commissioner for Internal Market and Services, succeeding Charlie McCreevy. The Internal Market Commissioner has responsibility for policy and oversight of accounting and auditing matters within the European Union, including relations between the Commission and the IASB. The Commissioner is also responsible for supervising the market for financial services and regulation of banks. Mr Barnier, 58, is currently a member of the European Parliament and has served in various political positions in France, including Member of the French National Assembly, Minister of the Environment, Secretary of State for European Affairs, Foreign Minister, and Minister for Agriculture and Fisheries. From 1999 to 2004 he served as European Commissioner for Regional Policy in the Commission of Romano Prodi. The new Commission will have 27 members, including President Barroso, one from each Member State. It will take office early in 2010 (the Parliamentary confirmation vote is scheduled for 26 January) and will serve through 31 October 2014. Click for EC Press Release on the New Commission (PDF 134k).
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December 2009: EU will create three financial supervisory authorities
The Council of Finance and Economics Ministers of the European Union, meeting in Brussels on 2 December 2009, agreed on a general approach on draft regulations that would create three new authorities for the supervision of financial services in the EU, namely:
The draft regulations are part of a package of proposals to reform the EU framework for the supervision of banking, insurance, and securities markets in the wake of the global financial crisis. The framework envisions the three new European supervisory authorities working in tandem with a network of member state supervisors. The regulations will require approval of the European Parliament. The Council hopes to have the regulations approved some time during 2010. Click for Press Release (PDF 277k).
December 2009: EU and other IFRS 'enforcers' meet in Paris
At a conference organised by the Committee of European Securities Regulators (CESR), securities market regulators from 33 countries, representatives from the International Accountings Standards Board, and auditors met at CESR's offices in Paris on 3 and 4 December 2009 to discuss enforcement of IFRSs. Participants included staff from regulators in the EU and the European Economic Area (EEA), and representatives of ten IFRS enforcers from other countries: Brazil, China, Egypt, India, Japan, Mexico, South Africa, Turkey, Switzerland, and the USA. Participants shared experiences on how enforcement systems have been set up in different jurisdictions with the objective of enhancing the consistent application of IFRSs around the globe for the protection of investors. Click for CESR Press Release (PDF 175k).
December 2009: Revised financial reporting guidelines from CEBS
The Committee of European Banking Supervisors has published revised guidelines on financial reporting (FINREPrev2). The revision of the guidelines is part of CEBS's effort to enhance and streamline reporting requirements for supervised institutions. CEBS recommends that EU Member States make the guidelines mandatory effective 1 January 2012 (CEBS's current authority is limited to making recommendations). In releasing the guidelines CEBS states:
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IAS/IFRS amendments. In order to avoid redundant and costly IT system changes CEBS will take into account agreed changes to IAS/IFRSs before starting implementing the revised FINREP framework (in particular, the recent IASB project on IAS 39 replacement and the proposal on IAS 1). A dedicated team consisting of accounting and reporting experts will monitor IASB proposals in order to assess the impacts on the FINREP framework. The revised guidelines on financial reporting will be reviewed in due course to take account of changes that are agreed in the future.
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December 2009: CESR summaries of IFRS enforcement decisions – Batch #7
The Committee of European Securities Regulators (CESR) has published its seventh batch of extracts from its confidential database of enforcement decisions taken by EU national enforcers of financial information. From time to time, CESR publishes extracts of selected decisions as a source of information to foster appropriate and consistent application of IFRSs in the EU. Topics covered in batch #7 of CESR's extracts:
- Restructuring of financial obligations
- Classification of a loan
- Presentation of financial instruments
- Classification of cash and cash equivalents
- Revenue recognition
- Customer loyalty programme
- Segmental reporting
- Provisions and contingent liabilities
- Correction of an error
- Half-yearly consolidated cash flow statement
- Related party disclosures
- Provisional purchase price allocation of a business combination
- Purchase price allocation of a business acquisition
- Business combination under common control
- Identification of the acquirer in a business combination
- Collective assessment for impairment of loans
Click to download this and earlier decision summaries:
December 2009: IAS 32 amendment endorsed for use in Europe
The European Commission has completed the process of endorsing, for use in Europe, the October 2009 amendment to IAS 32 Financial Instruments: Presentation – Classification of Rights Issues. The amendment provides that when an entity issues rights denominated in a currency other than the entity's functional currency, and those rights are issued pro rata to the entity's existing shareholders for a fixed amount of cash, they should be classified as equity even if their exercise price is denominated in a currency other than the issuer's functional currency. Click for the Commission Regulation (EC) No 1293/2009 (PDF 819k), the endorsement Regulation published in the Official Journal of the European Union on 24 December 2009.
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