This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

ICAEW responds to EC consultation on the impact of IFRS in the EU and publishes research report on the effects of mandatory adoption

  • Book badge (green) Image

06 Nov 2014

The Institute of Chartered Accountants in England and Wales (ICAEW) has responded to the European Commission's consultation on the impact of International Financial Reporting Standards (IFRSs) in the EU and has supplemented its response with a report reviewing 170 academic research papers that have looked at the impact of IFRS adoption both in the EU and in other countries.

In comparison with earlier surveys of research into the effects of IFRS adoption, the new report expressly addresses the objectives of the IAS Regulation, its scope is restricted, as far as possible, to evidence from the EU, and it excludes, as far as possible, the literature on the effects of voluntary IFRS adoption in the EU. It reviews the research for evidence in respect of transparency, comparability, the cost of capital, market liquidity, corporate investment efficiency, cross-border investment, other benefits, costs, and the financial crisis.

The report finds that there is evidence of benefits following IFRS adoption in relation to financial reporting transparency and comparability, the cost of capital, market liquidity, corporate investment efficiency and cross-border capital flows. However, the report also states that the evidence on some of these matters is disputed and it is unclear how far the benefits identified are attributable to the adoption of IFRS or to other concurrent institutional changes, particularly in enforcement. The report also notes that the benefits found are uneven, varying with the institutions and incentives that apply for different companies in different countries.

The report also identifies a number of challenges to IFRS. Among the challenges that apply to any set of financial reporting standards are the importance of surrounding institutions and preparers' incentives, the role of options in standards, the effects of principles-based standards, and the one-size-fits-all problem. Challenges that apply specifically to IFRS are identified as the role of fair value accounting and the priority given to the valuation role of accounting.

As the report was drawn up in response to the European Commission's consultation on the impact IFRSs in the EU, it also contains a conclusion for policy makers and the way forward:

For policy makers, the research findings summarised in this report will not end controversy on the effects of IFRS adoption in the EU, but they should help to form views on what has been achieved to date and what needs to be done in the future. Perhaps the most significant point to emerge from the research is the importance of institutions and incentives. The balance of evidence suggests that the objectives of Regulation 1606/2002 have been achieved to some extent. But differing institutions and incentives mean that its effects vary from firm to firm and from country to country. [...] If the EU wishes to achieve further progress in financial reporting and to reap the benefit of these improvements, it may make most sense to look at the incentives for those involved in the financial reporting process and at the institutions that surround it [...].

The report detailing the research results is available on the ICAEW website. It can be accessed in a seven page executive summary or in the 164 page full report.

The key points made in the ICAEW's response to the EC consultation, which is also available from their website, are:

  • The ICAEW believe that the current goals of the IAS regulation continue to be appropriate.  However, they believe there is a strong case that the scope of the IAS regulation should be amended to mandate application of IFRSs by listed companies that are not required to prepare consolidated accounts, in order to aid further achievement of these goals.
  • They believe that the adoption of IFRSs has had a positive impact on EU capital markets.
  • They believe that the current endorsement process is broadly appropriate, although it should be possible to expedite the process through earlier and more engagement between key European stakeholders and the IASB.  They strongly oppose the introduction of proposed new endorsement criteria that accounting standards should not hinder economic development or endanger financial stability, as they believe that (to the extent relevant) this falls within the current requirement to consider the 'European public interest'.  They also believe that the risks of giving the European Commission more leeway to modify standards as part of the endorsement process far outweigh any potential benefits.
  • They believe that the current EU enforcement model is appropriate and that it would not be desirable to enhance the role or powers of the European Securities and Markets Authority (ESMA) at the expense of member states.  They also believe that the EU should leave the provision of guidance on the application of IFRS to the IFRS Foundation.

In their response the ICAEW also welcome the UK Financial Reporting Council's recently announced initiative to address the causes of variable quality in IFRS reporting by smaller UK listed companies.

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.