EFRAG assesses that IFRS 16 is conducive to the European public good

  • EFRAG (European Financial Reporting Advisory Group) (dk green) Image

15 Feb, 2017

Following the preliminary consultation document relating to the endorsement of IFRS 16 'Leases' for use in the EU published in October, the European Financial Reporting Advisory Group (EFRAG) has now published draft endorsement advice on the standard.

In the preliminary consultation document, EFRAG had expressed the view that that IFRS 16 meets the relevant qualitative characteristics, raises no issues regarding prudent accounting, is not contrary to the true and fair view principle, would improve financial reporting, compared to the standard and the interpretations it replaces, and would not put European entities at a competitive disadvantage taking into account the lack of convergence with the equivalent US GAAP standard. However, EFRAG had not formed an opinion on whether the standard would reach an acceptable cost-benefit trade-off. Also, as EFRAG intended to conduct additional work that was expected to result in significant additional input into its assessment, EFRAG had not expressed a view on whether IFRS 16 is conducive to the European public good.

EFRAG has now done additional research and evaluated the feedback on the preliminary consultation documents and concludes that IFRS 16:

  • Meets the qualitative characteristics of relevance, reliability, comparability and understandability, leads to prudent accounting, and it is not contrary to the true and fair view principle.
  • Would improve financial reporting and would reach a cost-benefit trade-off that is acceptable. EFRAG has not identified that IFRS 16 would have major deleterious effects on the European economy, including financial stability and economic growth.

Accordingly, EFRAG has assessed that adopting IFRS 16 is conducive to the European public good and has issued its draft endorsement advice. Comments on the draft endorsement advice are requested by 13 March 2017. It is available through the press release on the EFRAG website.

EFRAG has also updated its endorsement status report accordingly.

In addition, the EFRAG has published a study by an independent economic consultancy which was used during the development of the draft endorsement letter. The study addressed potential changes in the behaviour of preparers, investors and lenders, the potential economic impact, and a cost-benefit analysis of IFRS 16. The overall conclusion was (quoted from chapter 1.5 of the study):

Overall views on the costs and benefits of IFRS 16

We found the main driver of compliance costs to be changes to lessees’ IT and accounting systems. Users of financial reports would benefit due to increased transparency and comparability, but these would be limited in scope since most public capital market users and, to a lesser extent, users at lenders / lessors already undertake work similar to IFRS 16’s expected effect. We also find that a small minority of lessees can be expected to seek amendments to leasing contracts to maintain the existing off-balance sheet treatment.

It is common in any policy change for there to be some incremental costs and indirect market effects. In this case we are not able to quantify the associated benefits of IFRS 16, although as we have set out in 5.4 these are likely to be somewhat limited in public capital markets (and regulatory arbitrage activity by lessees could limit these further), but do appear to be tangible in private capital markets. We consider the overall trade-off between the benefits identified and the costs, and other impacts, to be a fine one.

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