What Have We Learned from the EU Experience of IFRS Reporting?
Michael Izza | June 30, 2015 |
In July 2002, regulations were adopted requiring all European Union (EU) companies with securities traded on a regulated market to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). A decade since the switch to IFRS in 2005 by approximately 7,000 listed companies, debate continues over whether or not the introduction of international accounting standards has been beneficial. What is certain, though, is that important lessons can be learned from the EU experience of IFRS reporting. With this in mind, the Financial Reporting Faculty of the Institute of Chartered Accountants of England and Wales (ICAEW) has produced a new thought leadership report, Moving to IFRS Reporting: Seven Lessons Learned from the European Experience.
The report can be accessed on the ICAEW website, along with other supporting resources, such as video interviews with key stakeholders, including Ian Mackintosh, Vice Chairman of the International Accounting Standards Board (IASB). The report highlights seven key lessons and provides practical insights for jurisdictions that have recently adopted IFRS or are considering introducing or extending the application of IFRS reporting. Each of the lessons is important, but I’d like to highlight three that to my mind are particularly important.
Firstly, the benefits of IFRS outweigh the costs. The evidence—examined in more detail by ICAEW in a sister report, The Effects of Mandatory IFRS Adoption in the EU: A Review of Empirical Research, indicates that, in a relatively short period of time, mandatory IFRS adoption in the EU has brought benefits for investors and for the European economy more generally. In particular, it has improved transparency: standardization resulting from the common application of IFRS recognition and measurement requirements, coupled with the extensive IFRS disclosure regime, has made it easier to understand companies’ financial positions and performance. This is very important. Users no longer need detailed knowledge about multiple European GAAPs and can much better understand the accounting principles, policies, and judgments applied by those preparing financial statements. Similarly, there have been benefits overall in terms of comparability, cost of capital, market liquidity, corporate investment efficiency, and international capital flows. These benefits were distributed unevenly among different companies and different countries, and moving to a new GAAP has cost implications, but the important message is that, overall, the benefits of IFRS adoption significantly outweigh the related costs.
Secondly, strong national enforcement is critical. Any assessment of financial reporting cannot be undertaken without reference to the local professional and institutional infrastructure, and the EU experience shows that a robust national enforcement regime for IFRS reporting, alongside high standards of professional education and training, corporate governance, and auditing, is essential if the potential benefits of adopting global accounting standards are to be realized. Experience in Europe has also demonstrated the vital importance of mechanisms for sharing and coordinating enforcement decisions as a means of complementing and reinforcing nationally-based enforcement arrangements.
Thirdly, national standard setters remain important. In fact, in my view, they are perhaps needed more today than ever before. In an era of global standards and global markets, national standard setters, along with regional groupings, have a central role to play in undertaking coordinated research, field testing, and outreach activities as partners in global standard setting. In the UK, the case for retaining a national standard setter was debated at length with the advent of IFRS. The resounding conclusion was that a well-resourced national body remains critical for setting standards for UK entities other than listed companies and for influencing the debate at an international level. Ever closer involvement with key national standard setters, securities regulators, and accounting organizations should help over time to transform the IASB into a truly global and accountable organization.
As well as exploring these and other lessons from the EU experience—including in relation to the scope of IFRS reporting, local variants of IFRS, complexity, and endorsement—our report also looks back on ICAEW’s earlier report, The Future of IFRS, and briefly assesses what has been achieved since its publication in 2012, including an update on our perspectives on the role of IFRS in the global financial crisis and the prospects of the adoption of IFRS by the US. We note that while some of the lessons may be reassuring to those who believe that IFRS reporting has a future in the US, lesson 3 on avoiding local variants of IFRS may present particular challenges to those keen to see the US join the global IFRS community.
I think the report and the related resources are well worth the attention of anyone with an interest in the future of corporate reporting. The report’s authors, the Financial Reporting Faculty’s Nigel Sleigh-Johnson and Eddy James, would welcome any comments on the report from IFAC members, individual accountants and other stakeholders in the global discussion about corporate reporting.