Should Europe be able to develop its own IFRS?

Published on 25 October 2013 0 comments

By John Hitchins

The EU’s decision to adopt compulsory use of IFRS for consolidated financial statements of listed entities was a breakthrough moment in the development of a common accounting language for entities that operate globally.

But has the EU’s leadership position faded with time? At one level this is inevitable; as more countries join the IFRS movement they will expect their voices to be heard. The recent convergence agenda with the FASB has also given the US a significant influence. However, is there anything structural in the way the EU deals with IFRS that weakens its position? For example, IFRS is incorporated into European regulation through an endorsement system that allows the EU to only accept or reject a standard. It can delete words (the famous EU carve out of part of the IAS 39 hedging rules is the only example) but it cannot add. Some other endorsement processes permit amendments to standards, although there are again few instances of this.

Philippe Maystadt was appointed in March 2013 as special adviser to Commissioner Barnier to review the EU’s role in standard setting. The review looked at both the endorsement process as well as how the EU provides input to the IASB.

The main question about the endorsement process is whether to permit modification of an IFRS as published by the IASB or permit development of alternative guidance.

One view favours maintaining the current endorsement process to sustain the benefit of a global accounting language. The benefit of a single global accounting language is weakened if participants make their own amendments. Even if Europe perceived the need for its own regional guidance, there is no standard setting body to do this. This inability to develop converged standards at a European level was one of the main motives to adopt IFRS in the first instance. How can Europe agree on amendments or modification when it already adopts different and even opposite positions on existing IASB proposals?

A second view favours permitting the EU to amend IFRS. This is not about creating ‘European IFRSs’ but those that advocate it argue that Europe would have more influence if it had the same amendment powers as some other states. I am personally not convinced by this argument but recognize that it is deeply held by many.

It is certainly the case that European influence is weakened by the lack of a common European position on issues. If Europe could create a single representative body that speaks for the whole of the EU then European influence would clearly increase. Such a body could increase European proactivity in the development of IFRS, playing a greater role in agenda setting rather than only reacting to IASB projects. This might be achieved by reinforcing European upstream work with enough intellectual power and funds.

One thing is certain – the world continues to acknowledge the merits of high quality global standards. Many see a strong European influence as a crucial piece of the puzzle. Do you agree?

John Hitchins:
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