A decade on from the adoption of IFRS by listed companies across the EU, the ICAEW’s Financial Reporting Faculty has produced a short report highlighting the lessons that can be learned from the European experience.
The report aims to provide practical insights and recommendations for policy-makers, regulators, standard-setters and other interested parties in jurisdictions that have recently adopted IFRS, or are considering introducing or extending the application of IFRS reporting.
The evidence on the potential benefits of mandatory IFRS adoption in the EU indicates that there were overall benefits across a range of key economic phenomena: transparency, comparability, cost of capital, market liquidity, corporate investment efficiency and international capital flows.
The research evidence shows that, as might be expected, these benefits were distributed unevenly among different companies and different countries. Due to differences in institutional contexts and incentives, it is even possible that for particular companies or countries there were negligible benefits, or even net costs rather than benefits. But the overall message is clear, and in line with the expectations of policymakers and many investors: even in a relatively short period of time, the move to IFRS has had important economic benefits for Europe.
Overall, our conclusion is that the benefits of IFRS adoption outweigh related costs significantly. However, switching to IFRS involves to some degree a leap of faith. It is always likely to be very difficult to determine just how far the benefits found to follow mandatory IFRS adoption are attributable directly to the change of financial reporting standards or to any concurrent changes in other institutions. This may make it difficult for local commentators to appreciate the wider and longer-term benefits likely to arise from the switch in accounting framework and result in a focus on short-term costs and implementation challenges.
Experience suggests that the EU’s decision not to mandate IFRS reporting by private companies was a wise one. IFRS are after all developed primarily with those companies in mind that raise funds from the capital markets. However, the logic of omitting from the scope of the IAS Regulation listed entities that are not groups, and other public interest entities that are not listed companies, is open to question.
Beyond that, while much depends on the local institutional infrastructure, a differential reporting regime and a phased process of migration to the new accounting framework seem likely to be the optimal approach when moving to IFRS-based reporting, with separate standards for companies that are not listed, ideally based closely on the IFRS for SMEs.
In recent months a debate has begun in Europe about whether there is a case for allowing smaller companies listed on certain types of markets to use a simplified, tailored accounting standard. The outcome of this debate is far from certain
For jurisdictions on a journey towards IFRS adoption, making amendments to individual IASB standards or carving out aspects of IFRS that they dislike may seem like attractive options with little cost. Likewise, it is easy for local standard-setters or regulators to give in to the temptation of issuing unnecessary local guidance or interpretations, rather than relying on the exercise of appropriate professional judgement. However, most investors do not have the time or the resources to study the intricacies of local variations from IFRS as issued by the IASB or to easily understand the implications of carve-outs or amendments. They want to be confident that the IFRS brand has been adopted by jurisdictions in full.
Experience suggests that the full benefits of IFRS adoption can only be reaped if the standards are adopted in full and not accompanied by local interpretations or quasi-interpretations, except where local legal or cultural differences make them absolutely necessary. While it needs to be acknowledged that 100% uniformity may never be possible, as even a global language will encompass different dialects and accents, formal carve-outs should be kept to a minimum and wherever possible should have a limited life.
Despite the impression some may have, with few exceptions, this has been the approach taken by the EU.
The complexity of IFRS reporting requirements may well discourage some countries from fully embracing international standards. However, we would encourage such countries to think again, especially in the context of listed companies. Simplicity or a reduced disclosure regime are not desirable if they mean that investors are less well informed or have to seek additional information to explain the numbers reported in the annual financial statements.
We live in a complex world: where it is avoidable, accounting complexity is unacceptable, but today’s business transactions will often necessitate complex accounting solutions.
In an era of global standards and global markets, strong national standard-setters continue to be essential partners of the IASB. This is not likely to change. Both national bodies and, increasingly, regional groupings have a central role to play in undertaking coordinated research, field testing and outreach activities as full members of a unique global standard-setting partnership.
Any assessment of financial reporting cannot be undertaken without reference to the local professional and institutional infrastructure. Policymakers in jurisdictions thinking about introducing IFRS reporting should first consider how they will ensure that the standards are enforced robustly. While they can look for support from international and regional bodies such as The International Organization of Securities Commissions (IOSCO) and The European Securities and Markets Authority (ESMA), a strong national enforcement regime is essential to realise the potential benefits of adopting global accounting standard.
Experience in Europe has also demonstrated the vital importance of mechanisms for sharing and co-ordinating enforcement decisions as a means of complementing and reinforcing nationally-based enforcement arrangements.
Despite concerns over the time and effort involved, the EU’s endorsement process – involving member state representatives and the European Parliament – has proved a critical means of establishing the political legitimacy of IFRS in Europe.
The approach to endorsement taken around the world will vary according to local circumstances. But jurisdictions considering IFRS adoption should aim to develop mechanisms with clearly-defined and manageable timetables, necessitating the early engagement of key local stakeholders and involvement from the start by the body responsible for endorsement in the standard setting process.
When considering the scope and relative importance of endorsement criteria, policymakers should ensure that the need of investors and other users for transparent financial information is not overshadowed by reference to wider social, prudential or economic policy objectives.
The appendices revisit the key perspectives provided by our 2012 report The Future of IFRS. They assess what has been achieved since, and update comments on the role of IFRS in the global financial crisis and the adoption of IFRS by the United States.
IFRS reporting – lessons learned draws on evidence from an ICAEW thought leadership report, The effects of mandatory IFRS adoption in the EU: a review of empirical research.
KPMG Global IFRS Leader and EFRAG board member, Mark Vaessen, explains why he thinks the ICAEW report is so useful. (June 2015)
IASB Vice Chairman Ian Mackintosh discusses 'Moving to IFRS reporting: seven lessons learned from the European experience'. (June 2015)
Director of Stewardship & Reporting at the UK's Investment Association, Liz Murrall, reveals why members support IFRS reporting. (June 2015)
Deloitte Global IFRS Leader, Veronica Poole, discusses the significance of IFRS and its objectives in Europe. (July 2015)