European Parliament Adopts Resolution Calling for Changes to IASB, IASCF
April 25, 2008
FEI Summary

On April 24, 2008, the European Parliament (EP) adopted this resolution which affirms that the EP “is firmly convinced that high-quality global accounting standards must be developed.” 

The resolution also noted the EP  “welcomes… the fact that the IASCF/IASB have sought … improve[ments] …  through, inter alia, biannual meetings at which the IASCF reviews the IASB's work, impact assessments for new standards and the introduction of formalised feedback statements for comments received in public consultations.”

However, the EP believes certain changes to the IASB and its parent body, the IASCF’s governance, process and transparency should be made, including increasing the role of the EU.

Here are just a few highlights from the resolution (selected excerpts verbatim from the resolution): 

• the European Union should move away from a reactive towards a proactive attitude in its relations with the IASCF/IASB,
• the sub-prime crisis of summer 2007 highlighted the importance of accounting standards,
• the IASCF is a private self-regulatory body which has been given the role of lawmaker in the European Union by virtue of Regulation (EC) No 1606/2002; …[there are] some concerns about the fact that the IASCF/IASB may lack transparency and accountability as a consequence of not being under the control of any democratically elected government,… [and] … that, lacking satisfactory solutions to problems regarding the establishment and oversight of the IASCF/IASB, a debate should be launched on the conditions for integrating the IASCF/IASB into the system of international governance, for example with the International Monetary Fund, the Organisation for Economic Co-operation and Development and the World Bank.
• the increasingly theoretical dimension of IASB projects, the complexity and theoretical nature of which are such that small and medium-sized enterprises (SMEs), in particular, are not always able to follow them;

o        underlines that no political mandate has been conferred on the IASB to develop an IFRS for SMEs; notes that the endorsement procedure applies only to international accounting standards and interpretations for publicly traded companies; notes further that the endorsement procedure may not be used for the recognition of the IFRS for SMEs;  takes the view that accounting requirements for SMEs in the European Union must be tailored to the needs of users; advises, against this background, that user needs be analysed in detail once again;… points out that accounting rules exert a very strong influence on the whole field of commercial law, and that a new IFRS for SMEs will have a wide-ranging effect on SMEs and that, in particular, it would have a major impact in practice on national legislation concerning company taxation; notes that an IFRS for SMEs based on the fair-value principle runs counter to the principle of capital maintenance which predominates in other jurisdictions, and is not always in the best (tax) interests of SMEs; takes the view that an IFRS for SMEs must take into consideration the fact that there are different forms of undertaking in the European Union (such as partnerships and cooperatives); believes, therefore, that such an IFRS must contain a clear definition of 'own funds', which takes account of the particular needs of SMEs; regrets that the [IASB’s] draft IFRS for SMEs does not take adequate account of the fact that the addressees of SMEs' accounts are mainly personal shareholders, creditors, business partners and employees rather than anonymous investors, as in the case of public companies, and that those addressees are interested in a long-term business relationship rather than a short-term investment;

• some practical business aspects are not adequately reflected by the IASB; considers that, from a user's perspective, it is important that the financial statement presentation for accounting lend itself to other uses, e.g. for the purposes of providing financial information to investors, performance monitoring or financial management;

o        the application of the fair-value principle can be costly for companies and can lead to unrealistic valuations: for example, in the absence of an assessment by actual markets, the application of the fair-value principle may not be indicative of the true value of companies;

o        considers, in view of the potential links between the IFRS and taxation, that the drafting, entry into force and interpretation of these standards could have an immense impact on the Member States;

o        calls, in [the] future, for the chairpersons of the IASB and the IASCF to address an annual report to Parliament on all matters relevant to Parliament (including their work programme, staff decisions, funding and any controversial standards);

o        expresses concern, while supporting the intention of the IASB to improve existing standards, about the fact that making continual adjustments, and even small changes, can be costly and result in expensive changes for large companies; believes that any changes should happen only when they are deemed necessary following a cost-benefit analysis;

o        Welcomes the progress made in the EU-US Accounting Roadmap and the recent announcement from the SEC to allow foreign private issuers to submit financial statements in accordance with the IFRS without reconciliation to US GAAP, and

• Recalls the outstanding issue concerning the competence of the different jurisdictions applying the IFRS for establishing the definitive interpretation thereof, which entails the risk that conflicting interpretations will result; points out that only European authorities and courts are competent definitively to interpret an EU-specific IFRS and calls on the Commission to ensure that that remains the case; considers that the Commission, working together with the Member States and Parliament, must develop a system that will guarantee that the IFRS is interpreted and applied uniformly throughout the European Union.

Recommendations for IASB, IASCF Governance

The European Parliament recommends that the IASB and IASCF’s “governance and accountability must be improved through the following measures:”

a.       setting up a public oversight body involving all IASCF/IASB public stakeholders including, in particular, legislators and supervisors; and setting up a body allowing representative market participants, including preparers and users from jurisdictions where IFRS are mandatory, to deliver annually a report on the functioning of international accounting standard setting to the governing bodies of the IASCF/IASB;

b.       such an oversight body could be responsible for selecting and appointing the trustees in a transparent procedure ensuring both the competences of the candidates and a balanced geographical representation of all stakeholders; this would help make the appointment procedure more transparent and significantly enhance the legitimacy of the trustees;

c.       guaranteeing that the composition of the IASB, the Standards Advisory Council (SAC) and the International Financial Reporting Interpretations Committee is improved and that the trustees ensure that the appointment procedure is transparent and due account is taken of the interests of various interest groups;

d.       increasing the involvement of the trustees in supervising the IASB and its work plan, in particular as regards the way in which the work plan is drawn up and mandates are granted to the IASB

e.       ensuring that the IASCF constitution provides for the IASB to develop accounting solutions that are not only technically correct but also reflect what is necessary and possible from the point of view of all users (investors and supervisors) and preparers; and

f.         carrying out impact assessments for all projects, so as to check the costs and benefits (including those for user firms) of draft texts and, in particular, to highlight the implications for financial stability.

See the full resolution of the European Parliament for further details.

Prepared April 25, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not reflect FEI opinion unless specifically noted above.