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A lively debate around IFRS is presently taking place at European level. IFRS are prepared by the London-based IASB with the aim of standardising accounting practices internationally. In order to enhance the development of the single capital market in Europe, they were introduced for consolidated accounts of EU-listed companies in 2005 as a result of a Regulation in 2002, which is currently being evaluated by the European Commission.
This week, Syed Kamall MEP and Theodor Dumitru Stolojan MEP co-hosted a high level debate organised by ACCA in the European Parliament on 'The Future of IFRS: what purpose(s) do we want annual accounts to serve?' to discuss and debate the issue. A range of experts from various backgrounds, including the IASB, the EC, the ESMA, national standard-setters, the investor community, financial analysts, the accounting profession, businesses, as well as academics and think tanks, exchanged views on the relevance of IFRS in today’s economic environment and whether are they still fit for purpose, but also what needs to change as IFRS in Europe enters its second decade.
MEP Syed Kamall, who opened the debate, said: "Over time I have come to a few conclusions about what we need to learn from the crisis. One is that in the future there should be no more bailouts by taxpayers. Secondly, we need to increase liability standards and clarify the company directors' responsibilities. The third issue revolves around accounting standards, where I believe not enough prudence has been exercised.
"We need to discuss what we are trying to achieve with accounts. The European accounting model, which has developed over several centuries, is about far more than simply providing information to the capital markets - unlike the US model- , it is also meant to be a driver of better governance. The G20 commitment is to strengthen the global financial system. We have to ask ourselves whether converging around complex, wordy accounting standards is something that will protect us from future crises."
The debate revealed a great diversity of views between panellists, though a consensus on the need for global accounting standards to prevent any new financial crisis seemed to emerge. Most panellists agreed that given the global nature of our economy, IFRS are a valuable tool that helps Europe’s capital markets and in attracting foreign investment in the EU. It was stressed that allowing more flexibility in the implementation of IFRS into EU law could run the risk of resulting in different set of regional/local standards and thus potentially undermining the agreed - and reaffirmed by the G20 – objective of pursuing a single set of comparable and transparent financial reporting standards,. This might diminish the real added value of the financial statements and reinforce the already negative perception of 'fortress Europe'.
However, the debate revealed too that there is a mounting dissatisfaction among a certain number of people, including users and preparers of financial accounts, on the quality of IFRS linked to their complexity and relevance, as well as their endorsement process in the EU. It was argued that the long-running convergence project with the US has led to a loss of prudence, a concept embedded in the European accounting tradition but not in the US one.
Richard Martin, Head of Corporate Reporting at ACCA, said: "The debate clearly showed that there are a certain number of issues linked to the conceptual framework of the IASB, such as the issues of prudence, reliability and stewardship, which are being questioned by several stakeholders and need to be included in the forthcoming consultation of the IASB.
"The debate on whether IFRS are fit for purpose in Europe has been tainted by the failings in the financial statements of banks. The IASB’s proposed solution is currently out for comment. All parties should be encouraged to respond to IASB and to EFRAG, so that these bodies can judge the strength of opinions on these contentious matters."