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Draft ECON report reveals softer line on international reporting standards

A draft report from the European Parliament’s Committee on Economic and Monetary Affairs (ECON) suggests the Parliament has softened the tone of its rhetoric against International Financial Reporting Standards (IFRS).

Under its previous chairwoman, Sharon Bowles, the committee marked itself out as highly critical of the International Financial Reporting Standards Foundation, the parent body of the International Accounting Standards Board.

The report, drawn up by ECON’s rapporteur, Theodor Stolojan, notes that IFRS “strengthen accountability by reducing the information gap between investors and companies”.

The 10-page document also asserts that IFRS protect investor interests, deliver transparency and facilitate effective decision-making in Europe’s capital markets.

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The report, which also urges the EC to look at whether the European Securities and Markets Authority (ESMA) has adequate powers, potentially puts long-term UK investor concerns about IFRS in conflict with Europe’s politicians.

Sarah Wilson, chief executive at corporate governance advisers Manifest Proxy, said: “While we welcome more transparency and accountability in respect of IFRS, we would be extremely concerned by any proposals that sought to increase a market regulator’s oversight of company law matter.”

Of concern to corporate governance activists is the observation in the report that ECON “[w]elcomes the fact that the Commission is encouraging member states to follow the ESMA enforcement guidelines on IFRS.”

Stolojan, a former prime minister of Romania, goes on to urge the Commission to weigh up whether ESMA’s powers allow it to ensure consistent and coherent enforcement across the EU.

Wilson warned it was important to maintain a strict boundary between shareholder interests and market regulation.

“Companies exist even when financial markets do not,” she said. “Markets are trading facilities, not owning facilities.

“In many parts of the EU, just like the UK, there is a proper separation between the interests of companies and their providers of capital, the shareholders and the markets.”

In a statement, the Financial Reporting Council told IPE: “We support and benefit from ESMA’s current co-ordinating activities on enforcement.

“ESMA’s Standards of Enforcement ensure an appropriate level of consistency and comparability at EU level while leaving each national enforcer as the best placed to determine its approach, which suits the characteristics of its own market and behaviours of relevant market participants.”

ESMA’s founding regulation allows it to introduce guidelines for national competent authorities and issuers.

Under Article 16 of the regulation, member states must either comply or explain within two months.

ESMA then reports to the European Parliament on which states do not comply and what action it intends to take to ensure they do so in future.

The Stolojan report also asserts that allowing individual member states to decide whether or not to use IFRS for local reporting purposes such as separate financial statements “ensures proper subsidiarity and proportionality”.

Meanwhile, some investors in the UK, such as the Local Authority Pension Fund Forum (LAPFF), have been highly critical of IFRS in recent years.

The LAPFF has also complained that IFRS lack any reference to the principle of prudence in its conceptual framework.

The IASB has said it will reintroduce the concept of prudence to its conceptual framework.

The LAPFF has recently written to FTSE 350 chairmen and invited them to ignore guidance from the UK’s audit watchdog, the Financial Reporting Council, on the question of distributable reserves.

Ahead of that move, the LAPFF sought two opinions from leading commercial barrister George Bompas QC.

He concluded that accounts prepared under IFRS could potentially damage shareholder interests.

Listed companies in the EU have used IFRS as the basis for their financial reporting since 2005.

The standards are developed by the London-based international Accounting Standards Board.

Also contained in the 12 January draft ECON report is a reference to the European Commission’s plans to “examine the case for strengthening the EU rules relating to dividend distribution”.

The EC committed to look at the issue in a report last year.

The Commission noted that capital maintenance and dividend distribution rules have been a source of potential legal conflict in some jurisdictions.

Currently, each member state decides how to address these questions within the framework of its own national law and EU capital maintenance requirements.

The Commission concluded: “The Commission will examine the case for strengthening EU rules relating to dividend distribution.”

But away from shareholder concerns, ECON could be about to play hardball with the US over its failure to adopt IFRS for use by US companies.

Although the US has since 2008 allowed foreign entities to file IFRS financial statements, it has backed away from allowing domestic businesses to do the same.

Despite this, the US has nonetheless maintained a seat on the monitoring board that overseas the activities of the IASB’s parent body, the IFRS Foundation.

According to the draft ECON report, the Parliament supports the Commission in the view that applying IFRS and permanent financial contribution to the IFRS Foundation “are conditions for membership of the governing and monitoring bodies of the IFRS Foundation and of the IASB”.

Last year, Jim Schnurr, the chief accountant of the Securities and Exchange Commission, revealed publicly that here is “virtually no support to have the SEC mandate IFRS for all registrants”.

Moreover, he went on that “there is little support for the SEC to provide an option allowing [US listed] companies to prepare their financial statements under IFRS”.

But he added that one route to securing the objective of a single global set of accounting standards could be to give US-listed companies the option of providing supplementary IFRS-based information. 

The ECON report remains open to amendment by individual members of the European Parliament. 

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