What is EFRAG?

This latest acronym in the accounting world came into being in June with the formation of the European Financial Reporting Advisory Group.

The function of the new group has to be understood against the background of current proposals that from 2005 all EU listed companies should prepare their group financial statements in accordance with the standards and other pronouncements of the IASB.

The European Commission received legal advice that IASs could not be enforced by EU legislation without some process at the level of the EU institutions (Parliament, Council or Commission) for testing their suitability for EU use. Furthermore, it was evident that the normal process of developing EU requirements via Directives would be too slow to meet the timescales needed for adoption of IASs. Accordingly, a draft Regulation to implement the new procedures, which is under discussion with the European Parliament, proposes use of a recently developed shortcut process known as 'comitology', which would enable the endorsement decision for each IAS to be taken in the normal course by the Commission and a governmental working party called the Accounting Regulatory Committee. If approved, the Regulation will become directly applicable to listed companies in all Member States, as will also each IAS subsequently endorsed under the terms of the Regulation.

Over the past two to three years, as these proposals were being developed, the UK and others have urged the Commission to avoid creating a structure for institutional conflict between the EU and the IASB. It was suggested that an important means of avoiding such conflict would be to ensure that the EU monitored the development of IASs, following the issues and if necessary raising questions with the IASB from the early stages of each project. If this were done, it was thought that endorsement of the final IAS would be easier.

The newly created EFRAG is part of the mechanism for achieving such a dialogue with the IASB at a European level. Last year, the Commission invited FEE (the European Accountants' Federation), to take soundings of the principal European private sector organisations with an interest in financial reporting and to come up with proposals for a private sector body that could provide advice to the Commission on endorsement and also give comments to the IASB on its discussion papers and exposure drafts. FEE reported to the Commission in November 2000 and by the following June had set up EFRAG.

In recognition of the lively interest taken by numerous private sector bodies, EFRAG has a supervisory board consisting of representatives of seven Europe-wide organisations—the 'founding fathers' covering business, the accountancy profession, banks and credit institutions, insurance, users and small and medium-sized enterprises. Between them, these organisations provide the limited funding. The chairman is Goran Tidström, president of FEE, and among the members is Mary Keegan, chairman of the ASB.

The work of commenting on IASB proposed standards and the technical assessment of IASs is to be undertaken by a technical expert group of eleven individuals, selected by the supervisory board and committed to devote up to 50 per cent of their time to EFRAG business on an unpaid basis. Some two-thirds of these are either engaged in or have recently retired from standard-setting activities in Europe. The chairman is Johan van Helleman, stepping down as chairman of the Netherlands standard-setting body, and members include Stig Enevoldsen, the former chairman of IASC, and Allan Cook, technical director of the ASB. The backgrounds of members, apart from their standard-setting experience, are: business (5), auditing (4), financial analysis (1) and academia (1). The Commission and the European securities regulators also send observers. Arrangements are being made for an insurance subcommittee to assist on insurance issues and to be represented whenever those issues are considered by the technical expert group.

In reaching its judgements, the technical expert group of EFRAG acts independently both of its own supervisory board and of any national affiliations of individual members. EFRAG will be supported by a secretary general, Paul Rutteman, and a small staff.

A consultative forum of EU national standard-setters will convene six monthly to engage in discussion with the technical expert group on current topics. National standard-setters will also be consulted regularly on each project on the group's agenda and some may be asked to assist in the technical work.

In its early meetings EFRAG has been giving thought to the manner in which it should consult on IASB projects to develop its own views and help to improve the quality of accounting debate throughout Europe. It seems likely that a clear distinction will be drawn between EFRAG's comments to the IASB and the endorsement advice that it must ultimately give to the Commission once an IAS is issued. Accordingly, EFRAG's views in public responses to IASB exposure drafts should not necessarily be taken as an indication of the endorsement advice that will be given. The rejection of an IAS would have far-reaching consequences for EU companies and indeed the global convergence process, which would also have to be brought into the assessment before advising against endorsement of an IAS.

EFRAG will probably target its initial consultations about IASB proposals on EU national standard-setters and on the organisations represented on its supervisory board. However, contributions from other parties would, of course, also be studied. It is expected that active use will be made of an EFRAG Website to provide regular updates on EFRAG activities and a means for interested parties to make their views known on IASB proposals and EFRAG's reaction to them.

It is to be expected that on most issues the range of opinion expressed in EFRAG will reflect that which emerges from individual countries and internationally. EFRAG will be concerned, however, to pick up and make known to the IASB particular aspects of its proposals that may have different financial reporting implications in Europe from those elsewhere.