EU Endorsement of IFRS

During October, the European Financial Reporting Advisory Group (EFRAG) has issued its latest report showing the status of endorsement for application in the EU of each IFRS and IFRIC Interpretation. The report can be downloaded from the EFRAG website at www.efrag.org.

Currently, the following IASB pronouncements have not yet been endorsed for use in Europe:

IFRS 8 - Operating Segments
IAS 1 - Presentation of Financial Statements (revised September 2007)
IAS 23 - Borrowing Costs (revised March 2007)
IFRIC 12 - Service Concession Arrangements
IFRIC 13 - Customer Loyalty Programmes
IFRIC 14 - IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements, and their Interaction.

As reported in Inside Track 52, the adoption of IFRS 8 for use in the EU has proved to be particularly contentious. Following concerns expressed by the European Parliament’s (EP) Economic and Monetary Affairs Committee (ECON), the European Commission has carried out an impact analysis of the potential effects of the standard. The Commission’s report, which was presented to the EP in September, concludes that IFRS 8 would have positive cost-benefit effects and should be adopted for use in the EU. At the time of going to press, the EP final view on adoption was still awaited, although the ECON has discussed a draft motion to accept the endorsement of IFRS 8.

For a number of the other items listed above, adoption should be simply a matter of time. That said, the adoption of IFRIC 12 and IAS 23 are also proving to be controversial and it is not yet clear when endorsement decisions might be made.

Pro-active Accounting Activities in Europe (PAAinE)

In 2005, EFRAG and the European National Standard-Setters (NSS) agreed to work more closely together on a number of projects under the PAAinE initiative. The progress on the PAAinE project on pensions is reported elsewhere in this edition of Inside Track and details of all PAAinE projects can be accessed from the EFRAG website.

Revenue Recognition

As trailed in Inside Track 52, a PAAinE Discussion Paper (DP) on revenue recognition, developed by EFRAG and the German standardsetter (the DRSC) and issued by them and the French standard-setter (the CNC) was published in July 2007. The primary objective of the DP is to stimulate debate within Europe and thereby encourage the development of European thinking and views. The paper seeks to do this by discussing first what revenue is and then when it arises. The DP then considers and seeks views on two broad approaches to revenue recognition:

• ‘critical event’ approaches that involve recognising no revenue under a contract until a particular event or threshold in the contract (the critical event) has been reached; and
• the ‘continuous’ approach, where revenue is recognised continuously over the course of the contract as the contract progresses and the entity performs.

The DP, which has a deadline for comments of 10 December, can be downloaded from the ASB website at: http://www.frc.org.uk/asb/technical/projects/project0018.html.

Equity/Liabilities

The US FASB has commenced a project on the classification of equity and liabilities; this is a ‘modified joint project’ and it is intended that the FASB should develop a preliminary views paper that would then be issued by the IASB, without their substantive deliberation, for comment. To date, the FASB has issued (in 2005) a ‘milestone’ draft setting out proposals; it is now considering three approaches and it is expected that it the IASB will issue a Preliminary Views document by the end quarter of 2007.

A PAAinE working group, led by the German DRSC, has been established to consider the conceptual bases for the classification, with the intention of providing views to the IASB when it considers the proposals set out in the milestone drafts. An alternative approach, known as the loss-absorbing capital approach, has been developed by the working group and the DRSC. This was presented to the IASB and FASB at their joint meeting in April and was considered by the Board at its meeting on 19 April. The DRSC and EFRAG are continuing to develop these proposals.

Other PAAinE projects

There are a number of other ‘active’ PAAinE projects, covering:

• conceptual framework – being led by the French CNC; and
• performance reporting – being led by EFRAG.

EFRAG liaison meeting with the IASB

Twice a year, representatives of EFRAG and the major European standardsetters, including the ASB, meet with IASB Board members to discuss a number of topical issues on the IASB / FASB convergence agenda. The latest meeting took place on 15 October and the observer notes can be accessed via the IASB’s website at www.iasb.org. As well as an overview of where matters currently stand on international accounting standard-setting, the meeting covered discussions on the
conceptual framework (stewardship and the asset definition); equity / liability; business combinations; pensions; the entity approach to consolidation; and intangible assets.

European Commission roundtable on consistent application of IFRS

On 18 October, the European Commission hosted its 4th roundtable on the consistent application of IFRS. The event was attended by representatives of NSS (including the ASB), regulators, preparers, the accounting profession, the IASB and EFRAG. The roundtable is designed to be an informal and temporary mechanism to share and discuss potential issues that might give rise to problems of consistent application and which might be submitted to IFRIC. The roundtable acts as a filter.

Other than discussion of a number of specific accounting issues, the main item on the agenda was a presentation by the Committee of European Securities Regulators (CESR) on its review of implementation and enforcement of IFRS in the EU. The presentation highlighted CESR’s view that:

• while the implementation of IFRS presented a significant challenge, it had been achieved without major disruption to the markets or the financial reporting cycle;
• the general view of bodies responsible for the enforcement of IFRS in the EU is that the move to IFRS has improved the quality of financial reporting, mainly due to increased transparency of disclosures and greater comparability between issuers, although there are some areas where the level of compliance could be improved.

Papers relating to the roundtable meetings and the issues discussed can be accessed on the Commission’s website at: http://ec.europa.eu/internal_market/accounting/ias_en.htm.

ICAEW report on the first year’s implementation of IFRS in the EU

On 18 October, the Institute of Chartered Accountants in England and Wales (ICAEW) presented the findings of its study on behalf of the European Commission of the first year of implementation of IFRS in the EU. The study was commissioned to meet the requirement in the EU Regulation on international accounting standards (Regulation 1606/2002) for the Commission to review and report on its operation to the EP.

The study encompasses an assessment of the compliance with the requirements of IFRS and the overall quality of the financial statements, as well as an evaluation of the consistency of application and comparability of IFRS financial statements across industries, EU market places and Member States. The study focuses in particular on a market-impact analysis and cost / benefit evaluation of the first year of application of IFRS in the consolidated financial statements of a sample of 200 stock exchange listed companies drawn from across 25 EU Member States (including 40 from the UK) and all sectors, including banking and insurance.

The main message from the study is that the first year’s implementation of IFRS has been “challenging but successful”. As with the CESR report, the ICAEW found no general loss of confidence in financial reporting and IFRS implementation was generally seen as a positive development for financial reporting across the EU.