2.10 The EU endorsement process of the International Financial Reporting Standards

Up to this date the endorsement process of the IFRS to be applied by all European listed companies is as follows. When the International Accounting Standards Board issues a new standard, the European Commission consults the European Financial Reporting Advisory Group, an advisory body, for an advice on whether these international accounting standards meet the criteria of endorsement. The criteria for endorsement is explained in Article 3 (2) of the European International Accounting Standards Regulation and consists of two requirements, the new standard should not i) be contrary to the principle of true and fair view (as in the Fourth and Seventh Directives) and it should be ii) conductive to the European public good, understandability, relevance, reliability and comparability.1 The European Financial Reporting Advisory Group’s advice was between 2006 and 2011 submitted to the consideration of the Standards Advice Review Group, who emitted an opinion on whether it is well-balanced and objective. It was then based on both the advice of the European Financial Reporting Advisory Group and the Standards Advice Review Group’s opinion that the European Commission prepared a draft endorsement of the standards.2 Since 2011, the endorsement process of the IFRS in Europe involves only two consultative and advisory organizations: the European Financial Reporting Advisory Group and the Accounting Regulatory Committee.3 It is based on the European Financial Reporting Advisory Group’s advice that the European Commission prepares a draft of the Endorsement Regulation, which will only be applied after the favorable vote of the Accounting Regulatory Committee and favorable opinions of the European Parliament and the Council of the EU. The regulation will be effective after being published in the Official Journal of the EU.

In 2012 a group of investors released a Position Paper questioning the compatibility (legality) of the IFRS with, in general the EU Company Law and in particular, the UK Company Law. “The investors are concerned as they depend implicitly on prudent accounts to provide a reliable view of company capital, to evaluate the performance of executives, and to incentivize management to create enduring value.” This group of investors commissioned a legal review of the IFRS by legal counsel George Bompas, whose final report came to public in June 2013.4 Bompas’ legal review analyses whether the IFRS respects the principle of true and fair value required by the EU Company law. The legal review is in accordance with the concerns of the investors as for the fact that the EU company law provides more protection to providers of capital than the IFRS does.5 The group of investors insists on EU policy-makers to consider the legal opinion when reviewing accounting standards and assure compatibility with the EU Company Law. In the first half of 2013, five Members of the European Parliament (MEPs) have taken in the discussion and have called for the review of the IFRS in a draft amendment to proposed regulation.67The MEPs position is supported by legal counsel George Bompas’ legal opinion, which found the IFRS to be “substantially flawed”.8 The compatibility of the IFRS with the European Company Law is questioned; the MEPs have demanded for a true and fair view in financial accounts and for a “tougher liability standards for directors and auditors”. In March of 2013, Michel Barnier, the internal markets European Commissioner, appointed an independent review of the IFRS and the IASB by the special adviser Philippe Maystadt (former president of the European Investment Bank and former Belgian deputy prime minister). 9The Maystadt report was afterwards considered excellent by the Commissioner Michel Barnier.10 Among Maystadt’s recommendations were, maintaining a “standard-by-standard” endorsement procedure, where the EU retains the ability to accept or refuse the standards issued by the IASB,11 adding that a greater endorsement’ flexibility for amending or adapting a standard should be strictly regulated supporting the mainstream of an integrational set of standards; the reorganization of the European Financial Reporting Advisory Group to increase its legitimacy and representativeness; and suggested in order to have more influence on the work of European Financial Reporting Advisory Group and the IASB, to increase the dialogue between the Accounting Regulatory Committee and the European Financial Reporting Advisory Group at an earlier stage.12 From the 7th of August of 2014 to the 7th of November of 2014 the European Commission held a public consultation to gather the stakeholders’ views on their experience with Regulation 1606/2002, which mandates all EU listed companies to use the IFRS as adopted by the EU for their consolidated financial statements.1314The European Commission reviewed the mandatory adoption of the IFRS in the EU and the performance of the IFRS during the crisis. In the process of revision, it took into account Mr Maystadt’s recommendations to reinforce the EU’s contribution to the international standard-setting efforts.1516Among the European Commission’s findings, were the fact that the IFRS have generally been beneficial for the EU financial reporting17 and that stakeholders have shown how the reform of the European Financial Reporting Advisory Group (EFRAG)18 would be important “to strengthening Europe’s influence over the IASB”19 and the European Commission continue to urge the US to adopt the IFRS by US listed companies.