EU Vexed By IFRS Accounting Translations

European Union accounting rulemakers uniformly support their principles-based system of International Financial Reporting Standards. The devil, however, seems to be in the details of putting those principles to work across an economic zone that spans 25 separate nations.

Exasperation has cropped up across Europe lately, as auditors and preparers wrestle with how to apply their own judgment of IFRS principles to their day-to-day situations. At issue is the body created to help interpret IFRS and provide specific guidance on technical points—or more precisely, critics say, why it refuses to do so.

Complaints about consistent interpretation of IFRS first came into prominence at a meeting held recently in Brussels, the first of a series of roundtable gatherings organized by the European Commission. The EC is hosting such events to further its interest in seeing that IFRS gain a stronghold on the financial reporting world in its early years and emerge as a viable alternative to U.S. Generally Accepted Accounting Principles.

The roundtable, held at the end of May and closed to the media, drew top brass from financial circles across Europe: auditors, financial executives, national standards-setters, plus a bevy of pan-European regulators such as the Committee of European Securities Regulators and the EC’s own accounting experts, the European Financial Reporting Advisory Group.

The main focus was on the unsurprising needs by auditors and other stakeholders, such as national standards-setters, to get authoritative answers to their questions about how to apply IFRS principles in specific situations. Typically they call upon the International Financial Reporting Interpretation Committee, a branch of the International Accounting Standards Board, to give guidance. But, they complain, inquiries often meet with refusals to interpret; of 100 submissions recently, only nine have been given interpretations. Inevitably, auditors feel short-changed.

IFRIC, in turn, argues that it only addresses issues of reasonably widespread importance, where unsatisfactory or conflicting interpretations have developed or seem likely to do so. The fundamental difficulty, it explains, is that every time an interpretation is given on one small issue, it raises the possibility of a conflict later, stemming from different interpretation of a parallel issue. Hence IFRIC feels obliged to distinguish between serious and lesser issues.

Keeping It Simple

With an obvious eye to the U.S. GAAP’s 2,000-plus page rule book—something the European Union wants to avoid—both IFRIC and IASB want to fend off creating an accumulation of interpretations that would turn IFRS into a hidebound collection of rules. Too many interpretations, they fear, would make it impossible to apply the principles-based code uniformly in the 90 or so countries either already using or planning to adopt the system.

Recent inquiries for IFRS guidance have fallen on deaf ears; of 100 inquiries, the International Financial Reporting Interpretation Committee has provided only nine interpretations.

At present, American companies with investments in Europe remain on the sidelines as interested observers, since they will be able to continue using U.S. GAAP at least until 2009. Still, the larger issues in question underscore the challenges accounting rulemakers on both sides of the Atlantic face as they try to meld GAAP and IFRS into two branches of a single, interchangeable, principles-based system.

Though some remain frustrated with the lack of guidance, the general feeling in Europe is that universal principles must prevail. A Commission official told Compliance Week after the Brussels meeting that no one—including, he stressed, those in the United States—any longer disputes that rules-based codes are difficult to interpret, since they create opportunities for people acting in bad faith.

However, sympathy for perplexed auditors fighting to cope with IFRS principles is expressed by Paul Ebling, technical director of EFRAG. They want help, he says, because “they don’t necessarily understand the requirements [of IFRS] fully.” Without such clarity and guidance, he says, regulators must also “make clear that they accept the degree of inconsistency that is implicit in international standards.”

More Complaints

Much harsher criticism of IFRIC has recently come from the Union of Industrial and Employers Confederations of Europe, which represents more than 16 million small, medium and large companies in Europe. It has complained that “without efficient interpretation, the usefulness and future success of IFRS as a truly global accounting standard could be seriously hampered.” In a formal letter, the business group said that “reform of IFRIC has not at all matched expectations.”

de Buck

The letter to IFRIC, signed by Philippe de Buck van Overstraeten, UNICE’s secretary general, lamented that “the present situation leads to having the auditing profession play the role of an unofficial interpretation committee.” De Buck also called for improved transparency by IFRIC, suggesting that it webcast its meetings. The letter was addressed to Tommaso Padoa-Schioppa, who recently relinquished chairmanship of the International Accounting Standards Committee Foundation (which controls IASB) to become Italy’s new finance minister.

Yet more flak targeted at IFRIC has come from Charlie McCreevy, commissioner of the European Union’s internal market. In April, McCreevy spoke at a meeting of the IASC Foundation and said, “I would like to encourage IASB to redouble its efforts to make IFRIC effective. This is essential if we are to ensure that national authorities avoid the temptation to jump in and issue their own interpretations.”

McCreevy

He noted that the Paris-based CESR—which, as Europe’s coordinating institution for national securities regulators, is emerging as an equivalent to the U.S. Securities and Exchange Commission—had “a key role to play in consistent enforcement.” An unspoken nightmare in McCreevy’s mind would be 25 different sets of IFRS, one for each of the EU’s member states. Different nuances in different language versions of IFRS could bring on precisely such torment.

EU REGULATORS

European accounting and securities groups often use acronyms based in French but full names in English. Below is a list of key players in EU financial reporting.

Name

Acronym

Function

International Accounting Standards Board

IASB

Oversees accounting principles for International Financial Reporting Standards.

International Financial Reporting Interpretation Committee

IFRIC

Interprets IFRS principles for specific situations.

Committee of European Securities Regulators

CESR

Coordinating body for EU member nations' securities regulators.

European Financial Reporting Advisory Group

EFRAG

Advises European Commission on financial reporting policy.

Committee of European Banking Supervisors

CEBS

Advises European Commission on banking policy.

European Banking Federation

FBE

Trade association for EU banks.

European Federation of Accountants

FEE

Trade association for EU accounting profession.

SOURCE: Compliance Week

Despite those fears, McCreevy still envisioned a big prize from IFRS in Europe, “with a reduction in costs for multinational groups as a multitude of national GAAPs were swept away.” He also stressed the need for cooperation between regulators on both sides of the Atlantic. As financial supervision in the United States gets ever more involved with convergence, he said, the SEC would have to refrain from making strong, unilateral decisions about financial reporting rules if it were serious about convergence.

In February, he said, SEC Chairman Christopher Cox had agreed that dialogue on the implementation of IFRS was “of the utmost importance.” Both CESR and the SEC had to combat any “conflicting decisions … taken in relation to European companies” applying IFRS and filing in the United States.

One topical (and typical) issue raised at the roundtable meeting concerned International Accounting Standard No. 27, which lays down circumstances in which one entity can control another entity without owning more than half the voting power. IAS No. 27 veers away from a rules-based approach, which at its simplest would just set a share-ownership limit.

However, some companies (notably investment banks) have grown rather clever at achieving de facto control. For instance, they could make use of the situation where the bulk of other shares were widely dispersed; a more subtle technique could involve sales contracts. Now, under IFRS, preparers have doubts how to apply IAS No. 27.

Even in the face of such confusion, IFRIC does not currently want to issue an interpretation. IFRIC’s justification follows from an October 2005 IASB decision to revise IAS No. 27. That decision unto itself may be wise, but it brings little to prevent European accountants and auditors—who need to make decisions now—from feeling in limbo.

Related resources, coverage, and commentary on IFRS can be found in the box above, right.