The European Commission’s formal evaluation of the effectiveness and costs of applying IFRS across the EU has concluded the introduction of common standards has been largely positive, although it is critical of some of the complexity involved and says more needs to be done regarding accounting standards for SMEs
The Commission’s report found that the IAS Regulation has increased the transparency of financial statements through improved accounting quality and disclosure and greater value-relevance of reporting, leading to more accurate market expectations including analysts’ forecasts. It also led to greater comparability between financial statements within and across industries and countries although some differences persist.
Collected evidence suggested that the quality of financial statements prepared under IFRS is good, which implied that the standards are of good quality. Nevertheless, there were criticisms of their complexity.
The Commission found evidence of improved capital market outcomes: higher liquidity; lower costs of capital; increased cross-border transactions; easier access to capital at EU and global level; improved investor protection and maintenance of investor confidence.
However, it also noted that it had proved difficult to isolate the effects of IFRS from other changes affecting capital markets.
It also said that overall, the evidence from the evaluation showed that the benefits of the implementation of the IAS Regulation outweigh the costs, but noted that: ‘Nevertheless, application of accounting standards does not readily lend itself to traditional cost-benefit analysis as benefits are not quantifiable in money terms; there is little data on costs and there is an uneven distribution of costs and benefits whereby costs are largely incurred by companies preparing IFRS financial statements whereas benefits are shared by them, users of financial statements including investors and the wider economy.’
The report suggests evidence was ‘mixed’ regarding the controversial issue of the extent to which, if any, the use of IFRS may have exacerbated the financial crisis, but welcomed plans to introduce a new standard for financial instruments, IFRS 9.
In its recommendations, the European Commission said one option to be considered was whether there is value in developing a common EU level, high quality and simplified accounting standard for SMEs listed on Multilateral Trading facilities (MTFs), more specifically SME growth markets.
This proposal is included in a recent green paper on building a capital markets union, which is also looking at whether the powers of the European supervisory authorities to ensure consistent supervision are sufficient.
Melanie McLaren, the Financial Reporting Council’s executive director codes and standards, welcomed the report.
‘We agree that the existing scope of the regulation and the options given to member states are appropriate and support consideration of developing more simplified reporting standards for SMEs, as part of building the Capital Markets Union.
‘Improvements to the endorsement process for accounting standards are in train through the reform programme currently being undertaken by EFRAG,’ McLaren said.
The European Commission report is here
Full details of the research are to be presented at a conference, hosted by the Latvian Presidency, in Riga on 25 June.
