Effects of using International Financial Reporting Standards (IFRS) in the EU: public consultation

Transcription

1 Case Id: 28b4c9c4-bf0b-4c9f c5ff7220d4f Effects of using International Financial Reporting Standards (IFRS) in the EU: public consultation Fields marked with are mandatory. Impact of International Financial Reporting Standards (IFRS) in the EU: public consultation Purpose of the consultation The European Commission is holding a public consultation to seek views from all interested parties on their experience of Regulation 1606/2002 ("the IAS Regulation" ). The results of this public consultation will feed into the European Commission s evaluation of the IAS Regulation. Background Applying internationally accepted standards - the International Financial Reporting Standards (IFRS) means standardising companies' financial reporting to make financial statements more transparent and comparable. The ultimate aim is for the EU capital market and the single market to operate efficiently. Scope of the IAS Regulation The IAS Regulation states that the IFRS must be applied to the consolidated financial statements of EU companies whose securities are traded on a regulated EU market. EU countries may extend the application of IFRS to annual financial statements and non-listed companies ( view an update on the use of options in the EU). The Transparency Directive ( 2004/109/EC), as subsequently amended, also stipulates that all issuers (including non-eu ones) whose securities are listed on a regulated market located or operating in an EU country must use IFRS. Impact of the IAS Regulation The implementation of IFRS in the EU has had an impact on cross-border transactions, trade, the cost of capital, investor protection, confidence in financial markets and stewardship by management. However, it is difficult to differentiate their impact from that of other significant factors, including other regulatory changes in the EU and internationally. Developments since adoption Over 100 countries now use IFRS. These accounting standards have been increasingly discussed at international level (e.g. G20, Basel Committee) and with various interested parties in the EU, especially in the wake of the financial crisis.

2 Several initiatives concerning technical issues and governance are under way at both international and EU level. In the EU, the Maystadt report's recommendations are being implemented. These are designed to strengthen the EU s contribution to achieving global and high quality accounting standards by beefing up the role of the European Financial Reporting Advisory Group (EFRAG), which advises the Commission on IFRS matters. Current Commission evaluation The Commission is evaluating the IAS Regulation to assess: IFRS's actual effects how far they have met the IAS Regulation's initial objectives whether these goals are still relevant any areas for improvement. This consultation is part of the evaluation process. The questionnaire was drafted with the help of an informal expert group which is to assist the Commission throughout the process. Target group(s) Any interested party commercial, public, academic or non-governmental, including private individuals. Especially: capital market participants and companies preparing financial statements or using them for investment or lending purposes (whether or not they use IFRS). Consultation period 7 August 31 October 2014 (12 weeks). How to submit your contribution If possible, to reduce translation and processing time, please reply in one of the Commission s working languages (preferably English, otherwise French or German). Contributions will be published on this website with your name (unless in your response you ask us not to). N.B.: Please read the specific privacy statement to see how your personal data and contribution will be dealt with. Reference documents and other, related consultations IAS/IFRS standards & interpretations IFRS Foundation European Financial Reporting Advisory Group (EFRAG) Commission reports on the operation of IFRS Results of public consultation & next steps The results will be summarised in a technical report and will feed into the evaluation report to be presented by the Commission in line with Article 9.2 of Regulation 258/2014. Questions

3 Please note that some questions do not apply to all groups of respondents. Who are you? 1. In what capacity are you completing this questionnaire? If it's not on behalf of an organisation, please indicate that you are a "private individual". Company preparing financial statements [some specific questions for preparers marked with P ] Company using financial statements for investment or lending purposes [some specific questions for users marked with U ] A company that both prepares financial statements and uses them for investment or lending purposes [some specific questions for preparers and users marked with 'P' and 'U'] Association Accounting / audit firm Trade union / employee organisation Civil society organisation / non-governmental organisation Research institution / academic organisation Private individual Public authority [one specific question for public authorities marked with PA ] Other

4 2. Where is your organisation/company registered, or where are you are located if you do not represent an organisation/company? Select a single option only. EU-wide organisation Global organisation Austria Belgium Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta The Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom rway Iceland Liechtenstein Other European country Other

5 3. What is the name of the organisation or authority you represent? If you are part of a group, give the name of the holding company as well. PricewaterhouseCoopers International Limited 4. In the interests of transparency, we ask organisations to supply relevant information about themselves by registering in the Transparency Register ( egister). If your organisation is not registered, your submission will be published separately from those of registered organisations. Is your organisation registered in the European Parliament/Commission Transparency Register? Yes 4.1. Please give your registration number In the interests of transparency, your contribution will be published on the Commission's website. How do you want it to appear? Under the name supplied? (I consent to the publication of all the information in my contribution, and I declare that none of it is subject to copyright restrictions that would prevent publication.) Anonymously? (I consent to the publication of all the information in my contribution except my name/the name of my organisation, and I declare that none of it is subject to copyright restrictions that would prevent publication.) Relevance of the IAS Regulation Objective

6 6. The rationale for the IAS Regulation, imposing internationally accepted standards - the International Financial Reporting Standards (IFRS) - was to make companies use the same set of accounting standards, thus ensuring a high level of transparency and comparability of financial statements. The ultimate aim was to make the EU capital market and the single market operate efficiently. In your view, are the Regulation's objectives still valid today? Yes 6.1. Comments. We believe it remains important to have comparable and transparent financial reporting across markets, both in the EU and globally. Comparability and transparency of financial reporting helps to underpin the EU s single capital market. We believe the existing objectives are appropriate and do not consider that new or additional goals should be introduced. 7. The IAS Regulation refers to IFRS as a set of global accounting standards. Over 100 countries use or permit the use of these standards. The US, for instance, allows EU companies listed in the US to report under IFRS. However, it continues to rely on its "generally accepted accounting principles" (GAAPs) for its domestic companies' financial statements, while the EU requires IFRS to be used for the consolidated accounts of EU listed companies. Has the IAS Regulation furthered the move towards establishing a set of globally accepted high-quality standards? Yes

7 7.1. Please explain. The decision by EU member states to require, through the IAS Regulation, the use of IFRS by EU listed companies from 2005 was the single biggest event that acted as a catalyst to the wider global use of IFRS. In the years following 2005, many other countries also moved to adopt IFRS. According to the IFRS Foundation, almost 120 countries now require or permit the use of IFRS (including 15 of the G20 territories). We continue to believe that the global capital markets will derive most benefit from a single set of high-quality accounting standards. We recognise that this may be a longer term aspiration but in the meantime we consider that international institutions (including the G20) should continue to promote the goal of a globally accepted set of standards. Scope 8. The obligation to use IFRS as set out in the IAS Regulation applies to the consolidated financial statements of EU companies whose securities are traded on a regulated market in the EU. There are about 7,000 such firms. In your view, is the current scope of the IAS Regulation right (i.e. consolidated accounts of EU companies listed on regulated markets)? Yes 8.2. Comments. We believe the existing limitation to the consolidated accounts of listed companies is appropriate. However, we would support the Commission finding ways to address the occasional problems that the reference to consolidated causes (for example, where a listed company has no subsidiaries and hence is not required to prepare IFRS consolidated accounts). We also consider that the flexibility for member states to go beyond the requirements in the Regulation (for example, to permit the use of IFRS for the accounts of other types of companies) is appropriate and should continue to be available.

8 9. National governments can decide to extend the application of IFRS to: - individual annual financial statements of companies listed on regulated markets - consolidated financial statements of companies that are not listed on regulated markets - individual annual financial statements of companies that are not listed on regulated markets. In your view, are the options open to national governments: Appropriate Too wide Too narrow Cost-benefit analysis of the IAS Regulation 10. Do you have pre-ifrs experience/ experience of the transition process to IFRS? Yes 11. In your experience, has applying IFRS in the EU made companies financial statements more transparent (e.g. in terms of quantity, quality and the usefulness of accounts and disclosures) than they were before mandatory adoption? Significantly more transparent Slightly more transparent change Slightly less transparent Significantly less transparent Please elaborate. It is difficult to compare the current situation with the period before mandatory adoption when a range of different national GAAPs was applied. However, our experience is that IFRS has significantly increased the transparency of financial reporting in most EU member states and enhanced the comparability of financial reporting across jurisdictions. The financial reporting environment has been affected by other factors since the period before mandatory adoption, including the increased complexity of business and raised expectations of transparency, together with the measures taken in response to the financial crisis to enhance the transparency of corporate reporting more generally. The answer for any specific country would also depend on the nature of the local GAAP used prior to IFRS.

9 12. In your experience, has applying IFRS in the EU altered the comparability of companies financial statements, compared with the situation before mandatory adoption? Significantly Slightly Slightly Significantly increased increased change reduced reduced opinion In your country EU-wide Compared with non-eu countries Please elaborate. A single accounting language for listed companies across the EU has resulted in significantly increased comparability as compared to the situation prior to adoption of IFRS, when many countries used their own specific national GAAPs. Improvement in the comparability of financial statements between insurers since adoption of IFRS has been limited by the absence of an industry specific standard. The IASB is working to finalise an accounting standard for insurance contracts that will extend the benefits of enhanced comparability to insurance entities. We note also that a number of studies have been conducted that have examined the impact on comparability. For example, the European Commission procured an extensive survey of the 2006 financial statements across Europe (published in December 2008) by Ineum Consulting. It noted that other than [three specific areas] we have not found comparability across countries to be an issue and this conclusion would seem to be borne out by the replies we received from the preparers survey in which 62% responded that better comparability between countries has been achieved with IFRS. We also note an academic study conducted by Rita Yip and Danqing Young ( Does Mandatory IFRS Adoption Improve Information Comparability? published in the American Accounting Association s The Accounting Review in April 2012) which concluded IFRS adoption improved cross-country information comparability in 17 EU countries. The results also suggested that both accounting convergence and higher quality information under IFRS are the likely drivers of the comparability improvement.

10 13. Have financial statements become easier to understand since the introduction of IFRS, compared with the situation before mandatory adoption? Yes, in general Yes, but only in certain areas, in general, except in certain areas Please elaborate. Financial statements have become more understandable and comparable now that a single set of standards is being used by EU listed companies. We have not compared IFRS directly with each of the national GAAPs used in different countries, and a more detailed analysis might show that some specific areas have become more understandable, and some more complicated. However, financial statements overall are more understandable and comparable. The situation today is also difficult to compare with that prior to adoption. The business world has evolved since 2005, and the financial statements have to address more complex transactions to report the position and performance. There has however been a reduction in the use of some complex business structures and transactions following the financial crisis. We believe there is a perception among some commentators that financial statements have become less understandable, although this might reflect the evolution of the business environment and more complex transactions, increased economic volatility in the years since the financial crisis, and the increased volume of disclosure in annual reports which is driven by a variety of regulatory and other requirements (not simply accounting standards). The IASB has acknowledged that some areas of financial statements had become difficult to understand, and introduced changes (for example in relation to gains on own credit), with more proposals to follow. 14. Has the application of IFRS in the EU helped create a level playing field for European companies using IFRS, compared with the situation before mandatory adoption? Yes Yes, to some extent

11 14.1. Please elaborate. In our view the adoption of IFRS for listed companies in the EU has contributed substantially to a level playing field in financial reporting for those companies covered by the scope of the Regulation. 15. Based on your experience, to what extent has the application of IFRS in the EU affected access to capital (listed debt or equity) for issuers in domestic and non-domestic markets that are IFRS reporters? Made it a lot easier Made it easier effect Made it more difficult Made it a lot more difficult opinion Domestic capital EU capital other than domestic n-eu capital Please provide data / examples if available. Enhanced access to capital in European markets has been influenced by a number of factors in addition to changes to accounting requirements. These include other important measures taken under the EU s Single Capital Market initiative, in particular the Prospectus Directive (which introduced a passporting regime across the EU) and the Transparency Directive. We believe it is logical that use of a single accounting language for the financial statements of EU listed companies does make access to capital (particularly international capital) easier.

12 16. In your experience, has the application of IFRS in the EU had a direct effect on the overall cost of capital for your company or the companies you are concerned with? (Please distinguish - as far as possible the impact of IFRS from other influences, e.g. other regulatory changes in the EU and the international credit crunch and crisis.) Cost has fallen significantly Cost has fallen slightly effect Cost has risen slightly Cost has risen significantly Please provide data/ examples if available. There are many factors that may have impacted the cost of capital for companies or any individual company over time (particularly in the period since 2005 which has seen many market and regulatory changes). It is therefore difficult to isolate the specific impact of IFRS. However, we also note that a study by Li ( Does mandatory adoption of IFRS in the European Union reduce the cost of equity capital? ) published in The Accounting Review, Vol. 85, found evidence that IFRS could on average reduce the cost of equity for mandatory adopters by 47 basis points. 17. In your view, has the application of IFRS in the EU improved protection for investors (compared with the situation before mandatory adoption), through better information and stewardship by management? Yes, to a great extent Yes, to a small extent It had no impact, protection for investors has worsened

13 17.1. Please provide data/ examples if available. We believe the enhanced transparency and comparability of IFRS does improve the level of protection for investors. Some users ascribe a high degree of importance to stewardship. We believe that the concept is adequately reflected in IFRS (for example it is explained in Chapter 1 of the IASB s Conceptual Framework in the description of the objective of the financial statements), although we would also support a more explicit reference to the term stewardship within that description. Enhanced stewardship by management is however dependent on a variety of factors, including corporate governance standards, that are beyond the scope of IFRS and of the IAS Regulation. The EU has taken other steps to promote improved corporate governance. 18. In your view, has the application of IFRS in the EU helped maintain confidence in financial markets, compared with the likely situation if it had not been introduced? (N.B.: the enforcement section of this questionnaire deals with how IFRS are/ were applied.) Yes, to a great extent Yes, to a small extent It had no impact, confidence in financial markets has decreased

14 18.1. Please provide data/ examples if available. Overall, we consider that enhanced transparency and comparability of IFRS has helped to maintain confidence in financial markets. Our view is that IFRS is a principles-based accounting framework that requires accounting judgments to be given careful thought and consideration. It does not reduce the need to exercise judgment or to provide transparent information. IFRS also seeks to report economic performance as it happens economic performance can be volatile and it is inappropriate to expect an accounting framework that smoothes this out. The recent financial crisis in the view of some commentators highlighted that aspects of financial reporting and IFRS have been deficient. Commonly alleged shortcomings are: - Recording fair value movements in profit and loss resulted in unrealised profits being recorded and paid out in bonuses and dividends. - The use of fair values contributed to the impact of the crisis and has been pro-cyclical. - The incurred loss model for impairment led to declines in value being recognised later and with more dramatic effect. Those same commentators argue that fair value write-downs during the financial crisis created excessive strain on balance sheets leading to distress sales and further write-downs. However, we believe that fair value write-downs provided early warning signals that led to corrective actions sooner than otherwise would have been the case if such losses had not been recognised. We also consider that attempts to smooth out volatility in the past have always involved a loss of transparency through the use of mechanisms in certain local accounting frameworks such as hidden reserves or general provisions for doubtful loans which can vary from year to year these do not allow the transparent reporting of results and financial position. The use of fair value and different accounting measurement techniques has been carefully reviewed and revised by the IASB since the crisis and some new or revised standards have been issued, such as IFRS 9, though not all of these have yet been adopted for use in the EU. The final publication by IASB of this standard, which requires an expected loss impairment model and carries the support of a wide range of stakeholders helps to deal with one of the most significant criticisms of the accounting rules during the crisis.

15 19. Do you see other benefits from applying IFRS as required under the IAS Regulation? Yes Yes - please specify (you may select more than 1 option). Improved ability to trade/expand internationally Improved group reporting in terms of process Robust accounting framework for preparing financial statements Administrative savings Group audit savings Other If yes, please give details, with examples/ data if possible. 20. In your experience, on balance and at global level, how do the benefits of applying IFRS compare to any additional costs incurred compared with the situation before mandatory adoption, bearing in mind the increasing complexity of businesses that accounting needs to portray? Benefits significantly exceed the costs Benefits slightly exceed the costs Benefits and costs are broadly equal Costs slightly exceed the benefits Costs significantly exceed the benefits

16 20.1. Please provide any additional comments you think might be helpful. When EU listed companies adopted IFRS for the first time in 2005, there were certain one-off conversion costs associated with accounting system changes, costs of training finance staff, etc. However, a survey by PwC in 2006 of the views of UK FTSE350 senior financial executives IFRS: Embracing Change, indicated that for two-thirds of companies these one-off conversion costs were relatively modest at below 0.5m for external costs and similarly below 0.5m for internal costs. While costs and, especially, benefits are difficult to measure, we believe the longer term benefits of adopting IFRS have exceeded the costs incurred on adoption. Endorsement mechanism & criteria The EU s IFRS endorsement process

17 In the EU, IFRS are adopted on a standard-by-standard basis. The procedure is as follows: The International Accounting Standards Board (IASB) issues a standard. The European Financial Reporting Advisory Group (EFRAG) holds consultations, advises on endorsement and examines the potential impact. The Commission drafts an endorsement regulation. The Accounting Regulatory Committee (ARC) votes and gives an opinion. The European Parliament and Council examine the standard. The Commission adopts the standard and publishes it in the Official Journal. This process typically takes 8 months. Endorsement criteria Under Article 3.2 of the IAS Regulation, any IFRS to be adopted in the EU must: be consistent with the "true and fair" view set out in the EU's Accounting Directive be favourable to the public good in Europe meet basic criteria on the quality of information required for financial statements to serve users (i.e. statements must be understandable, relevant, reliable and comparable, they must provide the financial information needed to make economic decisions and assess stewardship by management). In his October 2013 report, Mr Maystadt discussed the possibility of clarifying the "public good" criterion or adding 2 other criteria as components of the public good, namely that: any accounting standards adopted should not jeopardise financial stability they must not hinder the EU's economic development. He also suggested that more thorough analysis of compliance with the criteria of prudence and respect for the public good was needed.

18 21. In the EU, IFRS are adopted on a standard-by-standard basis. The process, which typically takes 8 months, is as follows: The International Accounting Standards Board (IASB) issues a standard. The European Financial Reporting Advisory Group (EFRAG) holds consultations, advises on endorsement and examines the potential impact. The Commission drafts an endorsement regulation. The Accounting Regulatory Committee (ARC) votes and gives an opinion. The European Parliament and Council examine the standard. The Commission adopts the standard and publishes it in the Official Journal. Do you have any comments on the way the endorsement process has been or is being conducted (e.g. in terms of the interaction of players, consistency, length, link with effective dates of standards, outcome, etc.)? Although the question states that the process typically takes 8 months, it has on occasion been much longer than this (in some cases, stretching to several years). Examples of this are IFRS 8 on Operating Segments and IFRIC 12 on Service Concession Arrangements (which was endorsed after the IASB s effective implementation date). European companies are therefore potentially at a disadvantage to their peers elsewhere in the world by, for example, having less time to implement the latest standards and/or not being able to adopt standards early. It may also cause difficulties for US Foreign Private Issuers based in the EU, which may not be able to adopt the latest standards in order to file financial statements prepared in accordance with IFRS as issued by the IASB. EU companies with international operations (in particular financial institutions) may also be disadvantaged by not being able to enjoy all the benefits of applying the same standards across their entire corporate structures at the same time. We understand that, following the recommendations of the review by Philippe Maystadt, an enhanced EFRAG Board will make decisions on a consensus basis (although there will be a fall-back voting mechanism for use in rare circumstances). Consensus decision-making could also slow the adoption process - we are concerned at anything that risks introducing further delays in the adoption of IFRS standards for use in the EU.

19 22. Under Article 3.2 of the IAS Regulation, any IFRS to be adopted in the EU must: be consistent with the "true and fair" view set out in the EU's Accounting Directive be favourable to the public good in Europe meet basic criteria on the quality of information required for financial statements to serve users (i.e. statements must be understandable, relevant, reliable and comparable, they must provide the financial information needed to make economic decisions and assess stewardship by management). Are the endorsement criteria appropriate (sufficient, relevant and robust)? Yes Yes, to some extent 23. There is a necessary trade-off between the aim of promoting a set of globally accepted accounting standards and the need to ensure these standards respond to EU needs. This is why the IAS regulation limits the Commission's freedom to modify the content of the standards adopted by the IASB. Does the IAS Regulation reflect this trade-off appropriately, in your view? Yes 24. Have you experienced any significant problems due to differences between the IFRS as adopted by the EU and the IFRS as published by the IASB ("carve-out" for IAS 39 concerning macro-hedging allowing banks to reflect their risk-management practices in their financial statements)? Yes Quality of IFRS financial statements

20 25. What is your overall opinion of the quality (transparency, understandability, relevance, reliability and comparability) of financial statements prepared by EU companies using IFRS? Very good Good Moderate Low Very low Please provide any additional comments you think might be helpful. The European Securities Markets Authority (ESMA) and its predecessor body (CESR) have published annual reports on the implementation and enforcement of IFRS since the standards were first required for EU listed companies from Generally these reports have referred to enhancements in the quality of IFRS financial statements over time. For example in its report on enforcement activities for 2012, ESMA stated that Overall the quality of the IFRS financial statements continued to improve. 26. Given that firms have complex business models and transactions, how would you rate financial statements prepared in accordance with IFRS in terms of complexity and understandability? Very complex & difficult to understand Fairly complex & difficult to understand Reasonable t complex or difficult

21 26.1. Please provide any further comments you think might be helpful, specifying any particular areas of accounting concerned, if appropriate. Any perceived increase in complexity of financial reporting is likely to arise from a variety of factors and not simply from accounting standards. We noted in our response to Question 13 that the business world has evolved, with the result that financial statements have to report more complex transactions. There is a perception among some commentators that financial statements have become less understandable, however this may be influenced by a variety of factors, including the evolution of the business environment and the increased volume of disclosure in annual reports which has been driven by a variety of regulatory and other requirements. IFRS is a principles-based framework that explicitly allows companies the flexibility to provide additional information where necessary for a true and fair view. The treatment of sovereign debt is one recent example of the application of this flexibility in practice where banks, auditors and regulators ensured that the accounting and disclosure appropriately reflected the evolving situation. Additional disclosures have been encouraged through initiatives such as the recommendations of the Enhanced Disclosure Task Force. The annual reports of banks and other financial institutions include also many other mandatory (required by regulators) or voluntary disclosures aimed at explaining their capital position and their risk profile. This may have contributed to the perceived complexity of IFRS accounts, even though much of this information is disclosed outside the financial statements.

22 27. How would you rate financial statements prepared using IFRS in terms of complexity and understandability compared with other sets of standards you use? IFRS information IFRS information is IFRS information is neither easier nor is more difficult easier to more difficult to to understand opinion understand understand than than than... Information under your local GAAPs Information under any other GAAPs What are your local GAAPs? We have not compared IFRS with specific local GAAPs in the EU Please identify other GAAPs you are using as a basis for comparison. We have not compared IFRS with other GAAPs.

23 28. How do IFRS compare with other GAAPs in terms of providing a true and fair view of a company's (group's) performance and financial position? IFRS are better than... IFRS are equivalent to... IFRS are worse than... opinion Your local GAAPs (as identified under question 27) Any other GAAPs (as identified under question 27) 29. How often is it necessary to depart from IFRS under extremely rare circumstances (as allowed by IFRS), to reflect the reality of a company s financial performance and position in a fairer way? Often Sometimes Hardly ever Never Please provide additional comments and examples of departures from IFRS that you have seen. In our experience, the true and fair override is used very rarely.

24 30. How would you rate the extent to which IFRS allows you to reflect your company's business model in your financial statements? This is not an issue IFRS are flexible enough IFRS should be more flexible, so different business models can be reflected Please explain. We stated in our recent response to the IASB on its consultation on the Conceptual Framework that financial statements can be made more relevant if the IASB considers how an entity conducts its business activities when developing or revising particular standards. The notion of a business model has influenced the guidance in several standards, most recently IFRS 7, IFRS 8, IFRS 9 and IFRS 10. It has been used as a guiding point to determine what is relevant for users of financial information and it should continue to be considered when evaluating relevance in determining recognition and measurement of elements at the standards level. Enforcement Since 2011, the European Securities and Markets Authority (ESMA) has been coordinating national enforcers' operational activities concerning compliance with IFRS in the EU. ESMA has taken over where the Committee of European Securities Regulators (CESR) left off. Enforcement activities regarding companies listed on regulated markets are defined in the Transparency Directive ( 2004/109/EC, as subsequently amended). 31. Are the IFRS adequately enforced in your country? Yes Yes, to some extent t applicable

25 32. Does ESMA coordinate enforcers at EU level satisfactorily? Yes Yes, to some extent t applicable Please provide any additional comments you think might be helpful. It is important that stakeholders have confidence in all aspects of the infrastructure underpinning the capital markets. High quality, principles-based enforcement of financial information by credible national enforcement authorities is therefore an important part of ensuring market confidence. Different approaches to enforcement are followed in different EU countries, but we believe that this is appropriate provided those approaches are effective. ESMA recently consulted on its guidelines which codify and extend further the approach developed by CESR in its Principles of Enforcement Standards. 1 and 2. The approach is evolutionary, and hence broadly representative of current practice rather than new departures. We broadly support the guidelines, and believe it is important that flexibility is maintained under the guidelines such that national models that differ but are nevertheless effective are accommodated. 33. Has enforcement of accounting standards in your country changed with the introduction of IFRS? Enforcement is now more difficult Enforcement has not changed Enforcement is now easier t applicable 34. In your experience, have national law requirements influenced the application of IFRS in the EU country or countries in which you are active? Yes, significant influence Yes, slight influence t applicable

26 34.1. If you have identified differences in the way IFRS are applied in different EU countries, to what extent does this limit the transparency and comparability of company financial statements? Much less transparent & comparable Slightly less transparent & comparable impact on transparency or comparability Please detail. We are aware of instances where different interpretations or required treatments requested by regulatory authorities have contributed to differences in application of IFRS. For example, during the financial crisis, some national regulators required different treatment of loan loss provisioning (so called dynamic provisioning ). This contributed to reduced transparency and a loss of comparability with financial statements prepared by institutions in other countries. 35. If you are aware of any significant differences in enforcement between EU countries or with other jurisdictions, do they affect your practice in applying IFRS or analysing financial statements? Yes, significantly Yes, but the impact is limited t applicable 36. The recitals of the IAS Regulation stress that a system of rigorous enforcement is key to investor confidence in financial markets. However, the Regulation contains no specific rules on penalties or enforcement activities, or their coordination by the EU. Should the IAS Regulation be clarified as regards penalties and enforcement activities? Yes

27 37. Should more guidance be provided on how to apply the IFRS? Yes Consistency of EU law There are different types of reporting requirements in the EU (e.g. prudential requirements, company law, tax, etc.) 38. How would you assess the combined effects of, and interaction between, different reporting requirements, including prudential ones? Some commentators have speculated whether there should be a separate financial reporting regime for banks so that the accounts of banks can give greater prominence to prudential concerns. The principal points of difference around such a separate financial reporting regime might lie around the use of hidden reserves and the use of dynamic or countercyclical provisioning methods for impairment of financial assets. Our view is that these techniques should not be used in the financial statements prepared for capital market investors, since they would mask the underlying financial performance of the entity concerned. The requirements of prudential regulators can be addressed in a different ways, for example by separate regulatory returns (as already are prepared in some countries), or through the inclusion of additional disclosure alongside the IFRS financial statements. 39. Do you see any tensions in interaction between the IAS Regulation and EU law, in particular: Yes To some extent opinion Prudential regulations (banks, insurance companies) Company law Other

28 39.2. If you answered "yes" or "to some extent", please give details and state what the main effects of these tensions are. Please see our response to Question 38. User-friendliness of legislation All standards are translated into the official EU languages before they are adopted. The Commission also regularly draws up a consolidated version of the current standards enacted by the EU ( ). The consolidated version does not include any standards that are not yet in force, but can be applied before the date of entry into force. 40. Are you satisfied with the consolidated version of IFRS standards adopted by the EU, which is not legally binding, or would you like to see improvements? Satisfied Need for improvements I wasn't aware of it I don't use it 41. Are you satisfied with the quality of translation of IFRS into your language? Yes Yes, to some extent t applicable provided by the EU

29 General 42. Do you have any other comments on or suggestions about the IAS Regulation? Although we have responded as a global network, we have drawn in particular on the knowledge and experience of our IFRS accounting specialists and practitioners in the countries of the EU. The questionnaire design did not allow us to provide comments in relation to some questions. We provide further commentary on these below. In relation to Question 22, we note that Mr Maystadt s report recommended two additional criteria for adoption of IFRS standards. We do not believe that any further endorsement criteria beyond those in the existing IAS Regulation are necessary. In our view, the proposed additional criteria - that accounting standards adopted should not jeopardise financial stability and must not hinder the economic development of the region - are already covered by the existing requirement to have regard to the public good. In relation to Question 23, we consider the current arrangements to be appropriate. We would be concerned if this review of the IAS Regulation proposed additional mechanisms that would have the potential to create carve ins or other modifications of IFRS standards for use in Europe. This would take the standards used in Europe further away from IFRS as issued by the IASB and would not be in the interests of comparability and consistency in the global capital markets. Rather than exploring further mechanisms to modify the standards for use in the EU, we believe the emphasis should be on strengthening Europe's voice in discussions with the IASB at an earlier stage in the development of standards. The reconstitution of the EFRAG Board as a result of the recommendations of Mr Maystadt s review, with its broader-based stakeholder representation, should assist in this regard. In relation to Question 24, the establishment of the EU carve out for IAS 39 was a significant event for financial reporting and led some international commentators to believe that accounting in the EU was becoming politicised in a way that was potentially damaging to independent standard setting and to the prospects for international harmonisation. However, the carve out for IAS 39 has in practice affected only about 30 companies and we are pleased to note that there have been no further instances where carve outs have been established. The IAS 39 carve out has been generally viewed and accepted by the markets as a one-off difference, but the views of market participants would likely change if more carve outs, or additional mechanisms to modify the standards for use in the EU, were to be established.

30 In relation to Question 36, we consider that enforcement activities (including arrangements regarding penalties or sanctions) should continue to be the responsibility of national enforcement bodies. ESMA should continue to undertake a coordination role as indicated by our response to Question 34. In relation to Question 37, We believe that authoritative guidance on how to apply and interpret IFRS should be issued only by the IASB and its IFRS Interpretations Committee. The issuance of guidance material by other bodies puts at risk the benefits of enhanced comparability that IFRS has delivered. We did not respond to questions P7 and U4 since these are specifically addressed to preparers and users. However, our view is that clear, consistent and balanced presentation of supplementary financial measures (or non-gaap measures ) can be helpful to investors by providing additional information about an entity, its performance and position, provided certain ground rules are observed. We note that a number of organisations, including ESMA, are presently active in providing guidelines and similar material on non-gaap measures and on management reporting and analysis of such information. Thank you for your valuable contribution. Contact MARKT-F3@ec.europa.eu