7 lessons learned from IFRS and the European experience

It’s been 10 years since the adoption of International Financial Reporting Standards (IFRS) by listed companies across the EU, and we believe that Europe’s positive experience offers useful lessons for countries contemplating a move to IFRS reporting.
Our Financial Reporting Faculty has published a major new report detailing Seven Lessons Learned from the European Experience. The report sets out some practical insights and recommendations for policy makers, regulators, standard-setters and other interested parties in jurisdictions that have recently adopted IFRS or are considering doing so.

These lessons are:

  1. The benefits of IFRS outweigh the costs

In a relatively short time we’ve seen improvements in transparency, comparability, cost of capital and market liquidity. It’s fair to say these benefits have been felt among different companies and countries. But overall, it seems clear to us that for Europe the benefits of IFRS adoption outweigh the related costs.

  1. Companies listed on regulated markets should be required to use IFRS

Experience suggests that the EU’s decision not to mandate IFRS reporting by private companies was a wise one. However, in hindsight, the decision not to extend the use of IFRS to listed entities that are not groups and other public interest entities is more questionable.

  1. Local variants of IFRS should be kept to a minimum

The full benefits of IFRS can only be reaped if the standards are adopted in full. Unless local legal or cultural differences make them absolutely necessary, local interpretations should be avoided. Formal carve-outs should be kept a minimum and wherever possible should have a limited life.

  1. Sometimes complexity is unavoidable

Complexity in accounting has many causes and we must work to reduce it. However, we live in a complex world and complex business transactions can necessitate complex accounting. Simplicity is not desirable if it means that investors are less well informed.

  1. National standard-setters and regional groupings are important

 In an era of global standards and global markets, national standard-setters and regional groupings still have a central role to play in undertaking coordinated research, field testing and outreach activities as full members of a unique global standard-setting partnership.

  1. Strong national enforcement is critical

A strong national enforcement regime is an essential part of the IFRS process. Experience in Europe has also demonstrated the vital importance of mechanisms for sharing and coordinating enforcement decisions.

  1. Endorsement underpins legitimacy

 IFRS are adopted on a standard-by-standard basis for use in the EU. Under this process – referred to as ‘endorsement’ – each individual standard, amendment and interpretation is considered separately and a decision made on whether to adopt or reject it. This has proved a critical means of establishing the political legitimacy of IFRS in Europe. Concerns have, however, been raised over the time and effort involved. Jurisdictions considering IFRS adoption should develop endorsement mechanisms with clearly – defined and manageable timetables.

The evidence suggests overall that the EU’s bold decision to switch to IFRS has been good for business and investors; I believe the continued spread of IFRS around the world should make doing business internationally and cross-border investment much easier. The debate on the pros and cons of applying international standards will continue, and our Faculty’s report on the lessons of the past ten years is an important contribution to that debate.

Source: ICAEW – By Michael Izza