IFRS Makes Doing Business in Europe Easier



According to a research report from The Institute of Chartered Accountants in England and Wales (ICAEW), the advantages of using IFRS far outweigh the disadvantages and, where Europe is concerned, adopting the standards has resulted in important economic benefits.

The benefits encompass a range of key economic criteria, including improvements in transparency, comparability, cost of capital, market liquidity, corporate investment efficiency and international capital flows. The report notes that significant successes include accounting for business combinations, fair value measurement and revenue recognition.
More recently though, the two boards have had to agree to disagree, in particular over difficult issues like lease accounting and loan loss provisioning.

The research, contained in the report, moving to IFRS Reporting: Seven Lessons Learned from the European Experience, found that these benefits may have been distributed unevenly among different companies and countries – indeed some may even have experienced net costs because of differences in institutional contexts and incentives – but, even in the relatively short time since adoption in 2005, the quality and consistency of financial reporting had improved across the EU.

“In spite of calls from some quarters for a return to the days when Europe had a patchwork of inconsistent national accounting standards,” commented ICAEW Financial Reporting Faculty head Nigel Sleigh-Johnson, “the evidence suggests that IFRS has been good for business and investors.

“But this doesn’t mean we should stand still and consider it a job done. It has been a rocky ride and there is still much more that needs to be done by the International Accounting Standards Board itself and by policymakers and other stakeholders around the world.”

He pointed to the fact that IFRS are developed primarily with companies that raise funds from the capital markets in mind, and he endorsed the European Commission’s decision not to mandate IFRS reporting by private companies.

However, in hindsight, he said, the decision not to extend IFRS to listed entities that are not groups and other public interest entities was more questionable.

“There is also a need for balance when confronting the vexed issue of complexity. We live in a complex world and complex business transactions will often necessitate complex accounting solutions. Simplicity is not desirable if it means investors are less well informed.”

Experience over the decade since EU implementation suggests that the full benefits of IFRS adoption were only achieved when they were adopted in full. The report recommends that amendments made to the standards to please local markets should be kept to a minimum and time-limited.

The report says that countries which have yet to implement IFRS should not be put off by the complexity of the reporting requirements. Such complexity is unavoidable in today’s business world, it says, and simplicity or a reduced disclosure regime are not necessarily informative for investors.

However, countries contemplating such a move should aim to involve key local stakeholders as well as their national standard-setter from the start in developing mechanisms with clearly-defined and manageable timetables.

“Despite concerns over the time and effort involved, the EU’s endorsement process – involving member states and the European parliament – has proved a critical means of establishing the political legitimacy of IFRS in Europe,” the report says.

Sleigh-Johnson believes that the European experience of implementing IFRS provides a useful model.

“Progress towards the global use of a single, high-quality set of financial reporting standards should make doing business internationally and cross-border investment much easier, and should help bolster international business and investor confidence. Evidence suggests this is the case. However, the project can only continue to be a success if we learn the lessons of the past 10 years.”

According to the 2015 guide to IFRS in use around the world, 114 countries currently require use of IFRS for all or most domestic listed companies and banks.

Of the rest, the U.S. is by far the largest country continuing to set and use its own standards. Over the years the U.S. Financial Accounting Standards Board has worked with the International Accounting Standards Board on a convergence project and many of its standards are now comparable to IFRS.


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