- Almorò Rubin de Cervin – Head of Unit, DG FISMA, European Commission
- Michel Prada – Chairman of the Trustees, IFRS Foundation
- Gerben Everts – Board Member, AFM, the Netherlands
- Françoise Flores – Chairman and Chief Executive Officer, EFRAG TEG
- Carlos Montalvo Rebuelta – Executive Director, EIOPA
- Étienne Boris – Senior Partner, PwC
- Gérald Harlin – Group Chief Financial Officer, AXA Group
- Ralf Leiber – Head of Group Capital Management, Deutsche Bank AG
1.The move towards a single set of global accounting standards will take time
All the speakers agreed on the fact that the adoption of International Financial Reporting Standards (IFRS) in 2005 in Europe represents a real step forward as it has increased transparency, improved accounting quality and disclosure, and produced greater comparability.
However, they stressed that although the goal was proposed for convergence by mid-2011 at the G20 in November 2008, recent decisions and numerous statements by the SEC show that the US has postponed the adoption of IFRS, making the road towards a single set of global accounting standards that much longer.
Yet a speaker pointed out that we have been converging with the US, significantly, since 2002. He said that the major difficulties today are to be found in the financial sector, although huge progress has been made regarding the measurement of leverage and indebtedness. He concluded by explaining that it is not merely a sovereignty issue, but it probably concerns the specific features of the rule-based US system, where users want to have definite answers to questions so they can avoid potential difficulties in court.
2. The progress brought about by IFRS
A regulator stressed that the majority of investors are very positive about the information provided by IFRS: high quality, more consistency and comparability. In addition, he stressed that IAS and IFRS had also functioned well up until the financial crisis. He added that EIOPA has stated that accounting standards did not lead to the financial crisis, as some critics have said; they may however have deepened it for a while. Lastly, he was of the opinion that the market value approach had proved to be right.
The regulator considered that although there is still revenue recognition and hedge accounting, IFRS 9, leasing (which is very important), the IFRS framework is almost complete.
Market regulators and standard setters need to speak to prudential regulators, banks and insurance companies. The lessons learned are illustrated by the prudence reintroduced into accounting standards by the expected loss model, which requires more judgement when it comes to choosing real market valuations. However, a representative from the public sector stressed that one consequence of the new standard is the extended use of internal models.
3.The key role played by accounting standards in the economy suggests that Europe needs to strengthen its influence on the development of IFRS, as set as the main objective for the recent reform of the EFRAG (European Financial Reporting Advisory Group), with minimum divergence from the objective of creating a global standard
One representative from the financial industry stated that the crises in 2007, 2008 and 2011 amplified certain criticisms made of IFRS and US GAAP, with respect to the pro-cyclical nature of the mark-to-market principle. This provides an example, he said, of the broad economic effects stemming from accounting standards, which are ultimately a language that can influence behaviour, and which can affect decision-making processes. The EU Commission was very clear in the June 2015 report in this respect.
Consequently, he stated that in the long term, the issue for Europe is how to sustain international accounting standards, taking into consideration the needs of European users, particularly long-term investors, and also a focus on measuring the performance of companies based on their specific business models. Standards need to be conducive to the public good, which could mean for example financial stability and economic considerations. The speaker concluded by saying that, as in most jurisdictions around the world, whether it is the US, China, India or Japan, which have chosen to retain ultimate control of this strategic element for a functioning capital market, the legitimacy of accounting regulations should reside at the political level.
In this context, various speakers were of the opinion that to allow a political say in the EU on major options, while preserving the independence of the standard-setting process, EFRAG could be further reinforced and provided with intellectual resources and research capabilities comparable to those of the FASB.
Conversely, a standard maker reacted to the suggestion made by some that Europe should bring out EU-IFRS. He disagreed and explained that it would be extremely dangerous and detrimental to the global convergence objective, because there would clearly be fragmentation. He suggested that, provided that the IASB’s relationship with EFRAG has been excellent, the need is rather to improve the way we work together within the IASB, especially regarding communication with national and regional standard setters. Another public sector representative stressed that you could not have an international standard at the same time and be completely flexible. Lastly, he stressed that many countries around the world apply their sovereignty, but this does not introduce major differences.
4. Consistent accounting for insurers’ assets and liabilities requires the implementation dates to be aligned for IFRS 9 and IFRS 4 phase two, yet there are concerns on the investor side about a specific implementation for the insurance industry
An insurance industry representative said that accounting is not only a technical topic: it must meet the needs of various stakeholders – investors, obviously, and analysts, but also internal management. Consequently, he stressed that care should be taken to ensure that the upcoming accounting frameworks do not discourage insurers from investing in long-term assets. Indeed, insurers need to measure assets and liabilities consistently and avoid undue volatility. Unfortunately, the implementation of IFRS 9, the new standard for financial instruments, is planned for 2018, while the specific standard for insurers’ liabilities - IFRS 4 phase two - would be implemented in 2020. He also stressed that two successive significant accounting changes within two years would no doubt not help users and confuse investors.
A public policymaker acknowledged the difficulties involved in resolving the situation and that the implications of two potential alternatives that are still to be developed - the choice that insurance companies could be given to either defer or not defer - need to be looked at, which will have significant consequences in term of cost, uncertainty, disclosure and consistency. Another speaker was of the opinion that many people would not understand why the insurance community would ask for a deferral, in a context where insurance people have been referred to many times as “being different, playing different and being obscure”. A speaker mitigated this point, stressing that the European insurance industry has been extremely resilient during the crisis, is already mark to market and is the industry that has made the most significant efforts with Solvency 2 implementation.
5. The IASB’s flexibility and the option for firms to use non-GAAP means to further explain their specific features to investors
A speaker from the private sector highlighted the fact that the IASB was flexible during the crisis in order to improve accounting standards. He said that for example when regulators were eager for further disclosures during the crisis, e.g. on securitisation, subprime, etc., the response was immediate for adding them in the standards. Similarly, the IASB and FASB are now moving towards an improved accounting model for expected credit losses.
He stressed that firms can also use non-GAAP measures to explain their specific features whenever they feel that anything may not be not expressed in mandatory financial reports. In this respect, he stated that the banking industry has come to the table at the EDTF, which is transatlantic and includes US banks, in cooperation with investors and analysts, and quickly compiled a report that had seven principles and 32 recommendations for proper risk disclosure.
6. The EFRAG’s mandate has been widened to give further consideration in its endorsement advice to the European Commission
Before the Maystadt reform, EFRAG was entrusted by the European Commission with the assessment of any new IFRS from a purely financial reporting perspective. The assessment of whether an IFRS was conducive to the European public good was different.
Philippe Maystadt recommended in 2013 that EFRAG’s mandate should be widened to give further consideration as to whether an IFRS is conducive to the European public good.
EFRAG has therefore considered the analyses it should perform to this effect. Referring to the objective in the IAS Regulation, namely that the EU capital market and the single market can operate efficiently, the first analysis that EFRAG needs to perform is whether a new standard provides increased transparency and comparability for financial statements so that when this assessment is positive, the IFRS is likely to be conducive to the European public good because it is expected to lower the cost of capital, support more efficient capital markets, and therefore support economic growth. Other matters concerning European public good, such as whether a standard may affect financial stability or economic growth, will be considered on an ad-hoc basis, responding to specific requests from the European Commission, which also take into account, as appropriate, any concerns of Member States and the European Parliament.
However, an executive from the private sector warned that many believe that IFRS lowers the cost of capital, but this has never been proven or demonstrated. A standard maker warned that while the possible undesirable effects, which can affect behaviour, must be identified, conversely accounting standards should not be expected to be used as economic incentives.
7. Further consistency in the enforcement of accounting standards requires additional efforts within the EU
A regulator stressed that there should be a review within the EU to apply more pressure for the consistent application of IAS regulations. He also suggested creating something like a coordination mechanism in Europe for the regulators and their accounting supervision, which could be a coordinated exercise for which ESMA could be asked to take responsibility.
8. Unique business models should be acknowledged, but they require compromises to be found in order to remain as consistent as possible with the general accounting framework
Many speakers stressed that accounting should focus on an appropriate reporting on the performance of business models.
A standard maker clarified that the IASB has considered business models more deeply, and has tried to understand the business models of company issuers, but it should be borne in mind that principle-based standards tend to identify and deal with the same items in the same way. So, the IASB is not looking at banks or insurance or tourism or telecommunications, but at the different kinds of transactions, assets and liabilities, to identify them and measure them in a similar way.
When a business model is a combination of different systems, they need to be reconciled and this is extremely complex, as is the case for insurance, where there is a combination of insurance and asset management items that has to be dealt with together. The challenge is therefore to find a compromise, trying to be as consistent as possible, but also addressing such complexities.
A speaker stressed in this respect that sometimes IFRS represent an excessive burden for SMEs to have access to capital markets, and if IFRS are not complied with, banks, auditors and investors will all ask for additional assurances. He concluded by saying however that one should be cautious about introducing fragmented standards to entice SMEs into capital markets.
1. The move towards a single set of global accounting standards will take time
An executive from the private sector expressed the opinion that the adoption of International Financial Reporting Standards (IFRS) in 2005 in Europe was a real step forward. It has increased transparency, improved accounting quality and disclosure, and produced greater comparability. This adoption was clearly executed according to the perspective of a global convergence with US GAAP (Generally Accepted Accounting Principles). Such a convergence responds indeed to the appeal of a globally accepted set of high quality accounting standards. In November 2008 at the G20, the goal was proposed for convergence by mid-2011.
However he said, today, it is clear that the global convergence still remains a subject of discussion, but recent decisions on financial instruments as well as numerous statements by the SEC (U.S. Securities and Exchange Commission) show that the US has postponed the adoption of the IFRS and no longer has a timetable. One of the SEC commissioners said in March 2015 that he acknowledged the appeal of a single set of accounting standards but was not convinced of the need to abandon US GAAP in favour of IFRS. The road towards a single set of global accounting standards will be long. The goal remains relevant, but is part of longer-term agenda and a timeframe. The underlying reason on the US side is sovereignty, and that needs to be recognised.
There are a number of items where we have converged with the US
A standard maker intervened reminding the audience that in his opinion we have indeed been converging with the US, significantly, since 2002. There are already a number of standards that are identical. The truth is that the major difficulties today are to be found in the financial sector. There are a number of items where we have converged with the US, or where the differences are minimal such as recently, revenue recognition and leases. This represents a huge progress from a technical point of view regarding the objectivity of the measurement of leverage and indebtedness. Of course there must be further discussion, whether dealing with leases or making a difference between amortisation and interest, but the outcome will be very similar. The standard maker wondered then if it is merely a sovereignty issue. Probably, he said, it also concerns the specificity of the US system, which is very rule-based, and where users want to have the answer to the question, as a sort of given by the authorities not to find themselves in any difficulty in court. This is probably one of the main issues we have to deal with.
2. The key role played by accounting standards in the economy suggests more specific EU standards and the strengthening of EFRAG’s (European Financial ReportingAdvisory Group) but avoiding diverging from the objective of creating a global standard
Regarding the neutrality of accounting standards, the crises in 2007, 2008 and 2011 amplified certain criticisms made of IFRS and US GAAP, particularly in respect of the pro-cyclical nature of mark to market. But mark to market is just one example of the key role played by accounting standards in the economy. Ultimately, accounting standards are a language that influences behaviour, and which affect decision-making processes, decision making and a company’s financial position. Therefore, accounting standards do influence the overall economy.
The EU Commission is very clear in the June 2015 report, which states that above all the financial crisis has highlighted the fact that standards can have broad economic effects. The adoption of IFRS in Europe should not be questioned. In the long term, the issue is how to sustain international accounting standards in Europe, taking into consideration user needs, the need to focus on measuring the performance of companies based on their business and the specific needs of certain stakeholders such as long-term investors.
There are serious issues regarding long-term investors and the major needs of a European economy in the IFRS nine standards. Standards need to be conducive to the public good and the criteria for adopting IFRS in Europe are broadly understood as encompassing financial stability and economic consideration.
As the IAS regulation talks about public good and this could mean for instance more economic consideration, as financial stability, this is because accounting standards have an implication at the overall economic level. If they are not neutral about the economy, then the ultimate legitimacy for accounting regulation can only reside at the political level. And political legitimacy requires adapting the current governance to allow a political say on major options while preserving the independence of the standard-setting process.
Europe should seriously consider taking steps to change its regulation for providing the legal powers that allow for a full endorsement process, including giving itself the legal authority to demand or replace a standard that is deemed inappropriate for the needs of its economy. In this respect the choice that Europe has made up to now, which was confirmed even after the Maystadt Report, to be authorised to adopt, reject, or delete only is unnecessarily reductive.
Most jurisdictions around the world, whether it is the US, China, India or Japan, have chosen to retain the ultimate control of this strategic element of a functioning capital market. Where the EU has chosen not to give itself the same power and authority, instead partly abandoning its sovereignty in that respect. In response to that need, Europe should continue to reform the EFRAG. Efficient reforms have been made but further steps are needed; EFRAG should be an organisation with intellectual resources and research capabilities comparable to those of the FASB (Financial Accounting Standards Board) in the US so that Europe can effectively influence the direction of accounting standards and standard setting on an equal footing with the US, which is the other major global player. A mandated regulation is necessary in order to achieve it.
Global convergence should not be achieved at any price
Global convergence and the appeal of a single set of high quality accounting standards, remain relevant but should not be achieved at any price. Given the failure to achieve this ambition and despite tremendous progress in recognising the reality of global competition between major countries and economic blocks around the world, other solutions should be found. EU specific regulations and standards and the strengthening of EFRAG’s intellectual and research capability at the EU level are required in order to learn from the crisis. That is key to creating a better, global, level playing field in terms of accounting and regulation. If this can be resolved, it will provide a basis for not reneging back on the IFRS but instead contributing to their sustainability in respect of international accounting standards. Only a level playing field will allow a proper global balance of powers and, ultimately, a proper oversight of the IASB (International Accounting Standards Board) at the global level.
However, a standard maker disagreed with the proposal that the EU should regain some kind of sovereignty and try to develop decision-making whereby we would possibly diverge from international standards. He explained that it would be extremely dangerous and detrimental to the global objective that we are all supportive of, because of a number of items differing according to regions and countries where people would take the opportunity not to go in the same direction and then there would clearly be fragmentation.
He suggested rather that the need is to improve the way we work together within the IASB, especially the way we communicate with national and regional standard setters. He also stressed that in this respect the IASB’s relationship with EFRAG has been excellent in the past and no doubt it will be the same in the future, so together we can construct a common set of high-level principles.
you could not have at the same time an international standard and be completely flexible
A public sector representative stressed in this respect that you could not have at the same time an international standard and be completely flexible, so an important international standard is indeed global. The IFRS is now expanding – both China and India are using IFRS, but with some adjustments. So they are on the road, but the road might be long and the road of convergence with the US is extremely long.
A representative of the public sector entered the discussion stressing that many countries around the world have adopted IFRS and they apply their own sovereignty, but this does not introduce major differences. He concluded by saying that sovereignty does not mean necessarily the market would fragment further.
3. Accounting consistently insurers assets and liabilities requires aligning the implementation dates of IFRS 9 and IFRS 4 phase two
A representative of the insurance industry provided a description of the main accounting outcomes required by the insurance industry. Accounting he said, is not only a technical topic; objectives for an accounting framework must meet the needs of different stakeholders – investors, obviously, and analysts, but also internal management. It is a tool for decision-making, reporting and also for the economy. The previous panel has discussed the Juncker Plan, praising the Capital Market Union for giving a unique opportunity to the economy and investors, to invest in more long-term assets. Insurers have many long-term liabilities, but care should be taken that the upcoming accounting frameworks do not discourage insurers from investing in long-term assets. Today, Insurance companies follow two accounting standards: one standard related to the assets, IFRS 9, and one standard related to the liabilities, IFRS 4. Other industries will be left to apply the new standard for financial instruments, i.e. IFRS 9, the implementation of which is planned for 2018. Yet the IASB has been developing a new common valuation framework for insurance contracts i.e. insurers liabilities, which is called IFRS 4 phase two. Its implementation should be in 2020.
In this context the insurance industry is facing three different problems and constraints. First, assets and liabilities should be measured consistently. Second, undue volatility should be avoided. The combined utilisation of IFRS 9 and IFRS 4 is already known; however, the new IFRS 9, with the existing standard for liabilities for insurance (IFRS 4), will create more volatility than today’s. Third undue complexity should be avoided, users should be helped and confusing investors with two successive important accounting changes within two years should also be avoided. Consequently, an appropriate and effective approach requires consistent solutions for assets and liabilities and the aligning of implementation dates of IFRS 9 and IFRS 4 phase two. In concrete terms, the most practical solution would be a temporary deferral of IFRS 9 until the definition of IFRS 4 phase two is completed.
4. A specific implementation dedicated to the insurance sector raises concerns on the investor side
A public decision maker gave his opinion regarding the situation faced by insurers regarding the implementation of IFRS 9. He said that provided IFRS 9 is positive for insurance, it is an improvement. Unfortunately, in the real world the ideal option, which is to have the asset side and liability side recognised simultaneously is not available because there is no IFRS 4 phase two yet, implications and alternatives need to be looked at.
He insisted on the difficulties implicated in solving the situation. First he stressed that the IASB had tried to address the issue on a temporary basis by devising a proposal favourable to a deferral. Some regulators made also an attractive proposition for addressing the issue in a way that would be the least intrusive possible, allowing the implementation to be resumed as soon as IFRS 4 phase two was clarified.
no one even knows what the final outcome for IFRS 4 phase two will be
Finally, he stressed that the choice for insurance companies is either to defer or not defer. But he said that either of the options is optimal.
Indeed, currently the deferral will last until 2020 and no one even knows what the final outcome for IFRS 4 phase two will be as various technical options are being discussed regarding the impact of the liability discounting approach on balance sheets and profit and loss accounts.
In addition, both options have implications in terms of cost, uncertainty, disclosure and consistency. Regarding cost implications, the issue for insurers is to avoid paying twice, one on the asset side and again on the liability side. But there is no option without cost, for the insurance sector and others. In addition, uncertainty will not disappear because of a deferral or non-deferral. Disclosure and consistency issues are unavoidable in both options.
He concluded by saying that insurers must create the optimal situation, by assessing, which is the less punitive for the sector, and information markets will require in counterpart.
5. The flexibility of the IASB
An executive of the banking sector reiterated the need for global standards. It should be recognised, he said, that regarding general flexibility and accounting standards, the IASB was flexible during the crisis. There was some accommodation over the IFRS 39 reclassification debate. However, he added, there should be an ambition to have a global standard that is really a fixed standard, neutral and not tampered with. Indeed, caution should be exercised in contemplating amendments to IFRS, country by country, and claiming national sovereignty as a reason for overriding the bigger goal, which is to have a common platform, a common navigator. Firms can use non-GAAP measures and other means to explain their story if they feel that not everything is told in the mandatory financial reports published. For example, in terms of industry stocktaking, regulators were first eager for further disclosures during the crisis, e.g. on securitisation, subprime etc; the response was immediate for adding them. But the industry has also come to the table at the EDTF (Enhanced Disclosure Task Force) in 2012, following a request from the Financial Stability Board (FSB), and quickly compiled a report that had seven principles and 32 recommendations for proper risk disclosure. In 15 years of adoption of IFRS globally, 80% of these standards have effectively been respected since 2012 in large banks, whereas EDTF recommendations put forward by the industry itself in cooperation with investors and analysts, driven by their needs, have only reached an 8% application. He concluded by stressing that there are many positive developments in addition to the IFRS’s baseline platform that everyone can use.
The industry also supported IASB and FASB on their journey toward an improved accounting model for expected credit losses. Starting in 2010, there was an extremely constructive dialogue with an expert advisory panel to the FASB, an open dialogue: a very international one. At the last meeting in Beijing of that forum, John Smith did an impressive job for the IASB to bring everybody on board. IASB was perhaps a touch ahead of FASB on this topic, but they also came along. So this was a very valuable discussion.
6. The efforts of the banking industry within the EDTF have led to a further standardisation at the global level
At the request of FASB, the EDTF started a separate initiative this year and will publish an additional report at the end of 2015 on recommended disclosures that were designed jointly with investors and analysts in preparation for an expected credit loss. This is transatlantic so it includes US banks. There was a very clear opinion that FASB will come through, hopefully this year, with a standard that will be not identical, but similar in many regards – the industry is already bridging this gap, deciding how best to report. Any delay will end in huge costs for efficiency and damage the reliability of what people perceive. So that needs to be put in the balance when we look at the adoption rates. Also there is frustration regarding convergence – on netting, for example, there was an agreement between boards but that was stopped because of political interference after agreement had been reached. Indeed, convergence is possibly the biggest challenge today.
7. When endorsement is delayed for one industry there are costs also for the others
However, he reminded the audience that many people do not understand why the insurance community would ask for a deferral. Insurance people have been accused many times of being different, playing different and being obscure. A banker said in 2008: “It is not that you guys did not have a problem in the insurance sector, it is that you were able to hide your garbage.” Addressing appropriately the situation is in the insurers interests because there is a good insurance tale to tell regarding transparency, the soundness of the long-term business and how to avoid having investors penalising the industry for opacity, but supporting it because the insurance business is worth investing in.
He stressed that in a context where in 2015 we have been debating whether those conclusions should be endorsed or delayed, many people feel frustrated; indeed, investors and analysts are asking what are you waiting for? In addition, success is measured by the time it takes to go to market and things need to happen more quickly and endorsement is vitally needed. The insurance challenge is recognised and all interests need to be weighed. There are also costs for other industries when there is a delay, for example banking, and costs for the market and market efficiency because uncertainty remains. What will be the outcome? Swift endorsement is urgently required.
imposing a two-step change in accounting on the insurers is something that would be extremely difficult for many companies to bear
However, a representative of the insurance sector warned that Insurers should not be suspected of showing a lack of solidarity with other sectors. Indeed, he said, the proposal of this industry is to have a temporary deferral for insurers only. He then provided further arguments. Firstly, the European insurance industry has been extremely resilient during the crisis, and is already mark to market; maybe it is the only sector that already marks to market. Why? He said it is because most of its assets are bonds that are mark to market. Second, he stressed that insurance is the industry that has made the most important efforts with Solvency 2 implementation over the last 10 years. Consequently, imposing on top of this a two-step change in accounting on the insurers is something that would be extremely difficult for many companies to bear. Lastly he warned them of the confusion this would impose on equity investors, which are not investing with a two-year horizon. What would it mean to present a new balance sheet for one or two years only? it will not help them to have a favourable understanding of insurance companies.
8. The EFRAG’s mandate has been widened to give further endorsement advice to the European Commission
A public decision maker described in depth the main findings of the Maystadt report and subsequent new actions. He explained that before the Maystadt reform, EFRAG was interested in the assessment of any new IFRS only from a financial reporting perspective. EFRAG’s responsibility was to assess whether IFRS’s true and fair view principle was met, and that was all. The assessment of whether IFRS was conducive to the European public good was the result of a parallel and different process. That was a very important consideration, best dealt with according to IFRS own standard-setting process, not only according to the endorsement process. Philippe Maystadt recommended in 2013 that EFRAG’s mandate should be widened to giving further endorsement advice to the European Commission. Consequently, EFRAG would also consider whether an IFRS is conducive to the European public good. That is what EFRAG has been doing since late 2014 when the reform was put in place – the first candidate for this exercise was IFRS 9, the new standard for financial instruments, which has been one of the main IASB responses to the crisis. It was a very important piece of IFRS to consider, in a revised and reformed process. The discussion has already started on what is the interaction between the IFRS and the public interest, the European public good. Obviously, EFRAG must consider that before examining the IFRS 9 endorsement process.
9. The EFRAG assesses whether accounting standards are conducive to the European public good and whether they act at a reasonable cost
Then the speaker provided more details on the assessment approach completed by the EFRAG. EFRAG starts he said, from the set of objectives of the IAS (International Accounting Standard) regulation, which is intended to provide increased transparency and comparability to financial statements so that the EU capital market and the single market can operate efficiently, which is conducive to the European public good because it lowers the cost of capital. By doing this EFRAG is clearly forging a link between the IFRS and the European public good.
As part of this assessment, EFRAG decided that with every new IFRS it would assess whether the improvements in transparency were met and whether that was done at a reasonable cost.
The outcome of the assessment of IFRS 9 is already known as being positive, though it has not been published yet. Like all EFRAG’s processes, which are transparent, EFRAG’s final advice to the European Commission on IFRS 9 will be public. In addition, the draft endorsement advice will be subject to public consultation as EFRAG expects every stakeholder with an interest in this process to contribute.
With regard to this topic an executive of the private sector warned that many believe that IFRS lowers the cost of capital but this has never been proven or demonstrated and we should be careful with that kind of statement.
10. Although EFRAG tries to anticipate any possible undesirable effects on the economy, accounting standards are not expected to help as economic incentives.
The speaker then wondered where in the process financial stability and economic growth kicks in. He explained in this respect that economic growth starts because more efficient capital markets support it. More generally regarding financial stability and its possible effects on economic growth, the Maystadt report stated that the assessment should check that there were no side effects to any extent that would impede financial stability and economic growth.
The speaker stressed that although accounting standards must be assessed since they may have undesirable effects as they can affect behaviour, conversely accounting standards are not expected to be used as economic incentives, in addition to any improvement of financial reporting they may achieve.
The speaker illustrated such principles explaining the assessment of the IFRS 9. The EFRAG consultations he said, have qualified the expected loss model within IFRS 9, as conducive to better financial stability. Regarding the possible negative impacts of economic growth, EFRAG acknowledged that the expected loss model could affect and restrict lending. The EFRAG consultation however showed that capital requirements would have a more evident effect than accounting standards. Finally, one outcome is that the interaction between them has to be managed in a context where however the quantitative effects of IFRS 9 cannot be assessed before 2017.
11. Accounting standards have to provide stakeholders with relevant, timely and useful information. In this respect the late recognition of credit losses facilitated by IFRS 39 has negatively impacted the real economy
Then a public decision maker depicted the appropriate expectations on accounting standards and their role in prudential approaches. He stressed first in this respect that accounting is a means - not an end - to provide stakeholders with relevant, timely and useful information. These stakeholders not only are analysts, investors, and supervisors, but also managers of companies. Indeed, he pointed out that the best way forward is to provide management with the right information to enable it to make informed decisions. He concluded by saying that it is in this context that within the Solvency II project, which is a regulatory project, EIOPA has been a strong supporter of market-consistent valuation, with adjustments for both the assets and the liability sides of the balance sheet.
To conclude he went back to the main problems posed IFRS 39 during the financial crisis. He said that the underlying issues were linked to the possible non-neutrality of accounting standards regarding the real economy due to an extremely late recognition of credit losses. He explained that there was a need for a change and IFRS 9 will try to address that and in the assessment process conducted by EFRAG exists a step in the right direction to anticipate possible non-neutrality regarding the economy.
12. The progress brought about by the IFRS
A regulator expressed his views on the progress brought about by the IFRS. He said that establishing IFRS in Europe has been positive, though it has not been ideal. He declared that the work of the IFRS foundation was relevant, successful and did deliver. He stressed in particular that investors are in majority very positive regarding the information provided: high quality, more consistency and comparability. He said that there was very positive feedback on the consultation regarding the IAS regulation, which is not often the case. He also stressed the fact that the IAS and IFRS had functioned well also up to the financial crisis. He added that EIOPA had stated that accounting standards had not led to the financial crisis as some critics said. It may have however deepened the financial crisis, at least facilitated it for a while. Finally, he was of the opinion that the market value approach had proved to be right.
the expected loss model illustrates the progress made
Then he stressed that in such a context everyone had learnt his lesson and that it is very important that people should engage in a dialogue; market regulators and standard setters, need to speak to prudential regulators, banks and insurance companies. The lessons learned are illustrated by, for instance, the prudence reintroduced into accounting standards, which is very positive. The incurred loss model under which you can only take the losses into the account when people do not pay their bills, replaced by the expected loss model illustrates the progress made. The new system requires more judgement when it comes to choosing the real market valuation, which is beneficial.
However, a representative of the public sector while acknowledging the necessity to improve comparability – it is crucial he said – stressed the fact that we should be lucid and realistic because the consequence of the new standard is an extended use of internal models. He stressed that, when the industry begins implementing the new, appropriate, expected loss model that will use forward-looking information, more internal models, and more judgment. Finally, he questioned whether comparability might eventually be conceptual and not become reality in the end. We have to be mindful of the issue with more internal models and judgments.
Looking at the IFRS framework, the IASB’s work, the regulator considered that it is almost completed. They are now on the home straight he said. There is still revenue recognition and hedge accounting, IFRS 9, leasing (which is very important), but the framework is there. Everyone is very happy with that. He acknowledged that there are issues about timing but the framework is there and he said in this respect that what is necessary is consistent application instead of complexity. Consistency is key, fragmentation the enemy, he concluded.
13. Further consistency in the enforcement of accounting standards requires additional efforts in the EU
In addition, the regulator was of the opinion that there should be a review of the IAS regulation in order to put more pressure on consistent application. That could be done, for example, by taking the step that had been completed in the banking arena to create something like a coordination mechanism in Europe for the regulators and their supervision of accounting. This could be a coordinated exercise for which ESMA could be asked to take responsibility, he said. There is a need to ensure that industry charters are all the same, with no complexity or fragmentation to avoid collision damage and undue competition.
A standard maker acknowledged in this respect that considering the broad area of development of IFRS, the next issue is consistent implementation and so IASB has made it a priority, with securities regulators and others, to make sure that the implementation of such standards does not create any new diversity worldwide.
14. Unique business models should be acknowledged but they require finding compromises so as to remain as consistent as possible with the general accounting framework
A representative of the private sector stressed that accounting should focus on an appropriate reporting on the performance of business models. This is why the asset and liability matching which is the insurance problem must be addressed. The insurance industry needs to find the solution.
A public decision maker agreed then on the fact that unique business models should be acknowledged and taken into account. Yet he stressed that though you may have the perfect accounting treatment for an individual company or an individual sector, it will never be perfect for the functioning of the capital market; the latter needs a consistent approach and less fragmentation.
Regarding how to take into account business models, a standard maker stressed that it is clear that in the past and, following the financial crisis, the IASB has considered the business models more deeply, and has tried to understand the business model of the issuers of the companies.
However, he stressed that it should be borne in mind that the principle-based standards tend to identify and to deal in the same way with the same items. So the IASB is not looking at banks or insurance or tourism or telecommunication, but at the different kinds of transactions, assets and liabilities, to identify them and measure them in a similar way. Consequently, when a business model is a combination of different systems, they need to be reconciled and - in the case of insurance - there is a combination of insurance and asset management items that has to be dealt with together, which is extremely complex. He concluded there by stressing that the challenge is therefore to find a compromise, trying to be as consistent as possible, but also addressing such complexities, though we must take the blame if IASB is too late.
We should reduce complexity, use the same concepts and be clear where they are different
A representative of the private sector insisted on the fact that where things can be identical, they should be identical. We should reduce complexity, use the same concepts and be clear where they are different. Accountants often say, “do not even talk to me, that is accounting, it needs to be considered separately from regulation”. No, he said. We need to be together in this but a line must be drawn for any kind of overlay and prudence and so forth, wherever that is for the regulators, to be clear about what accounting does, and do whatever is needed as well for a clear statement. Clarity would also help the market.
15. The endorsement mechanism has to fill the democratic gap, as IASB is not a public EU institution
The regulator analysed then the endorsement mechanism. It is not ideal he said but it fills the democratic gap that otherwise would be there because, the IFRS Foundation is a private institution. The EFRAG also has achieved a great deal and the reforms are very positive, but it is not a public institution. In evaluating the functioning of this model, ESMA is the most appropriate body to take on the role currently played by EFRAG. Striking the balance between market regulators and prudential regulators is something that will enter the scene in years to come. There is a very strong Single Supervisory Mechanism (SSM) and a very strong banking regulator in Europe, but there is a fragmented system of market regulators looking over the shoulders of the issuing companies regarding accounting. This will pose a threat because they want the financial institutions to comply with IFRS but they have as well instructions from the SSM to apply their interpretation of those standards. The outcome could be the need to move to a central European market regulator for this type of support. On the long-term agenda of the Commission, he heartily supports the Capital Market Union. Sometimes in the accounting, the IFRS represent an excessive burden for SMEs to have access to capital markets. If the IFRS are not complied with, banks, auditors and investors will all ask for additional assurance and those companies who actually have a very good track record, will use it and are happy to comply. Let us be cautious on introducing fragmented standards to entice SMEs into capital markets. The speaker concluded by stressing that introducing more fragmentation will not serve the market.
By G. Everts - Board Member, Authority for the Financial Markets (AFM), the Netherlands
By G. Harlin - Group Chief Financial Officer, AXA Group
By A. Rubin de Cervin - Head of Unit, DG Financial Stability, Financial Services and Capital Markets Union, European Commission
By C. Montalvo Rebuelta - Executive Director, European Insurance and Occupational Pensions Authority (EIOPA)
By F. Flores – Chairman and Chief Executive Officer, European Financial Reporting Advisory Group Technical Expert Group (EFRAG TEG)