Financial reporting for sustainable development: Critical insights into IFRS implementation in the European Union

Abstract

By adopting a political economy perspective to accounting, this paper provides an overall post-implementation assessment of International Financial Reporting Standards (IFRS) adoption relative to the European Union’s (EU’s) fundamental goal of sustainable development. The paper questions the consistency of the International Accounting Standards Board’s business view with the EU’s and provides some critical insights into the potential long-run effects of IFRS on the European economy and society. Therefore, it raises several doubts about unquestioned accounting standardization at a global level and makes some suggestions for future policymaking and research.

Keywords:

• Financial reporting
• IFRS
• European Union
• Sustainable development

Acknowledgements

The author gratefully acknowledges the insightful comments of the two anonymous referees. She also appreciates helpful comments from all the participants at the 2017 Society for Advancement in Society and Economics Congress in Lyon (France).

Vera Palea, PhD. in Finance and Accounting at Bocconi University, is Associate Professor in Financial Reporting and Analysis at the University of Torino. Her research focus is on IFRS adoption in the European Union. She has published several papers on the topic in leading academic journals.

Notes

1 According to the European Commission (2014), industry includes the whole non-financial business economy, that is, manufacturing, raw materials, energy, business services (e.g., logistics), consumer services (e.g., after-sales services for durable goods) and tourism. In 2013, the EU-28’s non-financial business economy generated a total of EUR 6,240 billion of gross value added at factory cost. The non-financial business economy workforce reached 133 million people employed, representing around three-fifths of those employed in the EU-28. In the non-financial business economy, manufacturing is the largest in terms of value added: 2 million manufacturing enterprises generated EUR 1,630 billion of value added in 2013, while providing employment for about 29.7 million people (Structural Business Statistics Overview, 2018).

2 For insights into the distinctive characteristics of a political economy of accounting see Cooper and Sherer (1984).

3 In line with Gray (2010), this paper uses the terms “sustainability” and “sustainable development” interchangeably. There is a slight difference between the two expressions, in which “sustainability” refers to a state, while “sustainable development” refers to the process of achieving this state.

4 In 2013, the overwhelming majority (99.8%) of enterprises active within the EU-28’s non-financial business economy were micro, small, and medium-sized enterprises—some 22.6 million (Structural Business Statistics Overview, 2018). Family businesses account for 75% of European employment in Italy, Germany, and France; 85% in Spain; 70% in Belgium and Luxemburg; and 80% in Finland (KPMG, 2018).

5 Art. 3 of the Treaty on the European Union (2007), as emended by the Lisbon Treaty, states that the EU shall “work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.”

6 Even though the current “Exposure Draft Conceptual Framework for Financial Reporting” (IASB, 2015) states that “financial statements are prepared from the perspective of the entity as a whole instead of from the perspective of any particular group of investors, lenders or other creditors” (par. 3.9.), it then reaffirms several times its main focus on capital market participants in general and, more specifically, on investors. For instance, it states that “the Conceptual Framework: a) contributes to transparency […] enabling investors and other market participants to make informed economic decisions, b) strengthens accountability by reducing the information gap between the providers of capital and the people to whom they have entrusted their money […] c) contributes to economic efficiency by helping investors to identify opportunities and risk across the world” (IN 5).

7 The European Court of Justice’s judgment concerns the interpretation of the principle that a “true and fair view” must be given of companies’ assets, liabilities, financial position and profit or loss. Specifically, the judgment concerns the treatment, for accounting purposes, of the acquisition of shares that were resold, 1 month after their acquisition, at a price that was 3,400 times their purchase price.

8 In considering empirical literature, the focus is on European Union banks, whose prudential regulatory framework, which played a role in banks’ deleveraging, shows some differences from the US.

9 As is well known, social market economics shares with classical market liberalism the firm conviction that markets represent the best way to allocate scarce resources, while it shares with socialism the concern that markets do not necessarily create equal societies (Müller-Armack, 1966). Since a free market does not always work properly, public authorities should act and intervene to prevent it from providing negative outcomes for society (Spicka, 2007). It is also common to refer to social market economies as the “Rhenish” variety of capitalism, and to liberal market economies as the “Anglo-Saxon” variety of capitalism (e.g., Albert, 1993; Hall & Soskice, 2001). For other capitalist economies, different models are necessary (e.g., Witt et al., 2018). For further insights into the key features of social market democracies, see Albert (1993), Hall and Soskice (2001), and Witt et al. (2018). Many could argue that so far, European institutions, such as the European Commission, have not done enough to reach these objectives. Nonetheless, this does not undermine the relevance of the EU’s ideals. As Noël, Ayayi, and Blum (2010) note in their article on Habermas’ discourse of ethics applied to accounting policy, ideals give rise to action even if they are not or cannot be enforced, since they inspire us to improve our institutions and behavior.

10 In this respect, the recent constitution of the EFRAG academic panel along with the EFRAG Academic Network should be welcomed, with the purpose of providing effective contribution on accounting issues that are relevant to European constituents.