IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the EU?

† This commentary paper was commissioned by the editor of this journal. Parts of this paper draw on material previously published in non-academic form by PwC and by Wiley IFRS.

Abstract

This paper is a commentary on issues related to the first decade's mandatory use of International Financial Reporting Standards (IFRSs) in the EU. Three specific but related questions are addressed, as in the paper's title. On the first (imposition and use of fair value (FV)), I conclude that the International Accounting Standards Board has not substantially extended the use of FV in its 15 years of work and that most companies hold few assets or liabilities on the FV basis. On the second question (adoption in the EU), I analyse a consultation exercise which strongly suggests that the EU's imposition of IFRSs will continue. On the third question (legality of IFRSs), I explain why recent UK legal opinions that question the legality of reporting under IFRSs are not persuasive.

Keywords:

• myth
• IFRS
• fair value
• true and fair
• EU endorsement

Acknowledgements

The author is grateful for comments on an earlier draft from David Cairns, Christopher Napier, R.H. Parker, Priya Rabberu, Brian Singleton-Green, Stephen Zeff, an anonymous reviewer and the editor of this journal.

Disclosure Statement

No potential conflict of interest was reported by the author.

Notes

† This commentary paper was commissioned by the editor of this journal. Parts of this paper draw on material previously published in non-academic form by PwC and by Wiley IFRS.

1 As recorded on the journal's website: http://www.tandfonline.com/toc/raie20/current (Retrieved September 20, 2015).

2 It excludes IFRS 2 and IAS 17.

3 October 2015.

4 There are sometimes effects on assets and liabilities because of other parts of the double entries for revenue recognition (e.g. IFRS 15, paras. 55 and 91).

5 Some exploration and evaluation assets might fall under the general definitions of IASs 16 and 38 but are specifically excluded by those standards (IAS 16, para. 3, and IAS 38, para. 2). In the absence of IFRS 6, the assets might be treated as though they were under IASs 16 and 38 by applying IAS 8, para. 10.

6 This is complicated, but amortised cost is required by para. 4.1.2 of IFRS 9 in circumstances that overlap with the definition of held to maturity in IAS 39, para.9. Both standards also contain options to designate assets to FV. A detailed assessment of IFRS 9 is contained in http://www.efrag.org/files/IFRS%209%20endorsement/IFRS_9_Final_endorsement_advice.pdf (Retrieved October 26, 2015). A further detailed assessment can be found in Bischof and Daske (2015) who conclude that IFRS 9 ‘will not fundamentally change the current accounting treatment for financial instruments under IAS 39’ (p. 6).

7 Amendment of 2014.

8 Amendment of 2014.

9 Paragraph 6.14 makes this clear, and there are many references to the advantages of historical cost.

10 Again, it is quite clear from Chapter 6 that a mixed model is intended.

11 I have not seen any data on this, but my own casual observation of studying hundreds of listed companies is that one never comes across these standards. Of course, unlisted companies and developing countries are not studied in the detail needed to comment on this. The impetus for changing IAS 41 (see above) came particularly from the Malaysian Accounting Standards Board which used evidence from seven companies. See, http://www.ifrs.org/Meetings/MeetingDocs/IASB/Archive/Agriculture/AGRI-0912-13B.pdf.

12 These include mineral producers if they use net realisable value and commodity brokers if they use FV.

13 For the EU, see: http://ec.europa.eu/finance/accounting/docs/legal_framework/20140718-ias-use-of-options_en.pdf. (Retrieved September 20 2015)

14 The equity method was introduced as a further option in an amendment to IAS 27 of 2014.

15 Those within the scope of IAS 39.

16 The ‘about half’ comes from Table 2 of Gebhardt (2012) but this uses data of a different date from Table 3.

17 See the IASB's ‘Project Update’ on Leases (p. 13), issued in August 2014.

18 An exception is the Netherlands (Zeff, van der Wel, & Camfferman, 1992).

19 IFRS 9 was first issued in 2009 and is not EU-endorsed as I write (October 2015). IFRSs 10 and 11 were mandatory for 2013 onwards according to the IASB, but only endorsed in the EU for 2014 onwards.

20 Apart from any temporary differences caused by delays in endorsement, the IAS 39 carve-out is the only difference between IFRS and EU-endorsed IFRS. The carve out is only used by a few financial institutions; about 20 of them according to page 4 of: http://www.ifrs.org/Use-around-the-world/Documents/Financial-Reporting-Standards-World-Economy-June-2015.pdf

21 Up to now, this has generally been solved by: (i) ignoring the extra latitude for hedge accounting in the EU's version of IAS 39, (ii) ignoring opportunities for early adoption of standards until they are EU-endorsed and (iii) obtaining an extra audit report which refers to IFRSs.

22 See: http://www.efrag.org/Front/p172-4-272/Compatibility-Analysis-IFRS-for-SMEs-and-the-Council-Directives.aspx (Retrieved September 20, 2015).

23 See: http://ec.europa.eu/internal_market/consultations/2014/ifrs/contributions_en.htm (Retrieved September 20, 2015).

24 That is, 90% of answers were clear, and 84% of the answers were clearly positive. 

25 Two of these are anonymous. Some others relate to Royal London Asset Management and the Local Authority Pension Fund Forum.

26 The responses are summarised in: http://ec.europa.eu/internal_market/consultations/2014/ifrs/docs/summary-of-responses_en.pdf (Retrieved September 20, 2015). The report can be found at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0301&from=EN (Retrieved September 20, 2015).

27 The US origins of this term are investigated by Zeff (2007).

28 For example, in Bompas’ para. 26, it is not clear why reference is made to SSAP 2 rather than to FRS 18, which replaced it in 2000. FRS 18 (para. 35 (c)) has the rather restricted meaning (‘under conditions of uncertainty’) as in the pre-2010 IASB Framework. Similarly, Bompas’ reference to ‘all foreseeable liabilities and likely losses’ (para. 10.1.3 (ii)) has been removed from the law, as Bompas later explains (para. 26). In para. 11.1, Bompas apparently agrees with the complaint against IAS 39, but this relies on the old legal wording, so the complaint is wrong. On the specific point of bad debt impairment (para. 70), it is not clear that UK GAAP was more prudent than IFRS. The other vague remark about ‘provisions’ (also in para. 70) is inexplicable, given that FRS 12 was identical to IAS 37.

29 Although there are footnotes in IASs 1 and 8 which refer to the 2010 framework, these are editorial insertions made without IASB due process and without EU endorsement.

30 This would be sufficient because the Fourth Directive and the 2013 Directive which replaces it (Article 4 (1)) consider the notes to be part of the ‘accounts’.

31 https://www.frc.org.uk/Our-Work/Publications/FRC-Board/Martin-Moore-QC-Opinion-3-October-2013.pdf (Retrieved September 21, 2015).

32 See: http://www.lapfforum.org/news/files/BompasFurtherOpinionSignedCopy.pdf (Retrieved September 25, 2015).