The Evolution of the European Public Good Assessment in the EU Endorsement Process of IFRS

Abstract

Although legally the criteria to adopt IFRS in the EU have not changed since the adoption of the 2002 IAS-Regulation, the way they are assessed evolved over time. The purpose of this paper is to analyse how the European public good (EPG) criterion has been interpreted since the beginning of the EU endorsement process and how it is interpreted today. After retracing the origin of the European public good criterion in the IAS-Regulation we identify different periods in the EU endorsement process where the application of the EPG criterion changed. These changes are explained by a variety of factors, not least the financial crisis of 2008. The scope of what is considered to be part of the EPG has substantially expanded, a trend that is still ongoing.

Keywords:

• European Union
• IFRS
• endorsement process
• European public good

JEL classification:

• K22
• K33
• M41
• M48

Acknowledgements

An extended version of the study was presented in October 2018 to the Autorité des Normes Comptables (ANC), the French accounting standard setter that commissioned this study. Copyright of this study remains with the ANC. We would like to express particular thanks to David Alexander, Ingo del Guayo Castiella and Moritz Pöschke. We are also grateful to: Richard Baker, Alain Burlaud, Nicoleta Farcane, Giuseppe Ferrari, Manuel Gutan, Christian Hoarau, Sebastien Kott, Dominique Ledouble, Raffaele Manini, Chiara Saccon, and Yvan Stempnierwsky.

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 This same expression is already found in the general description of the endorsement mechanism for the first proposal of the Regulation (COM [2001] 80 Final COD 2001/0044 of 13 Feb. 2001, p. 7) without being specified.

2 Interviewed on 5 September 2007.

3 EFRAG did not give an endorsement advice but provided an analysis of the two carve-out features. However, EFRAG did not express ‘any opinion, favourable or unfavourable, on whether the carve-out is a desirable solution. [EFRAG’s] response should therefore not be interpreted as implying support for the carve-out itself.’ EFRAG letter of 26 September 2004.

4 What has become of the ‘temporary’ carve-out over time? The part of the carve-out relating to the deletion of the ‘fair value’ option was removed in November 2005 (European Commission, 2005) after the modification of IAS 39 by the IASB in June 2005. However, the reservation about hedging still applies fifteen years later. Indeed, IAS 39 was replaced by IFRS 9 for mandatory application in 2018, and the rules on hedging were relaxed, but the question of macro-hedging was deliberately set aside, with the IASB reserving the right to examine the issue as part of a specific project … which is still in progress. The IASB website identifies this (research) project under the heading: ‘Dynamic risk management’. The European Regulation for the endorsement of IFRS 9 logically mentions that the carve-out added to IAS 39 remains valid: ‘In order to ensure consistency with Union law a consequential amendment to IAS 39 relating to fair value hedge accounting, has not been effected in this Regulation’ (Recital 3 of Regulation no. 2016/2067 of 22 November 2016).

5 In June 2005 the IASB withdraw IFRIC 3.

6 This change was initiated by the new Chairman and CEO of EFRAG. Interview of 29 March 2018 with Françoise Flores, Chairman and CEO of EFRAG from 2010 to 2016.

7 Interview of 29 March 2018 with Françoise Flores, Chairman and CEO of EFRAG from 2010 to 2016. Also Van Mourik and Walton (2018).

8 Interview of 29 March 2018 with Françoise Flores, Chairman and CEO of EFRAG from 2010 to 2016. The Commission’s request letters were not (yet) published at that time.

9 Before the European Parliament intervened EFRAG (January 2007) and the ARC (February 2007) had already uncontroversially supported IFRS 8.

10 This discussion is not the subject of our work. In their study for the European Parliament on the criteria for adopting IFRS in relation to IFRS 9, Bischof and Daske (2015; also Bischof & Daske, 2016) point out that there is still no evidence that specific accounting standards have played a significant role or have contributed to the crisis. In addition, they add that prudential regulators should counterbalance any potential negative effects of accounting that they may perceive in their own regulations. See also Laux & Leuz, 2010.

11 Interview with Valérie Ledure, Directorate-General for Financial Stability, Financial Services and Capital Markets Union on 15 September 2016.

12 The Board also consisted of 17 members before the Maystadt reform, but these members ‘only’ represented EFRAG’s founding professional organisations.

13 The current president, Jean-Paul Gauzes, appointed on 1st July 2016, was a Member of the European Parliament from 2004 to 2014.

14 On 12 September 2016, the IASB published amendments to IFRS 4, entitled ‘Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts’.

15 In April 2020 the IASB even decided to defer the effective date of IFRS 17–1 January 2023 after continuing insistence of EFRAG (see, for example, EFRAG letter to the IASB of 24 September 2019 regarding IASB ED/2019/4 Amendments to IFRS 17).

16 Letter of 9 June 2016.

17 Letter of 27 October 2017.

18 http://www.efrag.org/Activities/1807101446085163/European-Corporate-Reporting-Lab-at-EFRAG# (last accessed on 23 August 2019).

Additional information

Funding

We acknowledge the financial support by the French Accounting Regulator Autorité des Normes Comptables (Convention No 2016-006).