During the height of the global financial crisis, the International Financial Reporting Standards (IFRS) exacerbated the tense situation on the capital markets. Due to their basis on market prices (“fair values”), the IFRS effectively functioned as fire accelerant when the markets slumped dramatically. Additionally, as the IFRS prescribed an incurred loss impairment model, banks had been underestimating their credit risks for a long time and then had to write off huge amounts when the losses incurred. In order to overcome these problems, the International Accounting Standards Board (IASB) revised the relevant international accounting standard on financial instruments IAS 39 and presented in 2014 the new international financial reporting standard IFRS 9. To become effective within the EU, accounting standards have to be endorsed by the Commission. The European Parliament can only reject new standards but not enforce to make any changes. If not objected by the European Parliament, IFRS 9 will become effective in January 2018.
This Monday, the Economic and Monetary Affairs Committee of the European Parliament (ECON) did not object the endorsement of IFRS 9 for the EU, but voted a motion for resolution ensuring that the new standard does foster financial stability and supports long-term investment. The resolution was adopted by a large majority including a number of Green proposals. In order to become binding, the resolution has to be adopted in a plenary vote next week in Strasbourg. It would be the first time that the Parliament does not simply endorse a standard but formally expresses concerns.
First of all, we acknowlegde that IFRS 9 constitutes an improvement compared to IAS 39 insofar as it addresses the problem of ‘too little, too late’ in the loan loss recognition procedure. However, we as Greens have been criticising for a long time that IFRS 9 is lacking a quantitative impact assessment. Therefore, in order to avoid any sudden unwarranted impact on banks’ capital ratios, the resolution calls on the European Commission to propose by the end of 2017 appropriate steps in the prudential framework.
Second, IFRS 9 is a more principle based and less mechanic rule than its predecessor IAS 39. As a consequence, the accounting process now involves a greater deal of judgement. In order to prevent any abuse of management discretion, the resolution calls on the European Supervisory Authorities in cooperation with the Commission and EFRAG to develop detailed guidance.
Third, as concerns remain whether IFRS 9 serves the EU’s long-term investment strategy, the resolution calls on the Commission to come forward with an evaluation of the impact of the new standard on long-term financial instruments no later than December 2017.
Finally, the recognition of unrealized gains under fair value accounting might potentially violate the Capital Maintenance Directive and the Accounting Directive. Therefore, the resolution calls for modifications on IFRS 9 if Commission’s comparison of Member States’ practices with regard to dividend distribution reveals non-compliance with EU law.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“The message of the MEPs is clear: Accounting standards are a public good. For the first time, the European Parliament does not simply rubber-stamp a new financial reporting standard, but expresses concerns and demands follow-up action. The Commission has the obligation to carefully monitor the impact of IFRS 9 on financial stability, dividend distribution and long-term financing and act if needed. We have to avoid any sudden unwarranted impact on banks’ capital ratios and any negative effect on long-term investment.
It is a pity that the European Parliament is only allowed to reject new financial reporting standards, but not to propose any changes. In the future, the Parliament must be involved at an early stage when developing financial reporting standards in general and in the endorsement process in particular. Therefore, the scrutiny process for the adoption of IFRS in the EU should be formalised and structured like the scrutiny process applicable to ‘level 2’ measures in the field of financial services.
As long as the IASB does not fulfil basic standards of democracy, we will continue to resist any extension of its powers to smaller companies, financial institutions or non-governmental organisations.”
Please find the draft resolution, the amendments tabled by all political groups and the resolution as voted in ECON on 26 September 2016 here:
Since 2005 listed companies in Europe have to draw up their consolidated accounts under International Financial Reporting Standards (IFRS). While prudence is the overarching principle in most local Generally Accepted Accounting Principles (GAAP), IFRS’s focus is on the information of investors and the valuation of assets at market prices. IFRS are developed by the International Accounting Standards Board (IASB), a private body based in London. The European Financial Reporting Advisory Group (EFRAG), also a private body, situated in Brussels, is meant to represent the European voice in the IASB.