Achieving Consistent application of the IFRS in EU - comment letter

Jbjames

Description

KPMG IFRG Limited Tel [phone] Dorset Rise Fax [phone] London EC4Y 8EN [e-mail] United Kingdom Mr. Tidström Chairman of the Supervisory Board EFRAG Our ref MV/288 13-14 Avenue des Arts 1210 Brussels Contact Mark Vaessen Belgium [phone] th6 October 2005 Dear Mr. Tidström ACHIEVING CONSISTENT APPLICATION OF IFRS IN THE EU: A DISCUSSION PAPER We appreciate the opportunity to comment on Achieving consistent application of IFRS in the EU: A discussion paper dated 27 July 2005. This letter expresses the views of the international network of KPMG member firms. We support initiating a debate in Europe on the important topic of ensuring that IFRSs are applied in a faithful manner consistent with a principles-based body of standards. Consistency Before providing specific feedback on a number of issues discussed in the Discussion Paper we wish to comment on the concept of consistency, which is the theme of the paper. We believe that it is important to have a debate about the concept of consistency so that preparers, auditors, users and regulators all have a consistent understanding of the term ‘consistency’. The paper sets out the background for discussion about issues surrounding consistent application of IFRS by providing its definition of ‘consistent application of IFRS’. The paper states that under IFRSs there is an “acceptance ...

Informations

• Publié par: Voem
• Nombre de lectures: 77
• Langue: English

Extrait

KPMG IFRG Limited 1-2 Dorset Rise London EC4Y 8EN United Kingdom

Mr. Tidström Chairman of the Supervisory Board EFRAG 1314 Avenue des Arts 1210 Brussels Belgium

th 6 October 2005

Dear Mr. Tidström

Our ref Contact

Tel [phone] Fax [phone] [e-mail]

MV/288 Mark Vaessen [phone]

ACHIEVING CONSISTENT APPLICATION OF IFRS IN THE EU: A DISCUSSION PAPER We appreciate the opportunity to comment onAchieving consistent application of IFRS in the EU: A discussion paperdated 27 July 2005. This letter expresses the views of the international network of KPMG member firms. We support initiating a debate in Europe on the important topic of ensuring that IFRSs are applied in a faithful manner consistent with a principlesbased body of standards. Consistency Before providing specific feedback on a number of issues discussed in the Discussion Paper we wish to comment on the concept of consistency, which is the theme of the paper. We believe that it is important to have a debate about the concept of consistency so that preparers, auditors, users and regulators all have aconsistent understanding of the term ‘consistency’. The paper sets out the background for discussion about issues surrounding consistent application of IFRS by providing its definition of ‘consistent application of IFRS’. The paper states that under IFRSs there is an “acceptance of a greater degree of flexibility – and therefore inconsistency – than is generally accepted in jurisdictions with more rulesbased frameworks”. It states that all the references in the paper to the ‘consistent application of IFRS’ should be read in that context.

The EFRAG paper explores a view expressed by some European commentators that if IFRSs are to be applied ‘consistently’, then IFRSs need to be supplemented by additional interpretations and guidance. This is because the application of IFRSs to

KPMG IFRG Limited, a UK company limited by guarantee, is a member of KPMG International, a Swiss cooperative

Registered in England No 5253019 Registered office: 100 Temple Street, Bristol BS1 6AG

ABCD

KPMG IFRG Limited 6th October 2005

specific circumstances is not always clear and broadbased experience in applying IFRS is in an early stage. There is a view that an additional layer of interpretations is needed to eliminate some of the implicit choices for recognition and measurement in IFRSs and thereby enable a greater degree of ‘consistency’ to be achieved. The context the EFRAG paper explores, is whether the appropriate mechanisms are in place to ensure that Europe applies IFRSs ‘consistently’.

We are concerned that this view suggests that ‘plain’ compliance with IFRSs may not be sufficient. In other words, in view of some, presenting financial statements that provide a true and fair view in accordance with IFRSs does not achieve the desired level of consistency. Those who hold this view believe that there may be a need in Europe to create a mechanism to achieve a greater level of ‘consistency’ or perhaps even ‘uniformity’, ie something beyond the ‘true and fair view’.

In our view, if all entities show a true and fair view and comply with IFRS, this level of consistency is the most appropriate objective and most desirable outcome. We believe that practice and experience of users and preparers with the application of IFRSs will, in the medium term, lead to greater consensus on acceptable alternatives.

In our view, consistent application means that when considering a specific issue or specific facts and circumstances a preparer is able to arrive at a conclusion that gives a true and fair view under IFRSs. Therefore the ultimate goal of consistency should be to identify those applications that are not acceptable under the standards. This view of consistency means accepting that applying IFRS will sometimes lead to differing answers, which are equally acceptable. Standards sometimes leave room for equally valid alternatives. As rightfully noted in the Discussion Paper it should not be the role of auditors or regulations to narrow these ‘implicit options’. This is the context that we would like to see in discussions about consistent application of IFRSs in Europe. All further references in this letter to consistency should be read in this context.

We are concerned that attempts to push for consistency at a higher level than “plain” compliance with IFRSs in the context of a principlesbased set of standards carries an unwelcome risk of setting detailed and voluminous rules for specific circumstances. Extrapolating principles (and interpretations thereof) from this guidance to apply to other situations will heighten the possibility of developing inconsistent submodels, inviting accounting arbitrage and fostering an atmosphere of compliance with the letter but not the spirit of the standards. We continue to support global principlesbased standards and do not believe in setting specific rules for specific facts and circumstances. Therefore, we do not believe that an additional mechanism dealing with implementation issues is necessary. We fully agree with the position taken in the paper that Europe should not issue interpretative or implementation guidance.

MV/288

2

ABCD

Implementation issues arising in Europe

KPMG IFRG Limited 6th October 2005

Adoption of IFRSs in Europe is a change that is unprecedented in its magnitude. Some 7,000 listed companies are adopting IFRSs at the same time. There are additional first time adopters in other countries of the world, including Australia, South Africa and Russia. Adoption of IFRSs is, in itself, a significant step towards achieving consistency. Listed companies in Europe are applying the same set of principles instead of 25 different GAAPs. In that sense we believe that adoption of IFRSs and the objective of giving a true and fair view under IFRS will achieve an unprecedented consistency among preparers in different countries.

However, we acknowledge that IFRSs represent a relatively untried set of standards that are not without complexity. As a result, we believe that it is inevitable that initially there will be a significant increase in the number of implementation issues that arise in practice. Countries have different traditions and market practices with respect to financial reporting. These different perspectives will not disappear simply because IFRSs have arrived.

In our experience, the majority of issues that arise in practice are issues relating to adopting IFRSs for the first time. Adoption of IFRSs in Europe has and will continue to require significant educational efforts in the next few years for all parties involved – preparers, regulators, auditors and users. As an illustration, in our experience it is common for implementation issues to arise upon the issuance of a new IFRS. In our experience a large volume of issues arises three to 12 months after issuance of a new standard. The majority of these issues are resolved within 12 to 18 months. Dealing with these implementation issues is also part of an educational process of understanding a new standard. We believe that once a stable platform is established for IFRSs the demand for resolving these implementation issues will inevitably reduce considerably.

The role of the IFRIC

Since in our view, issues relating to adopting IFRSs for the first time (including new IFRSs) are mostly implementation issues, they do not require a formal interpretation by the IFRIC. For future new standards, we believe that one way of dealing with practical implementation issues is for the IASB to sponsor a ‘New Standards Forum’ (please refer to our proposals below under the ‘urgent issues mechanism’).

Creating interpretations for multiple implementation issues arising in practice means running a risk of writing a book of rules as opposed to setting principles. We believe that IFRSs, as well as IFRIC interpretations, should continue to be principlesbased

MV/288

3

ABCD

KPMG IFRG Limited 6th October 2005

without extensive application guidance. We would expect interpretations on issues only when there are apparent conflicts in potentially applicable standards.

Considering that IFRSs are based on principles, application of IFRSs requires the use of judgement. The standards also allow, in some cases, for the use of alternatives. The facts and circumstances could be different for each entity’s situation. Therefore, there may be a good reason why two entities, or two accounting professionals, exercising reasonable judgement, might select different recognition or measurement policies or present apparently similar transaction in different ways. For example, the accounting for transactions among entities under common control is not covered specifically by IFRSs. In practice accounting for business combinations between entities under common control is done at either book values or fair values. One or both approaches may be appropriate depending upon the nature of the transaction, for example, whether the parties entered into the transaction on an arm’s length basis.

Also, as time passes, experience of applying IFRSs and knowledge of IFRSs will develop. Most implementation issues will be resolved as the body of practice develops. Clearly, significant efforts will be required from preparers and auditors of financial statements to ensure that the choices made under IFRSs are acceptable. These efforts will create an emerging body of practice. We believe that IFRSs will become a mature GAAP only once such a body of practice has developed to supplement the already voluminous literature published by the IASB. The most appropriate way to ensure the consistent application of IFRSs in the medium and long term is for standard setters and regulators to provide space for such a body of practice to evolve. We think it is appropriate that the financial reporting community is given reasonable latitude to developing appropriate accounting policies, even if this leads to some diversity, rather than referring all issues to the IFRIC.

As a result, we do not believe that the number of issues regarding IFRSs arising in Europe go beyond what is inevitable in the context of the massive scale of a change to adopt a new body of accounting standards with many differences from previously applicable national GAAPs, including: principles, scope, transition and effective dates. The significance of this change is amplified by IFRSs being appropriately a principles based, highlevel framework. Therefore, we do not believe that the number of issues that truly require an interpretation by the IFRIC will increase significantly.

Even if there were a large number of implementation issues to be addressed, a proliferation of new interpretations would not be the most effective way to aid consistency of application and could prove counterproductive:

MV/288

4

ABCD

KPMG IFRG Limited 6th October 2005

The publication of a large volume of new material could have a destabilising effect during the transitional period to IFRSs.

There is a risk that a “dependency culture” could develop, in which the financial reporting community ceases to take responsibility for developing an appropriate body of practice based on the principles in the standards but instead passively awaits the publication of the latest rule – whilst assuming that the absence of an explicit rule means “anything goes” in the meantime.

The publication of new interpretations tends to create demand for more interpretations – an infinite regression of interpretations.

A proliferation of interpretations would change the character of IFRSs, making IFRSs “rules based”.

The Discussion Paper notes views that the IFRIC is inundated with the number of potential interpretation issues. We would like to note that we have not seen any evidence that the IFRIC as constituted currently could not cope with the volume of issues that merit an interpretation at the principlesbased level. However, in order to be able to function effectively going forward, we believe that the IFRIC will need to be resourced adequately and continue to meet eightten times a year for two days at a time, with more frequent meetings of the IFRIC Agenda Committee. It is also vital that the work of the IFRIC is given a priority and commitment by its members and the IASB to ensure that each of those meetings is productive. In our view, the IFRIC’s newly adopted process of publishing more expanded commentary on its reasons for not taking questions onto its agenda is a helpful step forward in managing the volume of potential interpretive issues and building a shared understanding of the requirements of IFRSs.

Is an urgent issues mechanism necessary?

We do not support the establishment of an additional mechanism or body in Europe to deal with urgent issues (i.e. in addition to the issues dealt with by the IFRIC). Any guidance issued by Europe, over and above that issued by the IASB and the IFRIC, would not fall within the formal framework for IFRSs, and this could result in undesirable consequences in the form of development of “European IFRSs”. There is also a further risk with developing too many interpretations, in that it becomes akin to generating new rules to be applied in a principlesbased environment.

The time required for the development and release of an interpretation is another key factor in the debate regarding an urgent issues group. We believe that if such an additional mechanism or body were to try to resolve issues on an urgent basis, then it

MV/288

5

ABCD

KPMG IFRG Limited 6th October 2005

would require a truncated consultation process, which we do not support. The due process required to issue interpretations on an international level requires a minimum consultation period that is a critical part of the acceptance of the conclusion. The necessary due process would defeat the purpose of establishing an urgent issues group.

Furthermore, we are not certain that there are genuine urgent issues. Possibly some of the issues might have arisen as ‘urgent issues’ only because they were identified late, rather than because a solution could not have emerged in sufficient time. Many of the issues that are perceived as urgent issues are transitional issues. It is difficult to make a distinction between urgent and nonurgent issues during this period of conversion. From the perspective of a listed company preparing its first accounts under IFRSs all implementation issues are urgent.

In other words, it is not clear how much of the demand for guidance is a oneoff product of the adoption of IFRSs vs. a normal level of questions expected to arise in the context of ongoing reporting under IFRSs. In our view, a key driver behind the demand for an urgent issues group is the need to resolve issues arising upon first adoption of IFRSs, including issues arising on adoption of new standards. As discussed above, in our experience a large volume of issues arises three to 12 months after issuance of a new standard, the majority of which are resolved within 12 to 18 months. Therefore, we believe that creating an urgent issues group would be fixing a shortterm problem with a longterm solution. Once a stable platform is established for IFRSs we expect that the demand for an urgent issues group would be reduced considerably.

We suggested in our comment letter onIFRIC  Review of Operations: Consultative Documentthat one way to deal with new application issues is for the IASB to sponsor a ‘New Standards Forum’. A Forum could provide an opportunity for a number of Board, IFRIC and IASB staff members to meet with constituents to discuss practical and implementation issues. The aim would be for the IASB to facilitate discussion between interested parties, including users, preparers, auditors, standardsetters and regulators, and to provide insight into the intention of the standardsetters in the context of discussing these implementation issues. The IFRIC support mechanism proposed by the EFRAG could play an important role in this Forum. If the ‘support mechanism’ acts as an arena at which interested parties can debate pressing issues, this ‘support mechanism’ would be in a best position to identify those issues on a timely basis and bring them to the table at the ‘Forum’. The goal of the forum should be to identify and address as many issues a possible between the date of the issuance on the standard and its effective date.

Such a forum would facilitate discussion of application issues but should not seek to publish guidance. If the discussion highlights significant diversity of views regarding a

MV/288

6

ABCD

KPMG IFRG Limited 6th October 2005

particular issue, then it could be referred to the IFRIC for consideration. The forum meeting could be chaired by the IFRIC chairman or another member of the Board. A ‘New Standards Forum’ could be held initially after the issuance of the standard and then every three to six months for a period of approximately one year after a new standard is published. In this way, we believe that the majority of issues related to a new standard could be highlighted and discussed through greater interaction of constituents directly with Board and IFRIC members, while providing an alternative for dealing with urgent issues in a way that does not create another layer of authoritative guidance.

The discussions may identify issues that need to be brought to the attention of the IFRIC, however, this would not be the main purpose of the Forum. A summary of the discussions that took place at the Forum could be released after the meeting through posting on the IASB web site. This would enable constituents who did not attend the meeting to understand practical issues arising on the application of the new standard. These summaries should not express conclusions that are, in substance, interpretive or application guidance.

Role of regulators and auditors

We support the conclusions reached in the Discussion Paper that audit and enforcement should remain separate from standard setting.

At the same time, we recognise that the audit firms play an important role in ensuring that IFRSs are dealt with consistently within their networks and promoting consistency more widely. A great deal is being done to achieve this goal. However, when an issue of application of principles in IFRSs arises, auditors cannot substitute for standard setters and interpretations bodies. On the other hand, auditors have an important role in identifying application issues and raising these for the IFRIC to consider.

Regulators also have an important role in the process of achieving consistency. Although there is one standard setter, the IASB, the standards will be enforced by different national agencies. In Europe alone, there are potentially over 100 different regulatory agencies with an interest in IFRSs. To avoid inconsistent enforcement decisions, we believe that coordination is needed at the regulatory level. Divergence is likely to arise if each national regulator tries to establish its own ‘interpretations’ or rulebooks of IFRSs. We believe that authoritative interpretation should only deal with issues where there is a conflict within or between standards – and they should be issued by the IFRIC, the official interpretation body of the IASB.

MV/288

7

ABCD

KPMG IFRG Limited 6th October 2005

Preparers are also important players in achieving the goal of consistency. Many implementation issues surface when preparers apply IFRSs in practice. It is part of a day to day activity for the accounting profession to work on solutions to the issues that arise. This has been the traditional way in which the body of practice has emerged and evolved in many countries. We believe that a similar process is happening with IFRSs too. In our view, the most pressing need is for the financial reporting community to work together to address implementation issues to enable the body of practice to develop.

Should Europe issue interpretive or implementation guidance?

We agree with the conclusions reached in the paper that Europe shouldnot issue interpretative or implementation guidance. Only IFRIC, the official interpretation body of the IASB, a global standards setter, should issue binding interpretations.

The IFRIC support mechanism

We see some merits in establishing a body in Europe that will be a forum at which interested parties can discuss pressing issues in an open and transparent manner. However, we consider that the primary purpose of this mechanism should be to share experience of current practices in order to achieve a shared understanding of the application of IFRSs. This forum also could be a mechanism for identifying emerging interpretation issues that may need to be submitted to the IFRIC. However, the proposed mechanism should not generate additional technical literature, issue views or opinions.

Therefore, we agree with the position taken by the paper that the suggested solutions should not be published because this would create a second level of interpretive guidance. We consider that the output of the mechanism should be a request that the IFRIC consider whether an interpretation is necessary on a particular issue.

* * *

Please contact Mark Vaessen at 020 7694 8089 if you wish to discuss any of the issues raised in this letter.

Yours faithfully / sincerely

KPMG IFRG Limited

MV/288

8

ABCD

MV/288

KPMG IFRG Limited 6th October 2005

9