By Jean Medernach - The main role of EFRAG, the European Financial Reporting Advisory Group, is to advise the European Commission on whether new IFRS should be endorsed in Europe. The criteria for endorsement of new or revised IFRS are:
- Technical: do they meet the criteria of understandability, relevance, reliability and comparability of the financial information needed for making economic decisions, e.g. investment decisions, and are they not contrary to the principle of the true and fair view set out in the European accounting directives?
- Qualitative: are they conductive to the European public good?
EFRAG is a private not-for-profit association based in Brussels and was established in 2001 with the encouragement of the European Commission to serve the public interest. Member organisations are mainly European stakeholder organisations in the areas of accounting, business and finance, and national accounting organisations in European countries. BETTER FINANCE is represented at board meetings through an observer with speaking rights, representing the views of private investors and end users of financial services. BETTER FINANCE is currently represented by its own board member, Jean Medernach. Other observers at the EFRAG board are the European Commission, the European Central Bank and the European Supervisory Authorities (EBA, EIOPA and ESMA).
The mission of EFRAG, however, goes beyond the pure endorsement of new IFRS. EFRAG actively develops and promotes European views in the area of financial reporting through research projects and discussion papers, comments to IASB proposals and contributions to all IASB* projects, influencing and improving new accounting and reporting standards. For instance, in 2018 EFRAG established a European Corporate Reporting Lab to monitor and promote reporting best practices. The first project of the European Lab concerns climate-related reporting. The overall objective of EFRAG’s activities is to serve the European public interest.
BETTER FINANCE’s aim as observer is to ensure that private investors’ concerns and interests, such as prudent accounting, transparent and understandable reporting by public companies and financial institutions (banks and insurance companies), are taken into consideration. Comprehensive management reporting on financial and non-financial information with a focus on long-term value creation, risks and opportunities for the company, environmental, social and governance factors as well as sustainable investment by the company, are key for private investors trying to understand the performance and objectives of the companies they invest in.
The main technical activities of EFRAG in 2018 are summarised hereafter:
IFRS 17 Insurance Contracts dominated EFRAG’s endorsement-related work in 2018. IFRS 17 is almost certainly EFRAG’s most challenging endorsement advice to date, reflecting the need for in-depth impact assessment, the complexity of the Standard and some of the products it addresses, and the diversity of insurance accounting practices in Europe. EFRAG’s evidence-gathering activities included an unprecedented programme of 60 case studies with individual insurers to evaluate the expected costs, benefits and potential wider effects of the new Standard.
The EC timetable requested EFRAG’s advice by the end of 2018 but the project has since taken a different course. EFRAG’s identified several concerns and highlighted some aspects of IFRS 17 that merit further consideration to the IASB. It is a testament to EFRAG’s influence that the IASB will now consider some amendments to the Standard.
Despite the various concerns raised with IFRS 17, there is nevertheless widespread agreement on the need for a high-quality new insurance standard. EFRAG will continue to play its part in achieving this. Of particular interest is the updated ‘Endorsement Status Report EFRAG’ regularly publishes on its website.
EFRAG has been reappointed to the IASB’s ASAF** - a key forum to bring European views to the international debate.
One of the 2018 highlights in this context has been EFRAG’s work on the IASB’s Discussion Paper ‘Financial Instruments with Characteristics of Equity (FICE)’. EFRAG published an early draft comment letter in August, followed by outreach events and stakeholder meetings in partnership with other organisations, including with the IASB. Most notably, an ‘early-stage impact analysis’ was conducted with the objective of assessing the wider effects and potential unintended consequences of changes to rules on FICE reporting during the consultation phase, in order to reduce the risk of problems emerging in the endorsement phase.
EFRAG Research Work
In November 2018 EFRAG delivered a comment letter to the EC on Equity Instruments – Impairment and Recycling as part of its ongoing investigation into whether the IASB’s new requirements on accounting for equity investments are fully conducive to long-term investing and to Europe’s sustainable finance aims.
Furthermore, EFRAG regularly publishes research papers on its website. Recent examples of particular interest to investors is the following academic literature review:
- ‘Interaction of IFRS 9 and long term investment decisions’
- ‘Equity instruments-impairment and recycling’
- ‘Goodwill impairment test-can it be improved?’
For further information, please visit www.efrag.org
* IASB is the International Accounting Standards Board: the international institution that sets the IFRS ** ASAF: Accounting Standards Advisory Forum