Prsentation PowerPoint

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CEPS 22nd NOVEMBER,
2005 THE ECONOMIC IMPACT OF IFRS TRANSITIONAL
AND LONGER-TERM EFFECTS ENSURING COHERENT
IMPLEMENTATIONAT THE NATIONAL LEVEL WILL
FINANCIAL RESULTS ACROSS THE EU TRULY BE
COMPARABLE ? Philippe DANJOU Director,
Accounting Division - AUTORITE DES MARCHES
FINANCIERS Member of the IASBs Standards
Advisory Council
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Subjects for Roundtable Discussion

• WHY ARE MARKET REGULATORS INVOLVED WITH IFRS ?
• IN THE EU, WHAT IS THE INSTITUTIONAL ROLE OF
  MARKET AUTHORITIES ?
• COMPLEXITY OF THE TRANSITION TIMETABLE
• WHAT ARE THE CHALLENGES FACED TODAY IN
  IMPLEMENTING IFRS ?
• DO WE HAVE A STABLE PLATFORM ?
• AN EU PERSPECTIVE HOW DOES CESR VIEW THE
  CONSISTENCY OF ENFORCEMENT ?
• PLANS BY IOSCO FOR INTERNATIONAL COORDINATION OF
  ENFORCEMENT IN THE CONTEXT OF IFRS

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WHY ARE MARKET REGULATORS INVOLVED WITH IFRS ?

• IFRS THE FINANCIAL REPORTING LANGUAGE FOR
  LISTED COMPANIES IN 92 COUNTRIES
• MANDATORY IN THE 25 EU MEMBER STATES, AUSTRALIA,
  NZ, SOUTH AFRICA, PHILIPPINES etc
• CONVERGENCE WITH JAPAN, CHINA, USA, CANADA,
  COREA.
• IOSCO HAS SUPPORTED THE ADOPTION OF IFRS FOR
  CROSS-BORDER TRANSACTIONS SINCE MAY 2000 (Sydney
  Resolution)
• BETTER STANDARDS ENHANCE TRANSPARENCY
• EASIER COMPARABILITY OF INFORMATION
• ? DEEPER AND SAFER FINANCIAL MARKETS
• AS FOR ANY ACCOUNTING FRAMEWORK, LIGHT
  IMPLEMENTATION IS NOT ACCEPTABLE IF THE FULL
  BENEFITS OF HARMONIZATION ARE TO BE OBTAINED
• LEVEL PLAYING FIELD BETWEEN ISSUERS
• MARKET CONFIDENCE IN INFORMATION
• ? NATURAL REGULATORS OVERSIGHT ROLE

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IN THE EUROPEAN UNION A REGULATORY ENFORCEMENT
ROLE FOR MARKET AUTHORITIES

• RECITAL 16 OF REGULATION (CE) 1606/2002
• A proper and rigorous enforcement regime is key
  to underpinning investorsconfidence in financial
  markets. Member States are required to take
  appropriate measures to ensure compliance with
  IFRS
• ? National legislations have been enacted (e.g,
  France Law of 26th July 2005 General
  Regulation of AMF)
• TRANSPARENCY DIRECTIVE 2004/109 OF 15th December
  2004
• Art 24.4(h) Competent authorities in each
  Member State shall at least be empowered to
  examine that information referred to in th
  directive is drawn up in accordance with the
  relevant reporting framework and take appropriate
  measures in case of discovered infrigements
• PROSPECTUS DIRECTIVE 2003/71 OF 4th November 2003
  competent authorities designated in each Member
  State have to approve the prospectus and have
  numerous powers to fulfill this mission.

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COMPLEXITY OF TRANSITION Timetable in
consolidated accounts (as required by EU
legislation 1606/2002 and IFRS1)
IFRS 1 (par.6 7) First time application in
opening balance sheet at beginning of first
comparative period presented date of transition
will be 1/01/2004 in most cases
2003 2004
2005 beg. 2006
Local GAAP
??????
Interim information
Primary accounts published in local GAAP for
2003 2004 Interim information based on the
same accounting framework and national
requirements
IFRS
IFRS Proforma
2004 Comparatives published with 2005 financial
statements (according to IFRS1 parag. 36) using
IFRS applicable for 2005
First primary accounts in IFRS published at 2005
year end
EU Regulation
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CHALLENGES POSED BY THE TRANSITION TIMETABLE

• IFRS BIG BANG AT BEGINNING OF 2006 HOW WELL
  PREPARED ARE THE ISSUERS AND MARKET
  INTERMEDIARIES ?
• INTERIM INFORMATION IN 2005 NOT DEALT WITH BY EU
  REGULATION
• CAN DIFFER FROM INFORMATION FOR THE WHOLE YEAR
• NOT ALL ISSUERS WILL MAKE TRANSITION IN THE SAME
  YEAR
• Delay to 2007 allowed for certain issuers US
  GAAP will continue until 2007 in certain
  countries Issuers of bonds only can keep local
  GAAP until 2007
• Individual (parent company) financial statements
  will remain under local GAAP in many
  jurisdictions co-existence of a plurality of
  accounting frameworks
• SEC FOREIGN REGISTRANTS WILL HAVE TO CONTINUE
  RECONCILING THEIR IFRS FINANCIAL STATEMENTS TO US
  GAAP
• Until the date when the SEC will accept IFRS
  without reconciliation (see Roadmap to
  convergence) 2009 ? Earlier ?
• ? 2003-2007 IS A HIGH RISK PERIOD

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CHALLENGES POSED BY THE STANDARDS AND ENFORCEMENT

• PREPARERS / MARKETS NEED A STABLE PLATFORM DURING
  TRANSITION
• DO WE HAVE IT NOW ?
• IS IT COMPLETE ENOUGH ?
• EU ENDORSEMENT PROCESS IS LENGHTY
• CARVE OUT IAS 39
• PRINCIPLES BASED STANDARDS
• SMALL NUMBER OF INTERPRETATION BY IFRIC
• CONSIDERABLE JUDGMENT REQUIRED
• INFLUENCE OF NATIONAL ACCOUNTING CULTURES
• AUDIT FIRMS MAY HAVE DIFFERING VIEWS
• DIVERGENCES IN IMPLEMENTATION ARE LIKELY
• WE DO NOT WANT AN EU VERSION OF IFRS
• NEED FOR CONSISTENT ENFORCEMENT BY REGULATORS
• TRANSPARENCY OF ENFORCEMENT DECISIONS
• ? CESR AND IOSCO HAVE ADRESSED THE ISSUES

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From standard setting to implementation of
financial information A number of participants
who need to cooperate
IASB / IFRIC
EFRAG ARC
Soft Law IFRIC agenda Committee
decisions National interpretations Accounting
Doctrine Big 4 Positions
Endorsed Standards (OJ)
Europ. Commission
Listed company
Hard law
Regulators
Auditors
Financial information
Audit Standards - ISA
Law Courts
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WHAT ABOUT THE STABLE PLATFORM ?

• 2003-2005 NUMEROUS CHANGES IN A VERY SHORT
  PERIOD
• End 2003 comprehensive revisions to extant IAS
  1 to 40
• 5 subsequent amendments to IAS 39
• 7 new IFRS, 6 IFRIC (less IFRIC 3 withdrawn)
• ? Preparers need time to adapt systems, and
  auditors their audit approaches
• END 2005 MANY SUBJECTS NOT DEALT WITH BY IFRS
  e.g,
• Concession services
• Carbonic gas emission rights
• Business combinations application of the
  purchase method
• Put contracts on minority interests
• Insurance contracts
• Performance reporting
• MANY IMPORTANT INTERPRETATIONS ISSUES PENDING
• STILL A HEAVY WORK PROGRAM FOR 2006-2007
• 11 new projects due to become standards
• Driven by US IFRS convergence agenda
• CAN THE EU ENDORSEMENT MECHANISM COPE WITH THE
  PACE OF CHANGE ?
• Burden of translation necessary lengthy
  endorsement process (EFRAG, ARC, COMMISSION,
  PARLIAMENT, OJ)
• Risk of having a number of applicable IFRS/ IFRIC
  not endorsed in due time

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Regulatory Responses
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THE COMMITTEE OF EUROPEAN SECURITIES REGULATORS
- CESR

• Committee of European Securities Regulators
  (CESR) established by the European Commission
  Decision of June 2001 (taken in the light of the
  Report of the Committee of Wise Men on the
  Regulation of European Securities Markets
  -Lamfalussy Report-, as endorsed by the European
  Union
• An independent Committee regrouping senior
  representatives from national public authorities
  competent in the field of securities
• CESR has set out its own operational arrangements
  in its Charter.
• Chair and Vice-Chair elected for a period of two
  years.  The Committee meets at least four times a
  year.  CESR works with the support of a
  secretariat conducted by a Secretary General.
• A representative of the European Commission is
  entitled to participate actively in all debates
  (except in confidential discussions related to
  individual and/or firms).
• CESR submits an Annual Report to the European
  Commission, also sent to the European Parliament
  and the Council.  The Chair of CESR reports
  regularly to the European Parliament and
  maintains strong links with the European
  Securities Committee.

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ORGANIZATION
CESR-Fins OBJECTIVES Harmonisation of
enforcement, Cooperation in interpretation,
Exchange of information, Proactive action on
standards setting
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CESRs PLANS FOR IFRS TRANSITION AND CONSISTENCY
OF ENFORCEMENT

• PROVIDE FOR PROGRESSIVE INFORMATION ABOUT IFRS
  IN PUBLISHED DOCUMENTS
• To prepare investors to the change in financial
  reporting language
• ? a 3-step gradual and phased transition will
  help them understand the change, and will meet
  analysts demands for continuity
• To encourage issuers to give early indications of
  their state of readiness with regards to their
  future reporting obligations
• Will allow to identify those who are not getting
  prepared in time
• . MONITOR PROGRESS MADE BY ISSUERS IN PREPARING
  FOR THE TRANSITION
• . CESR MEMBERS TO PROVIDE ASSISTANCE TO ISSUERS
  WHEN FACED WITH COMPLEX SITUATIONS
• E.g, pre-clearance on accounting treatments under
  IFRS
• . MONITOR AUDITORS BEHAVIOUR IN REPORTING ON
  PUBLISHED IFRS INFORMATION DURING THE TRANSITION
  PHASE

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TRANSITION TO IFRS 2003- 2005
Additional information recommended by CESR-Fin
during preparation phase
2003 2004
in 2005 2005 Year end
Local GAAP
IFRS
IFRS proforma

Q1
S1
(4)Full IFRS with comparatives
(3) Interim information (when required) published
in accordance with IAS 34 or with IAS valuation
rules
(2) Quantified Information on effect of
transition on 2004 financial statements

• Description of transition plans, key differences
  identified in accounting
• methods as compared with known IFRS 2005
  (narrative updated at end 2004 )

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CESRs APPROACH TO CONSISTENCY OF ENFORCEMENT

• Sub-Committee on Enforcement a forum for CESR
  members to exchange views and experiences on
  methods for supervising the companies issuing
  listed securities.
• Enforcement decisions will still be taken at the
  national level, but will take into account
  precedents within the EU
• Standards n 1 and 2 on Enforcement of
  standards on Financial Information in Europe
  published by CESR
• Basis Recital 16 of EU Regulation 1606/2002
  
• A proper and rigorous enforcement regime is key
  to underpinning investors' confidence in
  financial markets/.. The Commission intends to
  liase with Member States, notably through the
  Committee of European Securities Regulators
  (CESR), to develop a common approach to
  enforcement.
•  

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INSIGHTS INTO STANDARD N1

• Principle 20
• In order to promote harmonization of
  enforcement practices and to ensure a consistent
  approach of the enforcers to the application of
  the IFRSs, coordination on ex-ante and ex-post
  decisions taken by the authorities and/or
  delegated entities will take place.
• Material controversial accounting issues will be
  conveyed to the bodies responsible for standard
  setting or interpretation.
• No general application guidance on IFRSs will be
  issued by the enforcers.
• Principle 21
• Enforcers should report to the public on their
  activities providing at least information on the
  enforcement policies adopted and decisions taken
  in individual cases including accounting and
  disclosure matters.

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INSIGHTS INTO STANDARD n2

• Principle 1
• Ex ante and ex post enforcement decisions taken
  by competent independent administrative
  authorities or by bodies delegated by these
  authorities (EU National Enforcers) should take
  into account existing precedents consistent with
  the timing and feasibility constraints which
  characterize the decision. Where practicable,
  discussions with other EU National Enforcers
  should take place before significant decisions
  are taken.
• Principle 2
• Within a reasonable time after decisions are
  taken by an EU National Enforcer, details of
  these decisions should be made available to the
  other EU National Enforcers in accordance with
  the policies developed by CESR.

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PRACTICAL IMPLEMENTATION OF STANDARDS

• Guidelines for Selection Method determining
  which issuers and documents to examine . Risk
  based approach list of typical risk factors
• ? approved in October, 2005
• Web based Database of enforcement decisions
  since August, 2005
• Case materials for EECS European Enforcers
  Coordination Sessions
• Guidelines for the publication of enforcement
  decisions
• Expected to provide further benefits for the
  harmonisation of enforcement as well as for
  achieving a consistent application of IFRS
• Publish all decisions taken except those which do
  not contribute to consistent application (e.g,
  simple accounting issue or mere repetition of
  earlier published decisions)

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IOSCO ANNOUNCES PLAN TO SHARE INFORMATION

• 4 October 2005 REGULATORS TO SHARE INFORMATION
• ON INTERNATIONAL FINANCIAL REPORTING STANDARDS
• The adoption of IFRS in many national
  jurisdictions and their use in numerous
  cross-border transactions should help to achieve
  convergence towards high quality global
  accounting standards that provide transparent and
  comparable information in general purpose
  financial reports./
• A system will be established for participating
  IOSCO members and other independent enforcement
• organizations to share information and consult in
  order to maximize co-ordination and convergence.
• While each national regulator will retain the
  right to deal with an issue in its own right, the
  system will facilitate consistency.
• IOSCO will assist participating regulators in
  cataloguing in a database, decisions made by
  regulators concerning application of IFRS. This
  will provide a reference source for input to
  future regulatory decisions. Participating
  regulators will also contact each other to
  discuss particular decisions.
• On an ongoing basis, IOSCO will monitor issues
  related to the implementation of IFRS for
  indicators of issues that should be referred to
  the International Accounting Standards Board or
  the International Financial Reporting
  Interpretations Committee for consideration.
• IOSCO anticipates that the database will be
  operational by the second half of 2006. At this
  stage it is not intended for the catalogue of
  decisions to be publicly accessible. The database
  will be developed in parallel with the CESR-Fin
  approach to facilitate coordination of these
  activities.

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MY TENTATIVE CONCLUSIONS

• SHORT TERM WILL BE COSTLY, PAINFUL
• IASB NEEDS TO LISTEN TO THE DEMAND FOR STABILITY
• WORK PROGRAMME FOR 2006-2009 NEEDS TO CONCENTRATE
  EFFORTS ON FILLING THE GAPS IN THE EXISTING HOUSE
• WAIT FOR AFTER 2009 TO INTRODUCE SIGNIFICANT NEW
  EVOLUTIONS
• DEVOTE SUFFICIENT RESOURCES TO ACCOMPANY THE
  INEVITABLE TRANSITIO DIFFICULTIES AND RESOLVE
  THE BUGS
• HELP THE CONSTITUENTS ACHIEVE CONSISTENT
  APPLICATION OF IFRS FIRSTLY IN THE EU
• CONVERGENCE WITH US GAAP IS IMPORTANT
• BUT LESS THAN ACHIEVING AN ORDERLY TRANSITION BY
  8000 EU COMPANIES
• LONGER-TERM BENEFITS SHOULD BE REAL
• QUALITY AND COMPARABILITY WILL BE GREATLY
  ENHANCED
• HOWEVER FULL SUCCESS ONLY IF USA ACCEPT IFRS AS
  EQUIVALENT TO US GAAP IN A REASONABLE PERIOD OF
  TIME
• IFRS No Pain, No Gain ( C. Mc Creevy)