ASEM IFRS SEMINAR Shanghai, March 2006 IFRS implementation in the EU – experience from a Commission perspective Ulf Linder Deputy Head of Unit Accounting EUROPEAN COMMISSION

Overview of session Introduction European Commission: experience from the point of view of the EU administration EFRAG: experience from technical work at EU level Austria: experience from a Member State, reactions from industry and the accounting profession

IAS Regulation (1606/2002/EC) Directly applicable in all Member States Fast, no national variations All EU companies listed – or with listed debt - in the EU to use endorsed IAS for consolidated accounts as from 2005 Non-EU issuers outside the scope (But: Equivalence under Prospective and Transparency Directives) Optional extension of the scope: –unlisted companies –individual accounts

Fitting the IAS Regulation into the existing EU Framework 4th and 7th Directives on accounting 2nd Directive on profit distribution The future role of the Directives SME accounting What about national GAAP? Tax, statistics and ”prudential filters”

Endorsement Objective is to get political and legal endorsement of IAS Criteria –IAS not contrary to “true and fair view” principle of Accounting Directives –IAS must be conducive to public good (competitiveness and convergence) –IAS must be understandable, relevant, reliable and comparable

Endorsement process IASB EFRAG European Commission ARC (Accounting Regulatory Committee European Parliament Interest groups Issues standard Public consultation Recommendation to EC Translation Opinion Publication in Official Journal

Issues related to the endorsement process (1) Complexity and time lag of the procedure Translations (into 20 languages) No reduction in IFRS options IAS 39 “carve outs” –Fair value option (now resolved) –Certain hedge accounting rules

Issues related to the endorsement process (2) Endorsed IFRS vs. full IFRS SEC likely to require full IFRS for issuers in the US (plus reconciliation) Year end issues – date of publication Audit statement: “in accordance with IFRSs as adopted by the EU” Consolidation of endorsed standards

Interpretations and consistent application Principle-based accounting requires judgements Interpretations by IFRIC: must be timely, relevant, and well-reasoned Inherent tendency to issue national guidance? Roundtable for consistent application of IFRS in the EU –Informal and of temporary nature –IASB, CESR, EFRAG, National Standard Setters, Auditors, Issuers, –Commission chair

Enforcement Role of CESR Coordination groups to achieve consistent enforcement decisions in the EU Public database Cooperation with the SEC and IOSCO US interpretations of IFRS?

Some early reactions from market participants (1) PWC survey of fund managers (Feb 2006): How clear has the IFRS information been in 2005 accounts and interim statements? –VERY 11%NOT AT ALL3% –FAIRLY65%DON’T KNOW5% –NOT VERY 16% Have the IFRS accounts for a specific company led you to: –INVEST21%NOT INVEST17% –HOLD11%SELL22% –NO INFLUENCE48%

Some early reactions from market participants (2) UK Hundred Group of finance directors: ”accounts more opaque and less useful” Criticism of extended use of fair valuation IASB rejects criticism: ”It is not our objective to get away from economic reality… There is nothing more real than the value of an asset today”.

To conclude: IFRS has arrived for listed companies –part of an international system –political, technical, legal and administrative challenges –consistent application –period of stability Need for evaluation of published accounts Future work on finding suitable accounting solutions for unlisted companies and SMEs

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