Documents not cleared
2 Financial reporting and auditing
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5213/13
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COM(12) 782
| Draft Regulation establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period 2014-20
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| Legal base | Article 114 TFEU; co-decision; QMV
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| Document originated | 19 December 2012
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| Deposited in Parliament | 10 January 2013
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| Department | Department for Business, Innovation and Skills
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| Basis of consideration | EM of 25 January 2013
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| Previous Committee Report | None, but see footnote
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| Discussion in Council | No date set
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
2.1 According to the Commission, the global nature of capital
markets means that the harmonisation of financial reporting and
audit rules at global level is essential to their smooth functioning,
and for the realisation of an integrated market for financial
services within the EU, and it says that this is why the EU decided
in 2002 to adopt international accounting standards (IFRS), rather
than introduce its own set of requirements. It also points out
that, with more countries moving to adopt IFRS, Europe will need
more weight in order for its voice to be heard, requiring it to
speak with one voice, and it notes that the European Financial
Reporting and Accounting Group (EFRAG), which is its technical
adviser in accounting matters, has gradually taken on the role
of providing technical input to the international standard setting
process.
The current proposal
2.2 The Commission goes on to note that, in 2009, the European
Parliament and Council adopted Decision No. 716/2009/EC establishing
a Programme[14] with
a budget of 38.7 million for the period 2010-13 to support specific
activities in the field of financial services, financial reporting
and auditing, which funded the Committees of Supervisors, the
International Accounting Standards Committee Foundation (IASCF),
the European Financial Reporting Advisory Group (EFRAG) and the
Public Interest Oversight Board (PIOB). That Programme will end
in December 2013, and this draft Regulation aims to renew it for
the next financial framework (2014-2020), though, as the responsibilities
of the Committees of Supervisors were taken over in 2010 by the
European Supervisory Authorities, it would now apply only to the
remaining beneficiaries — the International Financial Reporting
Standards (IFRS) Foundation (the legal successor of the IASCF),
EFRAG and PIOB (see Annex).
2.3 Funding of €58.01 million would be made
available from the EU budget in this period, of which €32.22
million would be for the IFRS Foundation; €23.51 million
for EFRAG and €2.27 million for PIOB. In addition, the Commission
proposes that funding of €4.01 million will be needed in
administrative expenditure for the Internal Market and Services
Directorate to manage this budget.
The Government's view
2.4 In her Explanatory Memorandum of 25 January
2013, the Minister for Employment Relations and Consumer Affairs
at the Department for Business, Innovation and Skills (Jo Swinson)
says that the Government agrees with the overall strategic aim
of the Commission's proposals to ensure stable, diversified, sound
and adequate funding to enable the relevant bodies to carry out
their EU related or EU public interest mission in an independent,
efficient and satisfactory way. However, she notes that the Commission
wishes to maintain (but not increase) the current level of funding
for the bodies concerned, and that the proposal therefore accounts
for an increase commensurate with the expected 2% inflation rate,
and she says that, whilst the UK recognises the important roles
these organisations fulfil and supports their continued funding
in principle, it questions if a blanket increase in budgets is
justified given the current austerity context. It therefore proposes
to ask the Commission to explain what consideration it has given
to prioritising the outcomes it wishes to see, and to linking
funding accordingly.
2.5 The Minister also comments on individual
beneficiaries, saying that the Government is supportive of the
ISRG Foundation, but that, whilst it values the work of EFRAG
as a technical advisor, it is concerned that it is unsuited to
the task of presenting Member States' views on standards, given
that these must include political, public interest, and economic
considerations. She also says that, since that EFRAG's principal
role is to provide a technical view at the end of the standard
setting process, it is important to limit its involvement at earlier
stages to avoid a process whereby it is called upon to pass judgment
on decisions to which it has been party. She adds that this is
a live debate with the Commission, the UK and other Member States
having expressed concern about the legitimacy of EFRAG taking
on this role, and that the UK considers that the EU Accounting
Regulatory Committee (ARC) may be more suited to the task.
2.6 The Minister also observes that the proposal
delegates power to the Commission to select new beneficiaries
for the Programme, subject to the proviso that these should be
non-profit making legal persons pursuing an objective which forms
part of, and supports, EU policy in the field of financial reporting
and auditing, as well as being a direct successor of one of the
beneficiaries already funded by the Programme. She says the Government will
consider if the use of delegated powers is the most appropriate
mechanism for this purpose, and will ask the Commission to explain
how it will consider if successor bodies merit continued funding.
Conclusion
2.7 Since this document would essentially
extend for a further period a programme which has been in force
since 2009, it does not raise any significant new issues, but,
given its aims and objectives, we think it right to draw it to
the attention of the House. We also note that, although the Government
supports the overall aim of the programme, it has raised some
questions about the level of funding proposed for 2014-2020, the
role of the European Financial Reporting and Accounting Group,
and the proposed use of the Commission's delegated powers. We
are therefore holding the document under scrutiny, pending further
developments on these various points.
Annex
The IFRS Foundation is an umbrella body which brings
together the organisations that develop international accounting
standards: the International Accounting Standards Board (IASB)
and the International Financial Reporting Standards (IFRS) Interpretation
Committee. The IFRS Foundation oversees their smooth functioning
and proper financing.
The EU decided to adopt IFRS in 2002 on the basis
that, given the global nature of capital markets, harmonisation
of financial reporting and audit rules is essential for the sake
of transparency and comparability. It proposes to fund the IFRS
Foundation to ensure that both the IASB and the IFRS Interpretation
Committee have the solid, neutral, reliable and calculable funding
base which will allow them to operate independently, recruit top
quality people, and develop high quality accounting standards.
IFRS are incorporated into Union law and applied
by companies with securities listed on regulated markets in the
Union (provided they meet the criteria set out in EU regulation).
The EU therefore has a direct interest in ensuring that the process
through which IFRS are developed and approved delivers standards
consistent with the requirements of the legal framework of the
internal market.
In the current Programme, the co-financing stemming
from the EU aims at covering 20-25% of the IFRS Foundation's budget,
in line with Europe's weight in the total global economy. The
Commission acknowledges that since the increased use of IFRS globally
will result in an expansion of the IFRS Foundation's membership
with an associated increase in its costs and total budget, the
Commission's relative contribution is unlikely to be maintained
in the next financial period (it may even drop to 10%). This will
mean the Foundation will need to seek additional funding from
other sources in order to be able to carry out its public interest
mission satisfactorily.
EFRAG
The European Financial Reporting Advisory Group (EFRAG)
is a private organisation, established in 2001, originally to
provide the Commission with technical expertise in financial reporting
matters. It provides the Commission with opinions on whether an
accounting standard issued by the IASB or an interpretation issued
by the IFRS Interpretations Committee complies with the endorsement
criteria set out in the regulation governing the adoption of international
standards for use in the EU. It has gradually widened its role
into actively influencing the IASB in its standard setting work,
and the Commission has indicated that it envisages this developing
further, such that EFRAG becomes the leading platform to form
a single accounting voice of the EU and to deliver the EU's input
to the IASB.
The Commission is concerned that, as more and more
countries move towards adopting the IFRS, the EU will need to
take steps to prevent a gradual loss of influence and weight in
the IASB. To this end, it regards it as essential that European
interests are well represented at international level, and that
Europe 'speaks with one voice' that is credible and technically
sound.
For the 2011 financial year, the EU provided 43%
of EFRAG's budget. The proposed co-financing level for the period
2014-2020 will not support additional tasks to be taken up by
the organisation; these will have to be financed from EFRAG's
own resources.
PIOB
The Public Interest Oversight Board is a not-for-profit
foundation created in 2005. Its key role is to ensure that the
International Standards on Auditing (ISAs) are developed and adopted
by the International Auditing and Assurance Standards Board (IAASB)
with due process, public oversight and transparency. The IAASB
is an independent standard-setting body that sets international
standards for auditing. Currently, 78% of the funding for PIOB
is provided by the International Federation of Accountants (IFAC)
and 22% by the EU. Work is ongoing to diversify this funding.
14 (30397) 5783/09: see HC 19-ix (2008-09), chapter
3 (4 March 2009), HC 19-xiv (2008-09), chapter 3 (22 April 2009)
and HC 19-xv (2008-09), chapter 5 (29 April 2009). Back
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