IFRS 8 – Europe gives a big thumbs down to the IASB

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I have been campaigning for improved segment reporting and for country-by-country reporting by companies for the last five years. It was in late 2002 that I first thought up the idea when in discussion with my Tax Justice Network colleague, John Christensen, and my first paper on this issue was published in January 2003.

It was therefore incredibly heartening to find that on Monday this week the EU Parliament's Economic and Monetary Affairs Committee passed a resolution in response to the IASB's IFRS 8 that noted that it:

Expresses reservation as to the Commission's analysis [of IFRS 8] that disclosure of geographical information would in practice not be reduced compared to IAS 14, and considers it vital that management continues to provide segmental information sufficient to allow users to assess the risks and drivers of the business in terms of geography, where relevant country-by-country, and business sector and asks the Commission to report back to the Parliament on the outcome of the discussion with the IASB on this issue within the next six months;

In addition it said that it:

Requests therefore that the European Commission go beyond voluntary guidelines and support the development of an appropriate accounting standard requiring country-by-country reporting by extractive companies;

I also note that the Parliament said that it:

Regrets that the impact assessment carried out by the Commission did not take sufficiently into account the interests of users as well as the needs of small and medium-sized companies located in different European countries and companies operating only locally;

It also noted in response to the IASB's demand that Europe endorse all its accounting standards without qualification that: it

Stresses that the European Parliament will actively use its right of scrutiny; Underlines therefore that the IASB/IASCF and the Commission in particular, must engage closer with the European Parliament and European Stakeholders as they have done so far, because this has caused serious problems as e.g. with IFRS 8; has to be involved in the earliest stages of the standard setting process in order to avoid significant delays in the endorsement process;

Stresses that the Commission in all cases should follow its own principles of better regulation, in particular regarding international accounting standards the Commission must ensure and support that impact assessments are carried out at the earliest stages in the development of international accounting standard or interpretation; underlines that such impact assessments must incorporate quantitative information and reflect an equilibrium between stakeholders;

Stresses the importance of appropriate enforcement of accounting standards, namely the capacity for the EP to properly exercise its right of scrutiny;

Now let me be clear: I didn't win all I wanted. The Committee also approved the use of IFRS 8 for now, but subject to the massive caveat that it:

Requests the Commission to follow closely the application of IFRS 8 and to report back to the European Parliament no later than 2011, inter alia regarding reporting of geographical segments, segment profit or loss, use of non-IFRS measures; underlines that if the Commission discovers deficiencies in the application of IFRS 8 it has a duty to rectify such deficiencies.

In other words, the Parliament has just about given the International Accounting Standards Board the bloodiest nose it could have done bar rejecting IFRS 8 and requiring continued use of IAS 14. In fact, in some ways it has gone further: it has said that the IASB got the argument on country-by-country reporting wrong in the case of the Extractive Industries and should now be working for the development of such a standard.

I am delighted. What has been proven is that independent minded people assessing the evidence presented to them could not see why:

1) A privately owned and funded Delaware corporation (for that is all the International Accounting Standards Board is) should have the right to create European law and demand that an elected Parliament approve its pronouncements without scrutiny;

2) Has told the Commission and the IASB that their procedures for consulting upon and approving International Financial Reporting Standards are wholly inadequate: their approval by the Big 4 firms of accountant is not enough to satisfy the European Parliament and all stakeholders, whether they be owners of shares or members of civil society have a right to be consulted and respectfully heard and to have their opinion considered on these matters. This is incredibly important. It brings the accountancy profession and is big business clients back within the domain of real accountability;

3) A demand for an accounting standard primarily intended to meet the needs of non-shareholder users of financial information, whether they be in civil society or government should not be ignored. In fact, they have accepted that there is a valid and appropriate case for its development for use in the extractive industry on which many developing countries are heavily reliant;

4) Expects objectivity in the Commission's appraisal of the work of private entities given the right to create self regulation and refuses to accept the capture of the state by such organisations.

It is hard to overstate the importance of this decision for accountancy, politics, the sustenance of democratic government and the constraint of the growth of self interest as the basis for regulation.

But at its core there is a much more important reason for feeling pleased with hat the EU has done. I originally created the idea of country-by-country reporting for one reason. It was to hold industries working in developing countries to account for the abuse of the resources that they extract from those locations without paying adequate return in exchange: a return that is vital if these states are to become fully fledged, independent and democratically accountable states in which populations can require their governments to account for their actions. Whilst it is possible for the profit earned in developing countries to be relocated offshore, which is easy to hide within carefully constructed consolidated accounts, then there is no way of those states either knowing the degree to which they have been exploited or of obtaining the information they need to charge the appropriate taxes on the profits that arise within their territory.

Country-by-country reporting would change that on the basis on which I have designed it. That's because the reporting would have to relate to both third party and intra-group transactions. Enough data would be disclosed to ensure that countries could tell who was likely to be exploiting them. This would let them focus their efforts on recovering tax from those most likely to owe it - a reason why this would also be of use without exception to the tax authorities of every populous state throughout the world, developed or not.

I know all the arguments that corporations present on why this is supposedly not possible - but they are all, without exception, wrong. I can say that with certainty because they undertake this exercise now, but do it in secret and do it with the clear and unambiguous intent of diverting taxation revenues from the countries to which it is owed to states where little or no tax is due so that payment does not arise. As such the argument that this cannot be done is absolutely bogus - it s simply a matter that these companies do not want to do it honestly, which is far from the same thing.

But if they were to do this honestly then the benefit would be enormous. Aid is about 0.5% of world GDP. Global taxes are in excess of 30% of world GDP. They're less in developing countries but corporate taxes are more important in these locations than in developed countries, If those s taxes were only 4% of GDP in developing countries (as they should be in the UK) they would still be massively more than all aid flows. Let me repeat that: ensuring that these taxes are paid would generate more income for developing countries than any aid initiative yet known could achieve. And country-by-country reporting could achieve that, and much more.

Success in this endeavour could make poverty history. That's what excites me about the opportunity that is developing. We have to grab it with both hands. It's the biggest gift accountancy can make to the world. And give it it must. And wholeheartedly now that the need has been accepted by those in a position to appraise the evidence.


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