On Friday I made a further submission on behalf of the Tax Justice Network to the European Commission team considering the adoption of IFRS 8. The reasons for doing so are given in the submission, which was sent in the form of an email, the text of which was as follows:
I am writing to make a further submission from the Tax Justice Network with regard to the review you are leading on the adoption of International Financial Reporting Standard 8 within the European Union. This email constitutes that submission.
There are three reasons for making a further submission at this time:
1. It has become apparent that IFRS 8 does not reflect the requirement of Article 43, subsection 8 of the 4th Directive on Company Accounts.
2. It is apparent that the 7th Directive on Consolidated Accounts does require issues with regard to social and environmental reporting to be taken into account when such accounts are issued, and this therefore would seem to set the framework in which your review should be framed.
3. The paper issued by EFRAG, The UK's Accounting Standards Board and similar bodies in Germany, Denmark, Italy, France and Poland in July 2007 that questioned the joint July 2006 IASB / FASB statement on development of the conceptual framework for accounting does seem to require consideration with regard to IFRS 8.
This submission seeks to draw all three of these issues to your attention on a formal basis. I comment in more detail on each as follows:
Article 43 (8)
This provision (http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31978L0660:EN:HTML)
requires that a note be included in the accounts of a company providing information on the following:
(8) the net turnover within the meaning of Article 28, broken down by categories of activity and into geographical markets in so far as, taking account of the manner in which the sale of products and the provision of services falling within the company's ordinary activities are organized, these categories and markets differ substantially from one another;
It is apparent that this requirement cannot be reconciled with the provisions of IFRS 8 because:
a) IFRS 8 only requires geographic disclosure to be split between the country of incorporation and the rest of the world. This is quite clearly different from the requirements of Article 43 (8).
b) It is clear that if a company complied with IFRS 8 but did not provide the further information required by Article 43 (8) then its financial statements would not comply with the requirements of the 4th Directive.
c) It therefore seems apparent that IFRS 8 needs modification to meet the requirements of EU law.
We suggest that this is reason for adoption of IFRS 8 to be deferred at this time. It seems necessary for it to be referred back to the IASB so that it can be modified to ensure specific geographic disclosure meeting, as a minimum, the requirements of EU law to be included.
Notes in the preamble of an amendment to the 7th Directive ( http://eur-lex.europa.eu/LexUriServ/site/en/oj/2003/l_178/l_17820030717en00160022.pdf )say:
(9) The annual report and the consolidated annual report are important elements of financial reporting. Enhancement, in line with current best practice, of the existing requirement for these to present a fair review of the development of the business and of its position, in a manner consistent with the size and complexity of the business, is necessary to promote greater consistency and give additional guidance concerning the information a 'fair review' is expected to contain. The information should not be restricted to the financial aspects of the company's business. It is expected that, where appropriate, this should lead to an analysis of environmental and social aspects necessary for an understanding of the company's development, performance or position. This is consistent also with Commission Recommendation 2001/453/EC of 30 May 2001 on the recognition, measurement and disclosure of environmental issues in the annual accounts and annual reports of companies.
It is apparent as a result that it was the EU's intention that all accounts likely to be affected by IFRS should take social and environmental issues into account in the course of their compilation. As such it seems imperative that these matters be considered by you in the course of your review of IFRS 8, contrary to previous indications supplied. Can I have your assurance that this is now being done?
The conceptual framework
The IASB and FASB have been working towards convergence on the conceptual framework for accounting that will form the basis for decision making by both organisations. They jointly endorsed the idea in July 2006 that the sole purpose of financial reporting was "resource allocation decision-usefulness".
In July 2007 EFRAG, The UK Accounting Standards Board and the equivalent bodies in Germany, Denmark, Italy, France and Poland issued a paper questioning this assumption. As the UK's Accounting Standards Board has noted on its web site:
The paper demonstrates that:
- there is consensus amongst respondents [to the IASB / FASB paper] on their view of stewardship/ accountability as a central plank of financial reporting;
- stewardship/accountability is inherently linked to agency theory and is a broader notion than resource allocation decision making as it focuses on both past performance and potential future direction;
- stewardship/accountability is required as a separate objective of financial reporting to ensure that there is appropriate emphasis on company performance as a whole and not just on potential future cash flow; and
- stewardship/accountability has implications for financial reporting which can be demonstrated by way of examples. However, these implications cannot be discussed meaningfully without some references to wider issues including recognition and measurement criteria.
If this is the case it is obvious that major accounting bodies in Europe, including one that is integral to the process of approving IASB standards for use in Europe, are questioning the basis on which those standards are produced. The dichotomy in approach between the European model of accounting, on which this paper from EFRAG and others appears to have been based, and the US model of accounting on which the FASB / IASB paper was based last year is starkly represented in the discussions on governance and the use of data inherent in the ongoing debate on IFRS 8. If, as seems to be the case, there is now reason to doubt that the IASB / FASB approach commands support in Europe then it seems appropriate to defer any decision to adopt IFRS 8 at this time whilst consideration of the broader implication of this is undertaken.
In the light of all these new issues might I reiterate our previous ask with regard to this matter, which is that adoption of IFRS 8 is deferred whilst the whole issue of its suitability for use in Europe is referred back to the IASB? Given the issues that have now arisen it would seem appropriate that the referral back to the IASB should also have conditions attached to it which, we would suggest, should be as follows:
1) Mandatory geographic disclosure should be included in any revised IFRS 8. Discussion of this issue should include consideration of country-by-country disclosure to ensure that social and environmental concerns that have been raised during your consultation process are taken into account;
2) The governance implications of IFRS 8 are specifically reappraised in the context of the European belief that financial reporting specifically embraces a stewardship function which implies a quite different management responsibility for reporting from that inherent in IFRS 8.
I look forward to your confirmation that these issues can be considered your review.
IFRS Project Director
Tax Justice Network