1 IFRS Accounting in Europe Thomas Oversberg Project Manager Brussels - 5. November 2007

2 Agenda  Who is EFRAG?  How do IFRSs become European law (the Endorsement Process)?  Lease Accounting in Europe

3 EFRAG - background  European Financial Reporting Advisory Group (EFRAG)  Technical group to advice European Commission (EC) on IFRS  Independent, private sector body, founded in 2001 by European organisations of preparers and users of financial statements and auditors, as well as European standard setters

4 EFRAG‘s role  Proactive contribution to the IASB and IFRIC – Comment Letters  EU Commission - Endorsement advice  Stimulate thought leadership – PAAinE  European Coordination - CFSS

5 EC – EFRAG Working Arrangement  The Working Arrangement of March 2006 formalised EFRAG‘s role as a technical advisor to the EC: "EFRAG will provide advice to the Commission on all issues in relation to the application of IFRS in the EU.”  Specifically on: Endorsement advice Proactive input to IASB/IFRIC

6 Technical Expert Group (TEG) Supervisory Board EFRAG‘s structure CFSS User Panel Secretariat INSURAN WGSME JWG JV WG Fin Inst WG CONCESSION WG

7 EFRAG‘s due process  Members of the TEG must not consider themselves as representing sectorial and/or national interests but shall be guided by the need to act in the European Interest.  EFRAG has an open and transparent due process, which allows all European constituents to provide input for consideration of EFRAG.  All technical discussions held in public meetings.  Invitation to comment on all EFRAG draft publications.

8 EFRAG‘s due process (cont.)  Publication of basis of conclusion for EFRAG on endorsement advice.  Publication of TEG agendas and summary minutes of its meetings.  Publication of the final endorsement advice to the Commission.  Publication of final comment letters on IASB consultation documents, and other EFRAG positions.

9 Endorsement Process  The “original” endorsement process – Endorsement with supervision  SARG – Endorsement with supervision and review of EFRAG’s advice  The future endorsement process – Endorsement with scrutiny

The Endorsement Process Endorsement with Supervision

11 Endorsement with supervision  Legal basis: IAS Application Regulation 1606/2002/EC Council Decision 1999/468/EC Based on Lamfalussy proposals  The “players”: European Commission, as the executive body EFRAG, as the technical advisory body supporting the EC Accounting Regulatory Committee as representatives of the European Member States The Council and the European Parliament in their role as supervisors

12

The Endorsement Process Endorsement with SARG

14 Standard Advisory Review Group  Commission Decision 2006/505/EC  SARG has been set up to ensure that the EFRAG’s endorsement advice is objective and well balanced.  As soon as the Commission receives EFRAG’s endorsement advice, it will submit it to SARG.  It shall deliver its advice to the Commission within three weeks upon receiving EFRAG’s advice.  When SARG identifies a particular concern, the chairman of SARG shall enter into dialogue with EFRAG with a view to resolve the matter before issuing final advice.  All SARG advices were so far positive (first one was on IFRIC 12).

15 SARG

The Endorsement Process Endorsement with scrutiny

17 Endorsement with scrutiny  Council Decision 1999/468/EC, as amended by 2006/512 (based on Article 202 EC)  Amendment of IAS Regulation has been drafted but final approval is pending (expected until year-end).  Main changes: Scrutiny by both EP and Council Benchmark for Parliament and Council:  EC exceeds the implementing powers or  EC proposal is not compatible with the aim or the content of the IAS Regulation (e.g. true and fair view) or  EC proposal does not respect the principles of subsidiarity or proportionality

18 Endorsement with scrutiny (cont.)  Main changes (cont.): All linguistic versions have to be transmitted to Parliament prior to the deadline commencing. Scrutiny takes three months after transmission of the last language version of the draft, four months in case of negative vote in the ARC.

19

20 Endorsement Situation  Until 2007, Europe has endorsed all IASB Standards and Interpretations, except: IAS 39 – Carve Out IFRIC 3 Emission Rights – Subsequently withdrawn by IASB  In 2007, the endorsement process was delayed due to concerns over: IFRS 8 Operating Segments and IFRIC 12 Service Concession Arrangements

21 Endorsement Situation (cont.) As of

22 IFRS 8 – State of play  The IASB published IFRS 8 on November 30, 2006  EFRAG issued its positive endorsement advice on January 16, 2007  The Accounting Regulatory Committee (ARC) unanimously supported endorsement in its meeting on February 2, 2007  The European Parliament (EP) raised some concerns on IFRS 8.  In April 2007, the EP and the European Commission (EC) agreed to carry out an impact assessment of IFRS 8.

23 IFRS 8 – State of play (cont.)  Impact assessment published by the EC in September  In October 2007 the ECON committee of the EP drafted a positive resolution, however requesting: Review of IFRS 8 implementation in 2011 by the EC Impact assessment on other standards and interpretations by the EC  Voting on the resolution expected in the November 2007 EP session.  Publication in Official Journal soon thereafter.

24 IFRIC 12 – state of play  The IASB / IFRIC published IFRIC 12 on November 30, 2006  EFRAG submitted – after considerable debate – a positive endorsement advice to the EC on March 23,  Meeting between Spain and IASB on that issue.  The ARC discussed IFRIC 12 several times so far, but has not been asked by the Commission to vote on it, i.e. the EC has so far not used its right of initiative.

25 PAAinE  Pro-Active Accounting Activities in Europe (PAAinE)  OBJECTIVES: Partnership with National standard setters High quality proactive input to IASB(+FASB) More consistent messages to IASB Create debates in Europe Involvement in the convergence work Monitor work of IASB & FASB Thought leadership Better utilisation of European resources

26 PAAinE publications so far Conceptual Framework Stewardship Revenue Recognition Performance Reporting Future publications: Performance Reporting II Conceptual Framework II Equity / Liability

27 Lease Accounting in Europe  4th Directive does not contain any specific guidance on lease accounting  European countries developed often tax driven systems (such as Germany, Belgium…).  IAS 17 increased comparability to a certain extent, but resulted in interpretation issues on terms used.  The first standard to apply “substance over form” concept.

28 Leasing – recent developments  Amendments to leasing standard as part of the annual improvements project  Leasing in the SME ED  The IASB / FASB Leasing Project

29 Annual Improvements Project  IAS 17: Classification of leases of land and buildings Contingent rents  EFRAG agrees with the proposed amendments.  IAS 40: Investment property held under lease  EFRAG agrees with the proposed amendment.

30 ED on IFRS for SMEs  Carries forward most of IAS 17 guidance, especially the difference between finance and operating lease contracts, which EFRAG supports.  However, ED proposes that Assets and liabilities in a finance lease should be measured at fair value.  EFRAG recommends that lessees measure assets and liabilities arising from finance leases “at an amount equal to the present value of the minimum lease payments”.

31 ED on IFRS for SMEs  Guidance on accounting of lease transactions in connection with investment property is limited.  EFRAG believes that additional guidance is necessary. The option to account for a property interest that is held by a lessee under an operating lease as an investment property add unnecessary complexity to section 15 Investment property and section 19 Leases. We find that the option should not be part of the IFRS for SMEs.

32 ED on IFRS for SMEs  Section 19 Leases includes a cross reference to IAS 17 for the accounting of finance lease in the financial statements of the lessor. EFRAG believes that this IFRS for SMEs needs to be a stand alone document, which means the cross-reference to IAS 17 should be eliminated and the necessary requirements should be included in the SME standard.

33 Leasing Project  EFRAG welcomes that the IASB & FASB intents to tackle lease accounting and its current issues.  EFRAG appreciates that any future solution needs to be aligned to the framework and the assets / liabilities definitions.  EFRAG cautions to develop a conceptually perfect solution, which is not practical to implement for the vast majority of contracts and companies.  Substance of lease transactions need to be considered.  EFRAG supports convergence, but not for the sake of it, but rather to get the best accounting solutions.

34 Concluding remarks  Speaking with one voice and submitting good and thoughtful arguments towards the IASB has proven to be of utmost importance.  Providing input and comments to EFRAG ensuring that EFRAG is aware of issues and positions and able to fulfil its role European role is paramount and should be a high priority for users, preparers, standard setters and other constituents, in short: YOU.

35  EFRAG  Avenue des Arts  1210 Brussels  Belgium 

36