# EUR-Lex - 52014DC0396 - EN

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# 52014DC0396

**REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the progress achieved in the implementation of the reform of EFRAG following the recommendation provided in the Maystadt report /* COM/2014/0396 final */**

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT
AND THE COUNCIL

on
the progress achieved in the implementation of the reform of EFRAG following
the recommendations provided in the Maystadt report

1.           purpose and scope of the report

The
Regulation of the European Parliament and of the Council, which extends a Union
programme to support specific activities in the field of financial reporting
and auditing for the period from 1 January 2014 to 31 December 2020[1],
came into force on 9 April 2014 following its publication in the Official
Journal[2].

The general
objective of the Union programme is to improve the conditions for the effective
functioning of the internal market by supporting the transparent and
independent development of international financial reporting and auditing
standards.

Article 3 of the
Regulation stipulates that the beneficiaries of the programme in the field of
financial reporting are:

— the European
Financial Reporting Advisory Group (EFRAG),

— the
International Accounting Standards Committee Foundation (IASCF) legally
succeeded by the IFRS Foundation

In the field of
auditing, the beneficiary is:

— the
Public Interest Oversight Board (PIOB).

According to
Article 9 (1) of the Regulation, by 31 March 2014, the Commission shall submit
the first report to the European Parliament and to the Council on necessary
governance reforms in the area of accounting and financial information in
respect of EFRAG, taking into account, inter alia, the developments following
the recommendations set out in the special advisor's report and on the steps
that EFRAG has already taken to implement those reforms.

The scope of
this report only covers the implementation of the reform of EFRAG following
Philippe Maystadt’s[3]
report, which set out recommendations for such reform and was discussed by the
ECOFIN Council on 15 November 2013.

2.           Background information

The main purpose
of accounting is to assist stakeholders in making better business decisions by
providing them with adequate financial information. The accurate and timely
financial information is indispensible in making sound investment decisions and
running business organisations, while it also allows business owners to measure
the effectiveness of their operations.

As capital
markets are global, harmonisation of financial reporting and audit standards 
at global level is essential for the sake of transparency, comparability, the
smooth functioning of the capital markets and also the realization of an
integrated market for financial services in the EU. It is generally recognised
that the EU Accounting Directives did not bring about a sufficiently high level
of harmonisation in the financial reporting of listed companies in the EU.
Consequently, instead of introducing its own set of regional financial reporting
standards, the EU  decided to adopt international accounting standards.

The European
Union has long been an advocate of one single set of global accounting
standards. The G20 has also called for global accounting standards and
convergence on several occasions[4].
The Union showed leadership in the process in 2002 when it adopted
international accounting standards (IFRS)[5] issued by the
International Accounting Standards Board to be used by companies listed in the
EU when drawing up their consolidated financialstatements. Pursuant to the IAS Regulation[6], IFRS have been in force in the EU since 2005. New standards are
periodically adopted by the Commission, subject to a regulatory comitology
procedure with scrutiny.

In a global
economy, there is a need to converge standards between jurisdictions and
develop international standards under a transparent and democratically
accountable process. Given the importance of accounting standards for financial
markets,  the Union has a key role to play in the international
standard-setting process. To ensure that the interests of the Union are
respected and that global standards are of high quality and compatible with EU
law, it is essential that the interests of the Union are adequately
represented.

With a growing
number of  countries moving towards and adopting IFRS, Europe's relative weight
in the international standard setting process is decreasing. EFRAG[7]
is a private body and the technical adviser to the European Commission in
accounting matters. It has taken up the role of providing technical and
credible input upstream in the IASB's standard setting process.

In March 2013, Commissioner Barnier appointed Philippe Maystadt as a special adviser with the
mandate to examine ways of reinforcing the EU's contribution to the
development of International Financial Reporting Standards (IFRS) and improving
the governance of the European bodies involved in this process.
Mr Maystadt held a series of interviews and consultations before drafting
his final report. Three different options were identified in the report for
strengthening the European Union's influence in international accounting
standard-setting: transformation of EFRAG, transfer of responsibilities of
EFRAG to ESMA or replacement of EFRAG by an EU Agency. Mr Maystadt’s report
recommended the restructuring EFRAG.

3.           Context and
overview of reforms of efrag

3.1       Current status of EFRAG

The European Financial Reporting Advisory Group (EFRAG), which was set up in 2001, is a non-profit international association ("IVZW/AISBL") established
under Belgian law in Brussels by the main European professional associations
interested in financial reporting. Its current members are BUSINESSEUROPE
(European Business Federations), FEE (European Federation of Accountants), Insurance Europe (European Insurance Organisation), EBF
(European Banking Federation), ESBG (European Savings Banks Group), EACB
(European Association of Co-operative Banks) and EFAA (European Federation of
Accountants and Auditors). It also co-operates with national accounting
standards-setters from EU Member States.

EFRAG currently operates
through an independent Technical Expert Group (TEG), supported by a User Panel
and various Working and Advisory Groups. The “early stage” proactive work is
coordinated by the Planning and Resource Committee (PRC), at which the major
European National Accounting Standard Setters (NSS) have a seat.

The work of EFRAG is
overseen by an independent Supervisory Board. Its main duties include selecting the membership and
overseeing the work of the Technical Expert Group and the Planning and Resource
Committee; monitoring cooperation with National Standard Setters; and ensuring
proper funding for EFRAG.

The existing  EFRAG
Supervisory Board consists of senior professionals and leaders with an interest
in the global development of financial reporting who reflect an appropriate
professional balance (including users, preparers and accountants) and geographical
spread. The Supervisory Board alsoincludes three public policy members;the
European Commission and the European Securities and Markets Authority are
observers at its meetings. The Supervisory Board is appointed by the EFRAG
General Assembly.

3.2         Key considerations for EFRAG reform in
line with the Maystadt recommendations

The recommended
option of transforming EFRAG essentially involves the
appointment of a high-level Board[8], which would enhance the organisation
so as to meet three identified objectives: to bring to EFRAG’s positions an
institutional legitimacy in addition to the legitimacy that its due process
provides; to have a different and supplementary set of skills to develop its
positions and to involve National Standard Setters more fully in the
organisation and to allow for their participation in all stages of the
decision-making process.

The key elements
of the Maystadt report’s recommendations for EFRAG reform are the following:

Clarify the
remit of EFRAG

According to the
Maystadt report, the remit of EFRAG should be focused on the application of
IFRS and should not cover non-listed companies, in particular SMEs, which do
not apply IFRS.

Funding of EFRAG

As far as the
funding of EFRAG is concerned, the Maystadt report mainly suggests assessing
the legal possibility of establishing a system of compulsory
contributions/levies paid by listed companies that use and benefit from IFRS.
Pending the legislation of such a levy system, the report recommends that
Member States organise a national funding mechanism (if they have not already
done so).

Structure of
EFRAG

General Assembly

The report
recommends extending the General Assembly within
EFRAG’s current legal form (international non-profit association - AISBL), to
include National Funding Mechanisms and other private and/or public
organisations that contribute financially or in kind. The General Assembly will
exercise oversight over the decision-making Board, including the nomination of
the Board members.

Supervisory
Board

According to the Maystadt report the current Supervisory Board
should be replaced with a high-level Board, which would approve the comment
letters addressed to the IASB and the endorsement advice letters to the
Commission, relying on the work of a technical group. The new Board would be
composed of members belonging to three pillars and would be appointed by the
General Assembly:

- European public institutions (4 members proposed by ESMA, EBA,
EIOPA and the ECB, respectively);

- Stakeholders (5 members: industrial and trading companies;
financial institutions; accounting professionals; users);

-
National Standards Setters (NSS) (7 members, with the implicit agreement that
the NSS of the four largest Member States will always be represented).

The
Maystadt report recommends that the Board would also include
a President who would be proposed by the Commission with the approval of the
Council and of the Parliament. Furthermore, the Commission would nominate one
observer with speaking rights to the Board. The Board would make consensus-based
decisions.

In line with the Maystadt report, prospective Members of the Board
should have a good understanding of financial reporting and its implications,
in particular, on economic growth and financial stability. To this end, the
report recommends developing ex-ante criteria to provide a benchmark for
institutions, organisations and national standard setters proposing candidates.

Finally,
the report recommends separating the role of the President of the Board, who
would be the public spokesperson of EFRAG, from the role of Chief Executive
Officer responsible for the daily management of the organisation including the
chairmanship of the TEG.

Technical
Expert Group (TEG)

It was
recommended that the future TEG becomes an advisor to the Board instead of having
full authority to determine the postions of EFRAG. The modified TEG would
prepare the projects submitted for the approval of the Board. The Board would
provide the TEG with guidance and feedback. The TEG would continue to be
composed of experts who should be active practitioners with diverse
professional experience and geographical origins. The members of the TEG would
be appointed in a transparent manner by the Board. The TEG would continue to be
supported by the existing EFRAG staff.

Impact assessments

In line with the Maystadt report, EFRAG is encouraged to pursue
its efforts in order to produce impact assessments corresponding to the needs
of users and of the European legislators, in cooperation with the national
standards setters. These impact assessments analyse the effects of the
standard, check whether the standard improves the quality of financial
information and explore alternative options in comparison with the ones
considered by the IASB. Furthermore, EFRAG and the other European bodies concerned
are also encouraged to work in a more coordinated manner when performing “field
tests”.

Consultative
Forum of Standard Setters (CFSS)

The report recommends maintaining the quarterly meetings between EFRAG and
representatives of all national standard setters (including Norway and Switzerland). They are important for the cooperation of the European national standard
setters, particularly for smaller Member States. In addition they serve today
as preparatory meetings for European participants in the IASB Accounting
Standards Advisory Forum.

The recommendations in the Maystadt report gained a broad support
at the ECOFIN Council meeting on 15 November 2013. The Commission considers
these as a benchmark in the implementation of EFRAG reforms.

3.3         Position taken by the European Central
Bank and European Supervisory Authorities towards the new structure of EFRAG

In a joint
letter to the Commission of 20 January 2014, x
the three European Supervisory Agencies (ESAs), namely the European Securities
and Markets Authority (ESMA), the European Banking Authority (EBA) and the
European Insurance and Occupational Pensions Authority (EIOPA) expressed
concerns with respect to the planned reform of EFRAG. The ESAs stressed the
importance of their involvement in the endorsement process but pointed out that
the body to be entrusted with such responsibilities should serve the public
interest and, thus, its decision-making processes should be centred around
public authorities.

The ESAs
informed the Commission that in the absence of changes to the mixed governance
structure and to the proposed voting model, they would ask  for observer status
rather than full participation in the new EFRAG Supervisory Board. In a letter
of 24 January 2014, the European Central Bank took a similar view.

The Commission
noted the concerns expressed by the three ESAs and the European Central Bank and considered that these organisations should play an important
role in EFRAG by participating at least as observers to the Board.

3.4       Mr
Maystadt’s special mandate for to follow-up the implementation process

On 4 February
2014, Commissioner Barnier agreed with Philippe Maystadt that his mandate as
Special Adviser should be continued in order to supervise the implementation of
the reform of EFRAG.

It has been
recognized that the detailed and timely implementation of these reforms
requires significant co-ordinated efforts from the public and private
organisations involved in the process.

As Mr Maystadt
has been supervising and facilitating the overall process by attending key
meetings with stakeholders and providing strategic advice on core issues, he is
well placed to ensure the implementation of EFRAG reforms.

4            Progress in
implementing the reforms

4.1       
Progress achieved to date

As regards
clarifying the remit and the related focus of EFRAG to IFRS, the Commission 
notes that this has been already reflected in the draft annual programme of
activities of EFRAG for 2014. The Commission will reflect this in the
prospective grant agreeement with EFRAG for 2014 and the following years and
ensure that the actual scope of the activities of EFRAG is in line with that
remit.

As far as the
funding of EFRAG is concerned and, in particular,the possibility of
establishing a system of compulsory levies paid by listed companies, the
Commission has focused its efforts on implementing parts of the reform that are
achievable in the short term. Similarily, no formal steps have yet been taken
to encourage the Member States that do not already have a National Funding
Mechansim[9]
to establish one.

In line with the
report, the implementation of recommendations related to the structure of
EFRAG, carrying out impact assessments and organising CFSS meetings falls under
the responsibility of EFRAG. EFRAG’s General Assembly (comprising. the seven
EFRAG Member Organisations) had to approve amendments to the EFRAG statutes and
the EFRAG internal rules that reflect these recommendations. It also needed to
approve the extension of the membership of EFRAG to National Funding Mechanisms
and to European organisations that are not currently members of EFRAG.

The EFRAG
Supervisory Board has taken the necessary steps, beginning with a meeting on 20
November 2013, to prepare the amendments to EFRAG by-laws for consideration and
approval by the General Assembly. The EFRAG Member
Organisations have expressed their support for the reform of EFRAG, on the
basis of the recommendations in Mr Maystadt’s final report of November 2013.

Following
the establishment of the task force responsible for the implemenation of reform
within the Supervisory Board of EFRAG in January 2014, significant progress has
been made, with interactions in meetings with existing Member Organisations,
potential new members, and National Standard Setters (and/or National Funding
Mechanisms). As a result, on 24 March 2014, the Supervisory Board approved  a
full set of amended statutes and internal rules to be proposed to the General
Assembly in its current composition subject to comments of EFRAG Member
Organisations and the National Standard Setters (and/or National Funding
Mechanisms).

The
amended statutes and internal rules were finally approved by the General
Assembly of EFRAG on 16 June 2014.

Based
on Mr Maystadt’s recommendations the main amendments to EFRAG’s statutes and
internal rules relate to the following issues:

- Extension of membership of
the General Assembly to include National Funding Mechanisms and other private
or public organisations.

- Criteria, commitments and
rights for membership of the General Assembly.

- A minimum of two year
financial commitment for members of the General Assembly.

- Voting rights in the
General Assembly, inspired by the notion that no single organisation should be
able to block the operations of EFRAG.

- Tasks of the General
Assembly.

- Nominating Committee with
an advisory role on certain aspects of the nomination and selection process.

- Profile and criteria of
the Board.

- Role of the President of
the Board.

- Responsibilities of the
Board.

- Fallback procedures for
the Board for cases where no consensus can be reached.

- Responsibilities of EFRAG
TEG.

- Profile and criteria for
the membership of EFRAG TEG.

4.2       Departures
from Mr Maystadt’s recommendations

Although the core ideas behind the recommendations for the EFRAG
reforms have been respected, it is important to highlight some departures from
the recommendations of the Maystadt report. These concern the following issues:

Composition of the new Board

Contrary to Mr Maystad’s recommendation, taking into account  the
views expressed by some Member States notably during the ECOFIN Council in
November 2013, the balance between National Standard Setters in the Board has
been addressed by granting an additional seat to the `smaller`[10]
Member States. Furthermore, following the decision of the European Supervisory
Authorities and the European Central Bank not to accept full membership of the
Board, these organisations will be granted the status of observers to the
Board. As a result, it was recognized that certain modifications to the
composition of the Board would be  needed to achieve a balance between the
National Standard Setters and private stakeholders. Consequently, three
additional seats would be allocated to private stakeholders.

Decision-making in the Board

Considering the views expressed by the majority of stakeholders,
and in accordance with the Maystadt report whereby the new Board would strive
for consensus-based decisions, a fall-back mechanism would be put in place for
cases where no consensus could be reached. This would take the form of a vote
where a qualified majority of two thirds of Members would be needed to make a
decision[11].

Combining the functions of CEO of EFRAG
and Chairman of EFRAG TEG

Currently the CEO of EFRAG is also the Chairman of the TEG. The
Maystadt report suggests that this arrangement continues also in the future.
However, during the discussions on the reform, several Members of the current
Supervisory Board were of the opinion that these two functions should be
separated. Consequently, the statutes only envisage a possibility (but not a
requirement) of combining the two functions.

4.3       
Prospective timetable

As mentioned above, the
amended statutes and internal rules of EFRAG were approved by the General
Assembly of EFRAG on 16 June 2014. However, in order to ensure a smooth
transition process, these amended statutes and internal rules will come into
force on 31 October when the new General Assembly will be in a position to meet
and appoint the new Board of EFRAG. Also further new members of EFRAG could be
admitted at this date.

5            Conclusions

On
the basis of the above, it can be concluded that overall EFRAG has made
promising progress in implementing the reforms following the key
recommendations of the Maystadt report. In order to carry out the key changes,
the statutes and the internal rules of EFRAG  have been modified to reflect the
necessary amendments to its structure and operations.

In
this respect, it should be recognized that the level of detail of these
amendments goes beyond the recommendations provided in the Maystadt report
(e.g. the methodology of allocation of voting rights in the General Assembly,
the profile criteria for Board Members, the responsibilities of the Board and
TEG). A collective effort has been  made by different stakeholders participating
in the process to find an agreement acceptable to all parties. To this end, the
extension of  Mr Maystadt’s mandate has proved significant considering his
expertise and involvement in the process.

As regards the
expected departures from Mr Maystadt’s original recommendations, the most
substantial change results from the ECB and the three ESAs  accepting only
observer status rather than full Board membership.  As this resulted in just
two pillars of members of the Board, a new balance was found by granting an
additional three seats to private stakeholders.

The Commission
will continue to closely monitor the implementation of the reform of EFRAG and
will duly report on that to the European Parliament and the Council. In line
with the new Regulation establishing a Union programme to support specific
activities in the field of financial reporting and auditing for the period of
2014-2020, from 2015 the Commission will prepare an annual report on the
activity of EFRAG, which will cover its progress in the implementation of its
governance reforms[12].

[1] In view of the pending reforms, the programme period with respect
to EFRAG (European Financial Reporting Advisory Group) runs from 1 January 2014
to 31 December 2016.

[2] OJ L 105/1, 8.04.2014

[3] Philippe Maystadt served in the Belgian government as Minister for
Economic Affairs, Minister of Finance and Deputy Prime Minister. He was also
President of the European Investment Bank from 2000 to 2011. In March 2013, Mr
Maystadt was appointed as a special advisor to Commissioner Barnier in order to evaluate the current system of adoption of the
IFRS in the EU with a view to enhancing the European contribution to the
developent of  global, high quality accounting standards.

[4] Repeated calls since the 2009 London declaration; last time in Los
Cabos, 2012

[5]  For the purposes of this paper, the term 'international accounting
standards' refers to IAS, IFRS and IFRIC

[6] Regulation 1606/2002 of the European Parliament and the Council of
19 July 2002 on the application of international accounting standards, OJ L
243, 11.09.2002

[7] European Financial Reporting Advisory Group

[8] The new Board would effectively replace the
current Supervisory Board of EFRAG

[9]    However, the Commission raised the possibility of setting up
such funding mechanisms with the Member States at the Accounting Regulatory Committee
Meeting held in Brussels on 8 April 2014.

[10] As
mentioned, the National Standard Setters from four largest Member States will
always be represented.

[11]   If,
in exceptional cases, a qualified majority could not be found, the President of
the Board could present his conclusions based on an indicative vote whereby the
majority view would be presented as the position.

[12]   According
to the Regulation, the annual report should be submitted to the European Parliament
and the Council no later than 30 June each year.