Report from the Commission to the Council and the European Parliament on the operation of Regulation (EC) No 1606/2002 of 19 July 2002 on the application of international accounting standards
Date: 2008-04-24
Institutions: European Commission
Subjects: accounting, application of EU law, capital market, consolidated account, financial transaction, international standard, standardised accounting system

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COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 24.4.2008 
COM(2008) 215 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

on the operation of Regulation (EC) No 1606/2002 of 19 July 2002 on the application of 
international accounting standards  

(Text with EEA relevance) 

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1. 

LEGAL BASIS 

Article 10 of Regulation (EC) No 1606/2002 of 19 July 2002 (the “IAS Regulation”)1 requires 
the Commission to review the operation of the Regulation and report thereon to the European 
Parliament and to the Council by 1 July 2007. 

2. 

OPERATION OF THE IAS REGULATION 

2.1.  Main provisions of the IAS Regulation 

The  IAS  Regulation  places  an  obligation  on  European  companies  whose  securities  are 
admitted to trading on a regulated market in the EU to prepare their consolidated accounts, as 
of 1 January 2005, in conformity with IAS/IFRS2 and SIC/IFRIC3 issued by the International 
Accounting Standards Board (IASB) and endorsed by the EU. 

Member  States  may  permit  or  require  this  accounting  framework  to  be  applied  to  the 
consolidated  accounts  of  companies  whose  securities  are  not  admitted  to  trading  on  a 
regulated market in the EU and/or to annual (individual) accounts regardless of whether the 
company is admitted to trading on a regulated market in the EU. The use of the options in the 
Article 5 of the IAS Regulation by Member States is described in the table below4:  

1 

2 

3 

4 

Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the 
application of international accounting standards, OJ L 243, 11.9.2002, p. 1 
International Accounting Standards (IAS) were first issued by the International Accounting Standards 
Committee  (IASC),  the  predecessor  of  the  International  Accounting  Standards  Board  (IASB).  The 
IASB issues International Financial Reporting Standards (IFRS). 
The  Standing  Interpretations  Committee  (SIC)  was  the  predecessor  to  the  International  Financial 
Reporting Interpretations Committee (IFRIC). 
Information taken from a Commission requested study made by the Institute of Chartered Accountants 
in England and Wales "EU Implementation of IFRS and the Fair Value Directive", 2007, page 24. 

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Use of options in the IAS Regulation by Member States 

Austria 

Belgium 

Cyprus 

Czech Republic 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Ireland 

Italy 

Companies 

All 

Credit institutions 

Other 

All 

All 

All 

Credit institutions, insurance 
companies, financial and mixed 
financial holding companies and 
investment companies 

Other 

Insurance  

Other 

All 

All 

All 

All 

All 

Supervised financial companies, 
companies with financial instruments 
widely distributed among the public 

Publicly traded companies 

Non-publicly traded companies 

Consolidated 

Legal entity 

Consolidated 

Legal entity 

Required 

Required  

Required 

Required 

Not permitted 

Permitted 

Not permitted 

Not permitted  

Required  

Not permitted  

Not permitted 

Required 

Permitted 

Required 

Not permitted 

Required 

Required 

Required 

Permitted 

Not permitted 

Required 

Permitted 

Permitted 

Permitted 

Required 

Required 

Required 

Required 

Required 

Required 

Permitted 

Permitted 

Required  

Not permitted  

Required  

Not permitted  

Required 

Required 

Required 

Required 

Required 

Required 

Permitted 

Not permitted 

Not permitted 

Required 

Not permitted 

Permitted 

Permitted 

Permitted 

Permitted 

Permitted 

Permitted 

Permitted 

Permitted 

Not permitted 

Not permitted 

Permitted 

Not permitted 

Permitted 

Required 

Required 

Required 

Required 

Insurance companies 

Required 

Not permitted 

Required 

Not permitted 

Other 

Required 

Required 

Permitted 

Permitted 

Latvia 

Banks, insurance companies and 
other financial institutions 

Required  

Required  

Required  

Required  

Other 

Required 

Permitted* 

Permitted 

Not permitted 

Lithuania 

Banks and controlled financial 
institutions 

Luxembourg 

Malta 

Netherlands 

Poland 

Other 

All 

All 

All 

Banks 

Required 

Required 

Required 

Required 

Required 

Required 

Required 

Required 

Required 

Permitted 

Required 

Permitted 

Not permitted 

Not permitted 

Permitted 

Required 

Permitted 

Permitted 

Required 

Permitted 

Required 

Not permitted 

Required 

Not permitted 

Pending admission to regulated 
market 

Subsidiary in IFRS group 

N/A 

N/A 

N/A 

N/A 

Permitted 

Permitted 

Permitted 

Permitted 

Other 

Required 

Permitted 

Not permitted 

Not permitted 

Portugal 

Banks and financial institutions 

Required 

Not permitted 

Permitted  

Not permitted 

Subsidiary in IFRS group 

Other 

All 

N/A 

Required 

Required 

Banks and insurance companies  

Required 

Other 

All 

All 

All 

Required 

Required 

Required 

Slovakia 

Slovenia 

Spain 

Sweden 

United 
Kingdom 

N/A 

Permitted 

Not permitted 

Required 

Permitted 

Not permitted 

Not permitted 

Permitted 

Permitted 

Required 

Required 

Permitted 

Permitted 

Permitted 

Permitted 

Not permitted 

Not permitted 

Required 

Permitted 

Not permitted 

Not permitted 

Required 

Permitted 

Permitted 

Permitted 

* Latvia: companies listed on the official list of the Riga Stock Exchange are required to prepare IFRS-EU legal entity accounts for listing 
purposes only. 

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Member  States  were  also  allowed  to  postpone  application  of  this  framework  to  1  January 
2007 for companies which have issued only debt securities admitted to trading on a regulated 
market in the EU and for companies whose securities are admitted to trading outside the EU 
and which, for that purpose, had been using internationally accepted standards before the IAS 
Regulation was published.  

Only international accounting standards and interpretations adopted and issued by the IASB 
and  its  predecessor  the  International  Accounting  Standards  Committee  (IASC)  are  endorsed 
for  the  purposes  of  the  IAS  Regulation.  They  are  endorsed  by  the  Commission  following  a 
committee  procedure.  First  the  Commission  should  receive  technical  endorsement  advice 
from the European Financial Reporting Advisory Group (EFRAG)5, then an opinion from the 
Standards Advisory Review Group (SARG)6 assessing whether EFRAG’s technical advice is 
objective and well-balanced. Following this, the Commission decides whether to propose the 
standard/interpretation for endorsement. The endorsement vote in the Accounting Regulatory 
Committee (ARC)7 is followed by confirmation by the European Parliament. If all these steps 
go well, the Commission decides whether to endorse the standard/interpretation and publish it 
in the Official Journal. 

2.2.  Main sources of input for the report 

The  Commission  has  drawn  on  input  from  various  sources  for  this  report.  Member  States 
have  been  consulted  –  within  the  Accounting  Regulatory  Committee  –  on  the  main  points 
covered.  The  Roundtable8  for  the  consistent  application  of  IFRS  in  the  EU  was  another 
valuable source of input. The Commission Services concerned have also kept regular contact 
with stakeholders during the introduction of IFRS in the EU.  

In order to have a full technical analysis of implementation of IFRS, the Commission Services 
have  also  considered  a  number  of  reports  on  the  2005  IFRS  implementation  prepared  by 
different organisations and companies9. 

This  Commission  report  also  takes  into  account  a  report  by  the  Committee  of  European 
Securities  Regulators  (CESR)  entitled  “CESR’s  review  of  the  implementation  and 
enforcement  of IFRS  in the  EU”10 and results  from other studies  and literature available  on 
initial application of IFRS in the EU.  

2.3. 

Effective use of IFRS in the EU 

In 2005 the number of IFRS adopters whose securities were admitted to trading on a regulated 
market in the EU stood at 7 365, of which 5 534 were equity issuers. 

5 
6 
7 
8 
9 

10 

For further information see: efrag.org  
For further information see: http://ec.europa.eu/internal_market/accounting/ias_en.htm#standards  
For further information see: http://ec.europa.eu/internal_market/accounting/committees_en.htm#arc  
For further information see: http://ec.europa.eu/internal_market/accounting/ias_en.htm#060609  
In particular the report mentioned in footnote 4. This report contains an exhaustive listing of other 
studies made.  
This review was published as document CESR/07-352 on 7 November 2007 and is available on the 
CESR website:  
http://www.cesr-
eu.org/index.php?page=contenu_search_res&doconly=all&searchdatefromday=1&searchdatefrommont
h=1&searchdatefromyear=1970&searchdatetoday=29&searchdatetomonth=2&searchdatetoyear=2008
&searchkeyword=07-352 

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Extract from the CESR report, Appendix 1: Number of IFRS adopters listed on a regulated 
market in the EU by country (equity issuers and bond issuers) 

CESR Members 

Equity issuers

Bond issuers 11 

Total

Austria 

Belgium 

Bulgaria 

Cyprus 

Czech Rep 

Denmark 

Estonia 

Finland 

France 

Germany 

Greece 

Hungary 

Iceland 

Ireland 

Italy 

Latvia 

Lithuania 

Luxembourg 

Malta 

Norway 

Poland 

Portugal 

Romania 

Slovakia 

Slovenia 

Spain 

Sweden 

NL 

UK 

72 

144  

369  

141  

66  

140  

16  

135  

680  

768  

356  

34  

23  

43 

288  

13  

43  

35  

15  

188  

197  

50  

N/C 

N/C 

60  

190  

350  

165  

953 

11

2 

60 

0 

24 

8 

6 

15 

200 

172 

0 

1 

8 

40

65 

4 

4 

200

19

0 

0 

28 

N/C

N/C

6 

120 

35 

25

778

TOTAL 

5 534 

1 831

NC: answer not provided 

83

146 

429 

141 

90 

148 

22 

150 

880 

940 

356 

35 

31 

83

353 

17 

47 

235 

34

188

197 

78 

N/C

N/C

66 

310 

385 

190

1 731

7 365

By 31 December 2005 the following standards and interpretations had been endorsed: IAS 1 
to 41, IFRS 1 to 6, SIC 7 to 32 and IFRIC 1 to 5, excluding those  superseded  or  abolished 
before  or  after  that  date12.  Additional  standards  and  interpretations  were  endorsed  in  2006 
(IFRS 7 and IFRIC 6 to 9) and 2007 (IFRS 8 and IFRIC 10 and 11), along with amendments 
to  previously  endorsed  standards.  Some  standards  (IFRS  6),  amendments  to  standards  (on 
IAS 39)  and  interpretations  (IFRIC  4  and  5)  endorsed  in  2005  could  be  applied  as  from 

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12 

Some  bond  issuers  may  have  decided  to  postpone  application  of  IFRS  until  2007  in  accordance  with 
Article 9 of Regulation (EC) No 1606/2002 of the European Parliament and of the Council. 
IAS 3 to 6, IAS 9, IAS 13 to 15, IAS 22, IAS 25, IAS 30, IAS 35, IFRIC 3, SIC 1 to 6, SIC 8 and 9, 
SIC 11, SIC 14, SIC 16 to 20, SIC 22 to 24, SIC 26, SIC 28, SIC 30 and SIC 33. 

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1 January  2006.  It  was  also  possible  to  apply  IFRS  7,  IFRIC  6  and  amendments  to  some 
standards endorsed on 11 January 2006 to 2005 financial statements. 

CESR’s  members  have  undertaken  a  full  review  of  1 410  companies’  2005  IFRS  financial 
statements  and  a  thematic  review  of  an  additional  920  companies’  2005  IFRS  financial 
statements. They have set up a database in which 85 enforcement decisions had been entered 
by the end of August 2007. 

2.4. 

Consistent application of IFRS in the EU 

Based  on  the  information  gathered  from  the  sources  mentioned  in  Section  2.2,  the 
Commission  has 
endorsed 
consistency  of 
standards/interpretations in the EU for the financial year 2005. The Commission reached the 
following conclusions: 

application  of 

analysed 

the 

the 

•  Overall, application of IFRS has been a challenge for all stakeholders, but it has 
been  achieved  without  disrupting  markets  or  reporting  cycles.  This  is  a  major 
achievement,  bearing  in  mind  that  implementation  of  IFRS  has  meant  a  general 
overhaul of the accounting framework in the EU for companies falling under the 
scope  of  the  IAS  Regulation.  The  switch  to  IFRS  has  required  hard  work  and 
significant  resources  from  the  companies  concerned,  in  particular  from  smaller 
listed companies13. 

•  There  is  a  general  perception  among  preparers,  auditors,  investors  and  enforcers 
that application of IFRS has improved the comparability and quality of financial 
reporting and has led to greater transparency. 

•  The options to extend the scope of the IAS Regulation have been implemented in 
different  ways  in  different  Member  States  (see  above  2.1),  depending  on  their 
individual economic and legal environments. This flexible approach has allowed 
implementation  tailored  to  the  characteristics  and  peculiarities  of  the  accounting 
environment  in  each  Member  State,  in  particular  the  links  to  fiscal  rules  and 
company  law.  Compulsory  use  of  IFRS  does  not  appear  to  have  been  widely 
extended to non-listed companies and/or to individual accounts. 

•  Most  stakeholders  believe  that  the  understandability  of  financial  statements  has 
generally  improved,  except  for  certain  areas,  where  there  seems  to  be  room  for 
improvement, notably on financial instruments, business combinations and share-
based payments. 

•  IFRS  accounts  are  still  influenced  by  national  accounting  traditions.  One  reason 
for this is the lack of experience and accounting doctrine. In practice, introduction 
of this principles-based accounting approach, requiring considerable professional 
judgment,  has  been  a  challenge  in  some  Member  States.  However,  as  preparers 

13 

Analysis of implementation costs and subsequent recurrent application costs in the ICAEW study (see 
footnote  4)  has  shown  that  they  appear  higher  for  smaller  companies  (turnover  below  €500m) 
amounting  respectively  to  0,31%  and  0,06%  of  their  turnover,  which  remains  an  acceptable  level. 
Smaller  quoted  companies  have  also  faced  more  difficulties  in  applying  IFRS  because  of  limited 
resources and a lack of prior experience of IFRS. 

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and auditors become more familiar with IFRS, initial application problems should 
be resolved. 

•  The  IFRS  recognition  and  measurement  provisions  appear  to  have  been  applied 
more  consistently  and  clearly  than  certain  disclosure  requirements.  In  particular, 
there  is  room  for  further  improvements  in  disclosure  of  general  accounting 
policies. Security regulators have taken note of these issues, but have concluded 
that they have not undermined the general level of compliance with IFRS.  

•  Options allowed by IFRS, including those related to employee benefits, borrowing 
costs and joint ventures, have been used in diverse ways by companies. Options in 
IFRS for early application have also been widely used. However, options to widen 
application of fair value measurement have not been extensively used and use of 
the  carve-out  in  IAS  39  is  limited  to  very  few  banks.  Enforcers  have  expressed 
concern  and  wish  the  number  of  options  available  in  IFRS  to  be  reduced  in  the 
future. 

•  Specific  concerns  have  been  identified  by  the  CESR  in  certain  areas,  such  as 
business  combinations  (goodwill,  as  well  as  de  facto  and  common  control), 
financial  instruments  (impairment),  non-current  assets,  disclosure  on  accounting 
policies,  estimates  and  assumptions.  Enforcers  also  recommend  improving 
disclosure  relating  to  pension  schemes  and  share-based  payments  plus  further 
streamlining of the balance sheet and income statement formats. 

•  Few  technical  accounting  issues  have  been  referred  to  the  Roundtable  for  the 
consistent application of IFRS in the EU. The number of issues sent to IFRIC for 
interpretation has also decreased. This seems to indicate that the principles-based 
approach has generally been working well. 

•  Academics  have  started  to  analyse  the  impact  of  introduction  of  IFRS  on 
securities  markets,  but  it  is  still  too  early  to  give  conclusive  results.  However, 
preliminary studies indicate that there is an overall reduction in the cost of capital 
for companies supplying IFRS accounts. 

2.5. 

Functioning  of 
requirements 

the  endorsement  process  and  related  administrative 

This  part  of  the  report  looks  at  how  the  endorsement  process  has  been  working,  including 
technical analysis, preparation of political decisions and flanking administrative and practical 
activities. The report  covers  mainly  the period up to 1 July 2007, but also other subsequent 
elements have been added for completeness.  

The  Commission  has  the  following  comments  to  make  on  different  aspects  of  the 
endorsement process: 

•  Technical analysis and endorsement advice: The European Financial Reporting 
Advisory  Group  (EFRAG)  has  supplied  timely,  high-quality  analyses  and 
endorsement advice to the Commission. The endorsement advice has provided the 
Accounting  Regulatory  Committee  and  the  European  Parliament  with  the 
technical input needed for their decisions. All endorsement advice, except in the 
case  of  IAS 39,  has  expressed  a  clear  view  on  whether  the  standard  concerned 

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should be endorsed. Over time EFRAG has improved the structure of its advice, 
which now regularly provides a basis for conclusions. EFRAG’s Technical Expert 
Group (TEG) holds a three-day meeting every month. 

•  Review by the Standards Advisory Review Group (SARG): SARG was set up to 
ensure that the endorsement advice received from EFRAG was well-balanced and 
neutral. SARG has put in place efficient working procedures and delivered timely 
assessments. The group held three meetings during 2007. 

•  The  endorsement  and  committee  procedures:  The  endorsement  procedure  has 
been working well, and most standards and interpretations have been endorsed in 
good  time.  Endorsement  of  standards/interpretations  in  accordance  with  the  IAS 
Regulation  has  followed  the  current  committee  procedures14.  These  procedures 
will be changed15, and more emphasis will be put on scrutiny by Parliament and 
the  Council.  Parliament  closely  follows  developments  in  the  field  of  accounting 
and  participates  actively  in  the  endorsement  process.  Parliament  has  also 
requested  that  analysis  of  the  effects  should  be  introduced  in  the  endorsement 
process. 

•  Need  to  analyse  the  effects  of  introducing  new  standards  and  interpretations: 
Impact assessments have been an integral part of the general legislative process at 
EU  level  and  in  Member  States  for  many  years.  The  Commission  attaches  such 
assessments  to  all  new  legislative  proposals.  The  need  to  analyse  the  effects  of 
accounting standards is becoming apparent. Impact assessments or effect analyses 
should  be  carried  out  at  an  early  stage  in  the  standard-setting  process,  and  the 
Commission has therefore asked the IASB to perform such analyses as part of the 
process  of  preparing  new  standards.  The  International  Accounting  Standards 
Committee  Foundation  (IASCF)16  has  committed  itself  to  doing  this  for  future 
standards.  Until  then,  the  Commission  –  after  discussion  with  the  European 
Parliament  –  has  agreed  that  such  analyses  of  effects  for  upcoming  major 
standards and interpretations should be performed at EU level. The Commission 
Services  have  finalised  an  effects  study  for  IFRS  8  (“Operating  Segments”)  and 
will prepare similar analyses for IFRIC 12 (“Service Concession Arrangements”) 
and IAS 23 (“Borrowing Costs”). For subsequent upcoming standards, EFRAG – 
in  close  cooperation  with  the  Commission  Services  –  will  contribute  to  such 
analyses as part of preparing its endorsement advice. 

•  Endorsements  and  “carve-outs”:  The  basic  idea  behind  the  IAS  Regulation  is 
that  IFRS  and  IFRIC  should  be  of  high  quality  and  obtain  such  general  support 
that  they  can  be  endorsed  in  the  EU.  All  standards  and  interpretations,  except 
limited parts of IAS 39, have been endorsed. At the time of endorsement of IAS 

14 

15 

16 

Council  Decision  1999/468/EC  of  28  June  1999  laying  down  the  procedures  for  the  exercise  of 
implementing powers conferred on the Commission, OJ L 184 of 17 July 1999, page 23. 
Council  Decision  2006/512/EC  of  17  July  2006  amending  Decision  1999/468/EC  laying  down  the 
procedures for the exercise of implementing powers conferred on the Commission, OJ L 200 of 22 July 
2006, page 11. 
The latest stage: Regulation of the European Parliament and of the Council amending Regulation (EC) 
No.  1606/2002  on  the  application  of  international  accounting  standards,  as  regards  the  implementing 
powers conferred on the Commission has been adopted and published in the OJ on 9 April 2008 
The IASCF is the foundation behind the IASB. 

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39, it was expressly stated that the IAS 39 carve-out should be limited in time and 
in  scope.  Concerning  a  first  carve-out  relating  to  the  fair  value  option,  after 
contacts with banking supervisors and central banks the IASB quickly presented a 
new solution which was subsequently endorsed in the EU. The second carve-out 
concerning certain hedging rules has been more difficult to resolve. Despite hard 
work  in  the  IASB  and  in  the  banking  industry,  no  solution  has  been  found  yet. 
The Commission has urged both sides to present new solutions to this issue. 

•  Consolidation and translation of IFRS: Each individual IFRS is endorsed in the 
EU by a regulation. This means that no full consolidated version of the endorsed 
IFRS  is  available.  Furthermore,  the  quality  of  some  of  the  language  versions  of 
endorsed  IFRS  has  been  questioned  by  Member  States  and  stakeholders.  To 
address these concerns, the Commission Services responsible have started a major 
consolidation  project  coupled  with  a  detailed  language  review  of  all  endorsed 
standards and interpretations. 

•  The  overall  length  of  the  endorsement  procedure:  The  average  time  between 
publication by the IASB and adoption of an endorsed standard by the EU has been 
about eight to ten months. The decision to perform effect analyses at EU level is 
likely to add about six more months to this process. However, in the future such 
analyses  will  become  part  of  the  IASB  standard-setting  process,  in  which  case 
endorsement  by  the  EU  should  remain  to  eight  to  ten  months.  In  urgent  cases, 
Member  States  and  Parliament  have  shown  flexibility  in  order  to  allow  quick 
endorsement  decisions  (this  was  the  case,  for  instance,  for  IFRS  7  –  “Financial 
Instruments: Disclosure”). There is a common interest in making the endorsement 
process as expedient as possible. Concerning IFRS 7 as well as IFRS 8, a number 
of  listed  companies  approached  the  Commission  to  request  swift  endorsement 
which would allow early application of these standards. 

3. 

CONCLUSIONS 

The first year of mandatory application of IFRS in the EU has been generally positive, even if 
the regulatory changes and lack of experience have posed a challenge for first-time appliers. 
The value of the accounting information supplied has increased and IFRS have generally been 
applied consistently in the EU. The level of consistency between IFRS accounts is likely to 
increase  over  time  as  preparers  and  auditors  gain  experience  with  applying  the  new 
accounting framework. 

The  EU  endorsement  process  per  se  ensures  technical  quality,  political  legitimacy  and 
relevance to business. The system has been working well and standards have been endorsed in 
good time. The endorsement system is flexible and has already been amended – inclusion of 
SARG, new working methods in EFRAG, new rules on committee procedures, effect studies, 
etc. The net result has produced an efficient and legitimate structure. 

In  order  to  maintain  the  current  high  acceptance  of  IFRS  in  the  EU,  it  is  important  that 
stakeholders feel that the work programme of the IASB is addressing the right issues and that 
future standards/interpretations will provide suitable accounting solutions. Some stakeholders 
have expressed doubts about some of the accounting projects currently being prepared by the 
IASB.  It  is  therefore  crucial  that  EU  institutions,  Member  States  and  stakeholders  become 
involved  in  the  standard-setting  process  as  early  as  possible,  as this  enhances  the  quality  of 

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the work and increases the legitimacy and acceptance of future standards/interpretations. The 
way the IASB undertakes impact assessment in future will also be monitored carefully. 

In order to ensure the overall quality of future IFRS and IFRIC it is also important that the 
IASB/IASCF  has  suitable  governance  structure  and  secure  funding.  The  Commission 
Services regularly assess the governance and funding of the IASB/IASCF and publish reports 
that can be downloaded from the Commission website17.  

17 

For further information see: http://ec.europa.eu/internal_market/accounting/ias_en.htm#070112  

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