REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Report on the funding of the International Financial Reporting Standards Foundation
Date: 2010-09-27
Institutions: European Commission
Subjects: EU office or agency, financing, information, international standard, standardised accounting system

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EUROPEAN COMMISSION 

Brussels, 27.9.2010 
COM(2010) 504 final 

REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Report on the funding of the International Financial Reporting Standards Foundation1 

1 

Following  revision  of  its  constitution,  on  1  March  2010  the  International  Accounting  Standards 
Committee  (IASC)  Foundation  name  was  changed  to  the  International  Financial  Reporting  Standards 
(IFRS) Foundation (the  change will  be  effective  in  July  2010).  This report uses  the new name  (IFRS 
Foundation) although Decision No 716/2009/EC refers to the old name (IASCF). The IFRS Foundation 
is  the  parent  body  of  the  International  Accounting  Standards  Board  (IASB),  whose  standards  are 
incorporated  into  EU  law  pursuant  to  Regulation  No.  (EC)  1606/2002  of  19  July  2002  on  the 
application of international accounting standards, OJ L 243, p. 1 of 11.09.2002. 

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REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND 
THE COUNCIL 

Report on the funding of the International Financial Reporting Standards (IFRS) 
Foundation 

1. 

INTRODUCTION 

the  European  Union  reviewed 

In  2009, 
the  IFRS  Foundation  funding 
arrangements and decided to encourage the move towards non-voluntary, stable and 
transparent  funding  arrangements  with  a  broad  geographic  basis.  In  light  of  this 
objective,  it  agreed  a  legal  basis  (the  Decision2)  that  would  allow  the  European 
Commission  to  provide  a  financial  contribution  towards  the  IFRS  Foundation 
budget3, subject to satisfactory progress being made to enhance the IFRS Foundation 
governance.  

The present report on the governance reforms of the IFRS Foundation provides the 
Commission’s submission to the European Parliament and to the Council pursuant to 
Article 9, paragraph 3, of this Decision. 

The  Commission  examines  in  this  report  the  latest  developments  concerning 
governance,  without  prejudging  the  debate  about  the  need  for  further,  more 
comprehensive  reforms  of  the  IFRS  Foundation’s  governance,  which  are  currently 
being  reviewed  through  the  IFRS  Foundation’s  Monitoring  Board  (see  point  4 
below).4  Until  the  latter  formulates  its  recommendations  and  until  they  are 
implemented,  it  is  essential  that  the  International  Accounting  Standards  Board 
(IASB) continues to have sufficient resources to deliver a number of urgent projects, 
notably those related to the financial crisis as well as key priorities for the EU, such 
as insurance accounting. 

2. 

BENCHMARKS SET-OUT IN DECISION NO. 716/2009/EC 

Article  9,  paragraph  3  of  Decision  716/2009/EC  states  that  “the  report  [about  the 
IFRS  Foundation]  shall  focus  on  the  governance  structure  and  processes,  including 
the composition and powers of the Monitoring Board, in particular on the ability of 
that  body  to  accomplish  its  public  interest  mission  in  a  transparent  and  efficient 
manner.  The  report  shall  also  set  out  progress  as  regards  the  roadmaps  for  third 
countries  to  apply  IFRS  to  their  domestic  issuers.”  The  last  aspect  is  covered  in 
section 5 of this report. 

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Decision  No 716/2009/EC  of  the  European  Parliament  and  of  the  Council  of  16 September  2009 
establishing  a  Community  programme  to  support  specific  activities  in  the  field  of  financial  services, 
financial reporting and auditing, OJ L 253, p. 8-16 of 25.09.2009. 
The financial contribution in the Decision is based on figures available at the time that the Commission 
proposal was prepared and does not anticipate future budgetary developments. 
See  announcement  about 
http://www.iosco.org/monitoring_board/ 

the  creation  of  a  working  group  by 

the  Monitoring  Board  on 

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Recital  19  of  the  Decision  refers  to  the  expectations  set  out  in  the  European 
Parliament  Resolution  of  24  April  2008  on  International  Financial  Reporting 
Standards  (IFRS)  and  the  Governance  of  the  International  Accounting  Standards 
Board  (IASB)  and  in  the  Council  Conclusions  of  8  July  2008,  in  particular  the 
creation of the Monitoring Board with relevant powers and appropriate composition, 
greater  transparency  and  legitimacy  in  regard  to  the  IASCF’s  standard-setting  and 
agenda-setting  processes,  the  enhancement  of  the  effectiveness  of  the  Standards 
Advisory Council and the formalisation of the role of impact assessments as part of 
the due process of the IASB. 

3. 

PROGRESS MADE BY THE IFRS FOUNDATION TO MEET THE BENCHMARKS  

3.1. 

Recent changes to the IFRS Foundation’s constitution 

On 15 January 2009, the Trustees completed the first part of their five-yearly review 
of  the  IFRS  Foundation's  Constitution.  This  part  of  the  review  addressed  public 
accountability  by  creating  a  link  to  a  Monitoring  Board  of  public  authorities  (see 
point  3.2  below).  It  also  expanded  the  membership  of  the  IASB  from  14  to  16 
members  (to  be  implemented  no  later  than  July  2012)  in  order  to  ensure  a  broad 
geographic distribution within the Board.  

In January 2010, the Trustees completed the second part of their five-yearly review 
of the IFRS Foundation's Constitution. The focus was on enhancing the transparency 
and accountability of the IFRS Foundation and the IASB and expanding stakeholder 
engagement and  outreach, whilst enhancing governance.  The key  changes were the 
following: 

•  the  IASB  will  in  future  be  required  to  carry  out  a  public  consultation  (every  3 
years) about its work programme, with the first consultation starting no later than 
mid-2011.  This  is  intended  to  bring  greater  transparency  to  the  IASB’s  agenda-
setting  process,  which  is  one  of  the  most  important  elements  to  ensure  the 
accountability of the Board and, more generally, of the IFRS Foundation; 

•  the term of office of IASB members will become shorter (5 years, extendable by 3 
years maximum), except for the Chair who will remain eligible for a full 5 years 
second  term.  This  is  intended  to  promote  greater  turnover  of  IASB  members, 
thereby ensuring the regular infusion of “new thinking” into the standards-setting 
process; 

•  there will be a possibility to shorten the due process below the minimum 30-day 
duration foreseen in the IASB’s Handbook. This brings greater flexibility in cases 
of urgency, such as that which arose in October 2008, at the height of the financial 
crisis,  and  which  made  it  necessary  to  introduce  new  reclassification  rules  for 
financial instruments; 

•  the objectives of the IFRS Foundation are amended to emphasise that the overall 
objective is the global adoption of IFRS, whereas convergence is only a means to 
facilitate this objective. This change is already being reflected in the preliminary 
discussions about the IASB’s future (post-2011) work programme – for example 
in the IFRS Advisory Council (formerly the Standards Advisory Council or SAC). 

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3.2. 

Composition and powers of the Monitoring Board 

representative  of 

The  Monitoring  Board  comprises  one 
International 
Organization  of  Securities  Commissions  (IOSCO)  Emerging  Markets  Committee, 
one  representative  of  the  IOSCO  Technical  Committee,  the  Commissioner  of  the 
Financial  Services  Agency  of  Japan  (JFSA),  the  European  Commissioner  for  the 
Internal Market and Services and the Chairman of the US Securities and Exchange 
Commission  (SEC).  The  Basel  Committee  on  Banking  Supervision  participates  in 
the Monitoring Board as an observer.  

the 

The relationship and responsibilities of the participating organisations are described 
in  the  Memorandum  of  Understanding  (MoU)  developed  by  the  members  of  the 
Monitoring  Board  and  the  Trustees.  The  principal  responsibilities  of  the  Monitoring 
Board are to:  

Participate in the Trustee nominations process and approve Trustee nominees;  

Review the adequacy and appropriateness of Trustee arrangements for financing the IASB;  

Review  the  Trustees’  oversight  of  the  IASB’s  standard  setting  process,  in  particular  with 
respect to its due process arrangements;  

Liaise  with  the  Trustees  regarding  the  regulatory,  legal  and  policy  developments  that  are 
pertinent to the IFRS Foundation’s oversight of the IASB; and  

Refer  matters  of  broad  public  interest  related  to  financial  reporting  for  consideration  by  the 
IASB.  

The Monitoring Board is still developing its procedures and working arrangements to 
accomplish in practice its public interest mission. The Commission considers that the 
Monitoring Board is a useful step towards greater accountability and transparency of 
the  IFRS  Foundation's  work.  Nevertheless,  the  Commission  considers  that  a 
comprehensive review of the IFRS Foundation's governance framework - including 
the role of the Monitoring Board - is appropriate, in particular to assess the need to 
strengthen its accountability towards public authorities (see point 4). 

3.3. 

Other commitments made by the Board of Trustees 

At  the  same  time  that  the  Trustees  of  the  IFRS  Foundation  agreed  the  latest 
constitutional  changes  in  January  2010,  they  also  agreed  to  further  review  three 
important aspects of the Foundation’s governance. In particular, Trustees agreed: 

•  to  undertake  immediately  a  full  strategic  review  of  the  Foundation  beyond  June 
2011, i.e. beyond the completion of the convergence agenda of the IASB and the 
US Financial Accounting Standards Board (FASB), including the financing of the 
organisation.  The  review  will  include  public  consultation  with  stakeholders  and 
the Monitoring Board; 

•  to undertake, and complete by the end of 2010, a full review of the effectiveness 
of  the  IFRS  Advisory  Council,  in  order  to  assess  the  recent  reforms  introduced 
and  to  determine  whether  further  reforms  are  necessary.  The  review  will  also 
consider the size, structure and operation of the IFRS Advisory Council; 

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•  to review the Trustees’ oversight framework of the IASB and their fulfilment of 

their oversight functions over the Board. 

The  European  Commission  welcomes  the  launch  of  these  reviews.  Consultations 
have already started in a number of fora. The Trustees held a first discussion about 
the  strategic review with the Monitoring  Board during the latter’s meeting in April 
2010. The IFRS Advisory Council has also held a first discussion with the Trustees 
about the review of its effectiveness. The European Commission will closely monitor 
progress of these reviews through its participation in the relevant fora. 

4. 

FUTURE GOVERNANCE REFORMS 

the  abovementioned  positive  steps 

Notwithstanding 
the 
transparency  and  accountability  of  the  IASB,  the  European  Commission  considers 
that  a  comprehensive  review  of  the  IFRS  Foundation’s  governance  framework  is 
necessary. For example, recent events surrounding the reprioritisation of the IASB-
FASB convergence agenda and high-level appointments within the IFRS Foundation, 
illustrate the importance of further enhancing the transparency and accountability of 
its decision-making process. 

towards  enhancing 

These  concerns  are  shared  by  other  members  of  the  Monitoring  Board,  which  has 
therefore  established  a  Governance  Working  Group  (WG)  to  carry  out  such  a 
comprehensive review. The Governance WG has been given broad mandate to cover 
all relevant aspects of the IFRS Foundation’s governance, including its institutional 
structure as well as the link between accounting standards and various public policy 
objectives,  including  market  transparency  and  financial  stability.  The  European 
Commission considers that the Governance WG should aim to report its conclusions 
and recommendations by the end of 2010 and that the latter should be implemented 
as soon as possible thereafter.  

5. 

ROADMAPS FOR THIRD COUNTRIES TO APPLY IFRS TO THEIR DOMESTIC ISSUERS 

The  Commission  adopted  a  report  to  the  European  Parliament  on  convergence 
between IFRS and third country national Generally Accepted Accounting Principles 
(GAAPs) on 4 June 2010. As stated in that report, many countries have continued to 
make  progress  towards  the  full  convergence  of  their  standards  with  IFRS  and 
towards the eventual adoption of IFRS for their domestic issuers. 

The  Committee  of  European  Securities  Regulators  (CESR)  has  provided  advice  to 
the  Commission  and  has  indicated  that  China,  Canada,  India,  and  South  Korea 
continue  to  make  progress  in  pursuing  their  convergence  or  adoption  programmes. 
The United States has conducted a public consultation on the adoption of IFRS and 
on 24 February 2010 the US SEC issued a policy statement confirming that it intends 
to  take  a  decision  about  IFRS  during  2011.  In  addition,  the  US  Securities  and 
Exchange  Commission  (SEC)  has  acknowledged  the  need  to  ensure  adequate 
funding  of  the  IFRS  Foundation  from  the  US  during  recent  meetings  of  the 
Monitoring Board. 

Japan  has  also  continued  the  work  on  convergence  between  GAAP  and  IFRS,  and 
has  recently  announced  its  intention  to  take  a  decision  around  2012  on  whether  to 

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adopt IFRS by 2015 or 2016. In the meantime, some Japanese companies can already 
apply  IFRS  on  a  voluntary  basis.  Other  major  economies  have  also  recently 
announced  their  intention  to  adopt  IFRS,  such  as  Argentina,  Brazil,  Mexico  and 
Taiwan.  In  Russia  however,  there  are  no  indications  of  substantial  development  as 
far as mandatory use of IFRS is concerned. 

In the coming years the Commission will continue to monitor the situation and assess 
the  ongoing  efforts  by  third  countries  converging  to  IFRS  or  intending  to  adopt 
IFRS,  with  the  technical  assistance  of  CESR.  The  Commission  will  continue  to 
support  the  efforts  of  those  countries  which  have  undertaken  to  converge  their 
accounting standards to IFRS and also of those countries which have undertaken to 
adopt IFRS. 

6. 

CONCLUSIONS 

The Commission concludes that the IFRS Foundation has made progress on several 
key  benchmarks  referred  to  in  Decision  716/2009/EC.  In  addition,  the  Monitoring 
Board has launched a comprehensive review of the IFRS Foundation’s governance.  

As  part  of  any  future  comprehensive  reform  of  the  IFRS  Foundation,  the  latter’s 
funding arrangements would need to ensure a non-voluntary, transparent and stable 
funding platform with a broad geographical basis (see Article 9.4 of the Decision). In 
this respect, it is particularly important that all major jurisdictions contribute towards 
the  budget  of  the  IFRS  Foundation  in  proportion  to  their  weight  in  global  capital 
markets. 

While  discussions  continue  concerning  a  more  comprehensive  reform  of  the  IFRS 
Foundation’s governance model, the IASB should be appropriately funded to ensure 
that it can deliver urgently required standards, including those related to the financial 
crisis  such  as  the  reform  of  the  accounting  requirements  concerning  financial 
instruments. The Commission therefore considers that the short-term funding needs 
of  the  IASB  should  be  supported,  in  accordance  with  the  Decision  716/2009/EC, 
while  a  comprehensive  review  of  its  governance  model  is  carried  out  by  the 
Monitoring Board.  

On  the  basis  of  the  preceding  analysis,  the  Commission  recommends  that  the  EU 
should  provide  the  IFRS  Foundation  with  the  funding  foreseen  in  Decision 
that  a 
716/2009/EC  from  2011.  The  Commission  nevertheless  emphasises 
comprehensive  review  of  the  IASB’s  governance  model  should  be  carried  out  as  a 
matter of urgency. The recommendations arising from this assessment will need to be 
thereafter. 
available  by  2011  and 

soon  as  possible 

implemented  as 

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ANNEX  

1. Description of the internal governance structure of the IFRS Foundation 

SEC (US)
SEC (US)

CE (UE)
CE (UE)

FSA (Japan)
FSA (Japan)

IOSCO
IOSCO

Basel 
Basel 
Committee (obs.)
Committee (obs.)

Monitoring Board
Monitoring Board

Appoints, monitors

Reports

IFRS Foundation
IFRS Foundation

Board of Trustees
Board of Trustees

Appoints

Informs

Oversees, appoints, finances

Informs

IFRS 
IFRS 
Advisory Council
Advisory Council

International Accounting Standards Board
International Accounting Standards Board

IFRS Interpretations Committee
IFRS Interpretations Committee

Standards and interpretations
Standards and interpretations

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2. Glossary of the key acronyms referred to in the report 

Financial Accounting Standards Board (FASB) 
The FASB is a private sector organisation in the United States that establishes financial 
accounting and reporting standards for business enterprises reporting under US Generally 
Accepted Accounting Principles (US GAAP). 
US Generally Accepted Accounting Principles (US GAAP) 
Accounting requirements for business enterprises in the United States, established by the 
Financial Accounting Standards Board (FASB), predecessor organisations and others. 
International Accounting Standard (IAS) 
A standard adopted by the International Accounting Standards Board’s (IASB) predecessor, 
the International Accounting Standards Committee (IASC). When the IASB replaced the 
IASC in 2001, it adopted all IASs then in force. 
International Accounting Standards Board (IASB) 
The IASB is an independent, privately-funded accounting standard-setter.  
International Accounting Standards Committee Foundation (IASCF) 
The former name of the parent entity of the International Accounting Standards Board 
(IASB), now known as the IFRS Foundation 
International Financial Reporting Standard (IFRS) 
A standard and interpretation adopted by the International Accounting Standards Board 
(IASB). 
IFRS Foundation 
The name of the parent entity of the International Accounting Standards Board (IASB) 
Standards Advisory Council  
A forum for the International Accounting Standards Board (IASB) to consult interested 
organisations, now called the IFRS Advisory Council. The Advisory Council meets three 
times a year, and Advisory Council members provide the IASB with input on its agenda, its 
work programme and particular projects.  

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