COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation for establishing a Union Programme to support specific activities in the field of financial reporting and auditing Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on establishing a Union programme to support specific activities in the field of financial reporting and auditing for the period of 2014-2020
Date: 2012-12-19
Institutions: European Commission
Subjects: EU programme, access to information, audit, disclosure of information, financial control, financial market, financial services, international standard, single market

EUROPEAN 
COMMISSION 

Brussels, 19.12.2012  
SWD(2012) 444 final 

COMMISSION STAFF WORKING DOCUMENT 

Ex-ante evaluation for establishing a Union Programme to support specific activities in 
the field of financial reporting and auditing 

Accompanying the document 

Proposal for a Regulation of the European Parliament and of the Council 

on establishing a Union programme to support specific activities in the field of financial 
reporting and auditing for the period of 2014-2020 

{COM(2012) 782 final}

EN 

   EN 

 
 
 
 
 
  
 
1. 

EXECUTIVE SUMMARY 

1.1. 

Background 

The  single  market,  where  goods,  services,  people  and  capital  circulate  freely,  is  among  the 
European Union's greatest achievements. One of the biggest challenges of the coming years 
for  Europe  is  to  step  on  a  sustainable  growth  path  in  order  to  overcome  the  financial  and 
sovereign debt crisis that unfolded since 2008. Integration and a perfectly functioning internal 
market are indispensable in achieving that objective.  

In particular, the freedom to establish a business entity is crucial to a well-functioning single 
market  and  the  economic  prosperity  of  Europe.  Transparency  and  a  level  playing  field  for 
entities  doing  business  within  Europe  and  globally  are  key  factors  to  allow  that  freedom 
unfold in practice. In order to establish a favourable business environment, the harmonisation 
of accounting and audit rules are crucial.  

As capital markets are global, harmonisation of  financial reporting and audit rules 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.  Therefore,  instead  of  introducing  its  own  set  of  regional  financial  reporting  standards, 
and thereby harmonising the EU-level legislation but adding to regional fractions at the global 
level, the EU has 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 at several 
instances.1 The Union showed leadership in the process in 2002 when it adopted international 
accounting  standards  (IFRS)2  issued  by  the  International  Accounting  Standards  Board  to  be 
used by companies listed in the EU when drawing up their consolidated financial reports.3 In 
addition,  several  Member  States  allow  or  require  the  use  of  those  standards  by  non-listed 
companies and/or for annual reports.  

Progress  towards  a  single  set  of  high-quality,  understandable,  enforceable  and  globally 
accepted financial reporting standards has been steady. All major economies have established 
time lines to converge with or adopt IFRS in the near future.  

1  
2   

Repeated calls since the 2009 London declaration; last time in Los Cabos, 2012 
For  the  purposes  of  this  paper,  the  term  'international  accounting  standards'  refers  to  IAS,  IFRS  and 

IFRIC as well 

3   

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, p.1.; Directive 2004/109 of the European Parliament 
and of the Council of 15 December 2004 on the harmonisation requirements in relation to information about 
issuers whose securities are admitted to trading on q regulated market and amending Directive 2001/34 OJ L 
390, 31.12.2004 p. 38.; and Directive 2003/71 of the European Parliament and of the Council of 4 November 
2003  on,  the  prospectus  to  be  published  when  securities  are  offered  to  the  public  or  admitted  to  trading  and 
amending Directive 2001/34 OJ L 345 31.12.2003 p.64. 

1 

 
 
                                                 
With  more  and  more  countries  moving  towards  and  adopting  IFRS,  Europe's  weight  in  the 
international standard setting process is decreasing. In order to be heard and listened to, the 
Union has to speak with one voice. EFRAG4, the European Commission's technical adviser in 
accounting  matters  has  gradually  taken  up  the  role  of  providing  upstream,  technical  and 
credible input to the IASB's standard setting process.  

Both the international standard setter and the organisation representing Europe's interests need 
to be independent, possess the sufficient capacity and expertise to produce quality standards 
and input to those standards, and have sound financial basis in order to be able to carry out 
their public interest mission on a long-term basis. 

To  these  ends,  in  2009  the  European  Parliament  and  the  Council  established  a  Community 
Programme to support specific activities in the field of financial services, financial reporting 
and auditing5. The purpose of the current ex ante evaluation is to examine closely whether the 
EU co-financing should be continued.  

1.2. 

Beneficiaries of the 2010-2013 financing 

The  beneficiaries  of  the  current  Programme  were  originally  the  Committees  of  Supervisors 
(CESR6,  CEBS7  and  CEIOPS8),  the  IFRS  Foundation  (legal  successor  of  the  IASCF9), 
EFRAG10 and the PIOB11. In 2011, the newly established European Supervisory Authorities 
took over the responsibilities of the Committees of Supervisors and the Committees ceased to 
exist.  Thus,  the  Programme  can  be  prolonged  with  respect  to  the  current  beneficiaries:  the 
IFRS Foundation, EFRAG and the PIOB. 

The IFRS Foundation is a not-for-profit corporation incorporated in the State of Delaware, 
USA. Its operating office is based in London, United Kingdom. The Foundation provides the 
overall  governance  and  funding  framework  for  two  entities,  the  International  Accounting 
Standards  Board  (IASB)  and  the  IFRS  Interpretations  Committee  (formerly:  IFRIC),  which 
respectively  issue  International  Financial  Reporting  Standards  (IFRS)  and  interpretations  of 
such standards. The International Accounting Standards Board (IASB) involves a broad range 
of  stakeholders  in  its  work  through  an  open  consultation  process,  including  preparers  of 
financial statements, investors, auditors and national accounting standards setters. 

Regulation  (EC)  No 1606/2002 on  international accounting standards (the 'IAS Regulation') 
foresees  that  the  European  Commission  may,  subject  to  certain  conditions,  decide  on  the 
applicability  of  IFRS  and  related  interpretations  to  the  consolidated  accounts  of  companies 
with  securities  listed  on  a  regulated  market  within  the  Community.  Pursuant  to  the  IAS 
Regulation,  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. 

4  
5  

6  
7  
8  
9  
10  
11  

European Financial Reporting and Advisory Group 
 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 of 25.9.2009 p.8. 
Committee of European Securities Regulators 
Committee of European Banking Supervisors 
Committee of European Insurance and Occupational Pensions Supervisors 
International Accounting Standards Committee Foundation  
European Financial Reporting Advisory Group 
Public Interest Oversight Board 

2 

 
 
                                                 
interested 

European  Financial  Reporting  Advisory  Group  (EFRAG)  is  a  Belgian  law  non-profit 
international  association  ("IVZW/AISBL")  set  up  in  Brussels  by  the  main  European 
professional  associations 
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.  The  European 
Commission  is  an  observer  in  several  EFRAG  internal  committees  and  working  groups. 
EFRAG  was  set  up  in  2001  to  assist  the  European  Commission  in  the  endorsement  of 
international  accounting  standards  by  providing  advice  on  the  technical  quality  of  such 
standards.  EFRAG  is  also  gradually  taking  up  the  role  of  pro-actively  influencing  the 
development  of  international  accounting  standards.  This  role  is  seen  as  crucial  by  all 
European  stakeholders  as  it  is  important  to  ensure  that  the  standards  developed  at  the 
international level reflect the business reality and concerns of European companies. 

Public  Interest  Oversight  Board  (PIOB)  is  a  non-for-profit  Spanish  Foundation  set  up  in 
Madrid.  The  key  partners  of  the  PIOB  are  the  Monitoring  Group  (MG),  which  is  the  body 
representing  international  regulators  and  institutions8,  and  the  International  Federation  of 
Accountants  (IFAC),  which  is  the  private  body  representing  accountants  and  auditors 
worldwide9. The PIOB consists of ten members including its Chairman. The PIOB members 
are  persons  nominated  by  the  Monitoring  Group  for  a  three-year  period  according  to  a 
Memorandum of Understanding. The PIOB constituency comprises a variety of stakeholders: 
legislators  (e.g.  the  European  Parliament,  national  legislators),  regulators  and  supervisors  of 
financial markets including auditor's oversight bodies, national standard setters for accounting 
and  auditing,  auditors  and  audit  profession  in  general,  preparers  of  financial  statements 
(companies),  users  of  financial  statements  (e.g.  investors,  analysts,  researchers,  suppliers), 
academics. 

PIOB's role is to guarantee that due process, oversight and transparency are respected in the 
proposal, development and adoption of international standard for auditors in the framework of 
the International Federation of Accountants (IFAC). The Foundation is governed by a Board 
of Trustees in which each member of the PIOB is a trustee. 

A detailed analysis of the current situation for each of these bodies is set out in the Annexes, 
establishing any shortcomings that need to be addressed with a view to ensuring the efficient 
functioning of the European single market. 

1.3. 

Experiences of the grants 2010-2013 

The current financing Programme was aligned to the financial framework 2006-2013: in the 
case of EFRAG and the PIOB it has covered the period 2010-2013, whereas in the case of the 
IFRS Foundation, the financing started only in 2011. Thus, we have some, although limited 
experience (1-2 years) with the co-financing. 

It may be premature to draw scientifically sound conclusions from the experiences of only a 
few years. Nevertheless, some trends can be identified.  

3 

 
 
1.3.1.  The experiences of the IFRS Foundation's financing in 2011 

One of the aims of the Community co-financing has been to allow for a decrease in voluntary 
and/or private funding of the IFRS Foundation thereby raising its (perceived) independence. 
During 2011, the only year of financing so far, the IFRS Foundation saw increases in funding 
from various sources.  The receipt of the EC grant provided the bulk of the increase compared 
to  2010.  The  voluntary  contributions  for  2011  were  about  the  same  level  as  2010.  The 
Foundation was able to achieve increases with the big accounting firms and saw a decrease in 
voluntary contributions, primarily those from US companies.  It is the Foundation’s long term 
goal to reduce reliance on voluntary contributions.  The receipt of the EC grant is a significant 
step forward to achieving that goal. The EU contribution to the IFRS Foundation's budget in 
the  2011  fiscal  year  was  €4.229.165,14  (17%  of  the  Foundation's  eligible  expenses  for  that 
year). 

The EC grant is the IFRS Foundation’s largest institutional funding.  In one respect it is the 
Foundation’s  “lead  funding”  that  encourages  other  countries  to  create  funding  mechanisms.  
This  is  important  not  only  for  the  independence  of  the  organisation,  but  is  key  to  the 
completion of the Foundation’s mission, meeting the demands of the work plan and building 
adequate reserves.  The EC grant has enhanced the Foundation’s reputation to attract funding, 
staffing and volunteers.   

As  a  result,  in  2011  the  Foundation  has  made  substantial  progress  with  its  work  plan  and 
further worked on other important standards such as those for Leases, Revenue Recognition 
and Insurance Contracts.  Substantial progress has been made in completing the work plan but 
some  complex  issues  remain  and  the  convergence  project  of  IFRS  with  other  accounting 
standards (mainly with US GAAP) will continue.   

Nearly all IFRS Foundation staff is employed under permanent contracts and is recruited from 
a  range  of  sources.   There  is  approximately  50  technical  staff  (not  including  the  15  IASB 
members) of which there are 6 secondee positions occupied by practise fellows recruited from 
a range of accounting firms who serve up to 2 years. Since the IFRS Foundation is competing 
for the best professionals on the labour market, its funding arrangements should allow being 
able to attract and retain its staff on its own payroll. 

1.3.2.  The experiences of EFRAG’s financing 2010-2011 

EFRAG’s dependence on precarious/voluntary funding from interested parties has been 
reduced,  thus  the  credibility  and  independence  of  its  work  has  been  considerably 
enhanced. Among others, now the Technical Expert Group (TEG) chairman (the leader 
of EFRAG’s technical work and operations) is on EFRAG’s payroll instead of being paid 
by a big accounting firm.  

In parallel to the establishment of the grant programme, EFRAG’s governance reforms 
were completed in 2009. They enhanced its independence, accountability, transparency 
and the public policy aspects in its operations. The EU grant ensured that those reforms 
did  not  lose  ground.  The  funders  of  EFRAG  accepted  that  their  influence  in  the 
organisation  considerably  diminished,  whereas  their  level  of  contributions  had  to  be 

4 

 
 
maintained.12 Without the additional staff that the EU grant allowed to employ, EFRAG 
clearly would not have been able to cope with the IASB’s level of activities. Moreover, 
the additional funding allowed EFRAG to be more pro-active in on-going projects.  

The EU co-financing, and the expansion  of its budget also allowed EFRAG to take up 
new activities. Most importantly, the pro-active European input to the IASB’s standard 
setting process is now institutionalised: EFRAG’s Planning and Resource Committee has 
been set up. This committee provides a stable platform for views from all over Europe 
(not  only  the  big  Member  States)  and  continuity  in  the  actions  (as  opposed  to  ad-hoc 
projects previously). An indicator for the success of this type of activities is that the vast 
majority of the pro-active projects selected by EFRAG became high also on the IASB’s 
agenda.  EFRAG  is  now  regularly  asked  to  present  its  pro-active  projects  at  the  World 
Standard Setters’ Meeting.  

Representatives  of  smaller  Member  States  with  fewer  resources  often  remark  that  their 
only chance to influence the IASB is to do it through EFRAG. They would not have the 
capacity to do themselves the work that EFRAG does for them. Based on the feedback 
received from those standard setters, they feel sufficiently associated to EFRAG's work. 
It  is  therefore  important  that  EFRAG  received  sufficient  financing  for  representing  the 
views of those smaller Member States. Indeed, the EU grant serves the purposes to allow 
for  forming  a  truly  pan-European  accounting  view,  where  all  Member  States'  interests 
are taken into account irrespective of their financial or other resources. 

In sum, the Union's grant contributed to make EFRAG better equipped to fulfil its public 
interest mission.  EFRAG managed to employ more staff and take over its chairman on 
EFRAG  payroll.  Nevertheless,  EFRAG  is  still  somewhat  understaffed:  some  activities 
are not undertaken and the current staff is under workload pressure. On the basis of EU 
financing  Decision  of  16  September  2009,  the EU  contribution  to  EFRAG  in  the  2011 
fiscal year was €2.288.160 (43% of EFRAG's total budget for that year). 

1.3.3.  The experiences of PIOB’s financing 2010-2011 

Funding contributions to the PIOB were expected to come from a variety of stakeholders from 
all over the world but primarily from the other members of the Monitoring Group. However, 
the  usual  difficulties  associated  to  international  co-funding  arrangements  have  been 
exacerbated  in  recent  times  by  the  financial  restrictions  facing  all  international  bodies  and 
institutions  due  to  the  negative  prevailing  financial  and  economic  climate.  As  a  result,  at 
present, only IFAC and the EU co-finance the PIOB. 

On  the  basis  of  EU  financing  Decision  of  16  September  2009,  the  EU  contribution  to  the 
PIOB in 2010 fiscal year was €286.231. Such an  amount represented 22% of the PIOB's total 
eligible expenses (€1.301.050). On  the other hand, the EU contribution to the PIOB in 2011 
fiscal year was €288.991,78, which also represents 22%  of the PIOB eligible expenses for that 
year (€1.313.599) 

The PIOB co-funding experience has been up to now positive. The European Commission has 
had  the  opportunity  to  visit  the  PIOB  premises  twice  (March  2010  and  April  2011)  and  to 

12  

The EU co-financing did not have a squeeze-out effect; EFRAG needed additional funding. 

5 

 
 
                                                 
verify  their  financial  controls.    The  European  Commission  also  trained  its  staff  on  EU 
budgetary  procedures.  From  a  practical  point  of  view  the  activities  involved  in  the 
management of the operating grant for the 2010 and 2011 fiscal years have been a very useful 
learning experience for both sides. This has paved the way for a straight and more efficient 
management of future funding contributions.  

The  EU  co-financing  of  the  PIOB  has  become  an  example  for  other  potential  contributors. 
Several  international  institutions  are  expected  to  provide  funds  to  the  POIB  already  for  the 
2013 fiscal year. Moreover, the Monitoring Group, the PIOB and IFAC have created a Task 
Force to select and convince a group of donors from all over the world to provide funding to 
the PIOB on a stable and long-term basis. 

1.4. 

Problem definition and objectives 

Without  the  Union  co-financing,  the  problem  in  the  financing  of  the  three  proposed 
beneficiaries is two-fold:  

•  The financing structure is not stable enough (is based on voluntary contributions) and 
comes from stakeholders that have a direct interest in the work of the beneficiary (this 
is the case of the IFRS Foundation and the PIOB and it partly applies to EFRAG);  

•  The financing received from the other sources would not sufficient to cover its public 

interest mission (this is typically the case of EFRAG). 

In  addition,  in  the  case  of  the  IFRS  Foundation,  Europe  can  maintain  its  seat  in  the 
Monitoring Board (the body overseeing the IFRS Foundation) if it contributes to the funding 
of the Foundation. 

The  overall  objective  of  co-financing  the  accounting  bodies  proposed  is  to  support  the 
adoption of IFRS and its acceptance as a global single accounting language and to preserve 
the EU’s weight and voice in influencing the setting of IFRS at the same time. Therefore it is 
rational  to  co-finance  the  international  body  (the  IFRS  Foundation)  and  the  European 
technical body (EFRAG) at the same time in a coordinated manner. 

The  EU  co-financing  is  also  expected  to  contribute  to  enhancing  the  independence  of  the 
beneficiaries  in  the  field  of  accounting  by  allowing  them  to  move  from  voluntary  and/or 
private funding sources to stable, predictable, public financing. The EU grant also contributes 
to  boosting  the  beneficiaries’  reputation  and  thus  helping  them  in  attracting  financing  from 
other sources and in the recruitment of highly qualified experts. 

In the case of EFRAG, it is also expected that fair burden sharing among Member States is 
enhanced. Also, the EU co-financing should equip EFRAG with sufficient financial resources 
to carry out its European public interest mission.  

In  the  case  of  the  PIOB,  the  aim  is  strengthen  the  independence  of  the  organisation:  an 
oversight  body  must  not  be  financially  dependent  on  the  stakeholders  it  oversees.  Public 
oversight may be inefficient or at least not credible otherwise. 

6 

 
 
1.5. 

Available policy options 

In  our  analysis,  we  compared  the  identified  policy  options  to  the  baseline  scenario:  ‘no 
action’,  meaning  stopping  the  EU  co-financing  of  the  proposed  beneficiaries.  The  policy 
options examined were: 

•  setting  up  only  National  Funding  Mechanisms  (ensuring  the  EU’s  contribution  from 

only other sources than the EU budget); 

•  “internalising” the beneficiaries’ functions (setting up a European standard setter, or a 
dedicated  EU  agency  to  pro-actively  influence  the  IASB’s  standard  setting  and 
provide technical advice to the Commission); and  

•  keeping  the  status  quo,  i.e.  continuing  the  EU  co-financing  of  the  proposed 

beneficiaries.  

When comparing the above options, the following factors were taken into account: 

•  whether the given option contributes to achieve the objectives envisaged; 

• 

the political consequences of the given option; 

• 

feasibility; and 

• 

implications for the EU budget. 

It has been established, that the most cost-efficient option that achieves the objectives and is 
feasible is to continue the EU co-financing of the proposed beneficiaries. 

1.6. 

Volume  of  appropriations,  human  resources  and  other  administrative 
expenditure 

Our estimations for the proposed financing are based in the figures of the current Programme, 
the  beneficiaries'  budget  projections,  the  expected  inflation  rate  and  took  into  account  the 
current context of budget austerity and sovereign debt crisis. From a policy and political point 
of  view,  we  think  that  the  current  level  of  funding  should  be  maintained.  Therefore  our 
proposal  accounts  for  an  increase  commensurate  with  the  expected  inflation  rate  (2%).  The 
beneficiaries'  activities  are  expanding;  therefore  their  total  budgets  are  also  projected  to 
increase.  This  means  that  the  level  of  EU  co-financing  will  gradually  decrease  in  terms  of 
percentage  of  the  beneficiaries'  budget.  Accordingly,  the  EU  intervention  should  amount  to 
the following sums: 

Yearly 
contribution 

average 

(in EUR) 

Total  contribution 
over  the  2014-2020 
period 

(in EUR)

7 

 
 
 
 
IFRS Foundation  

4.6 million 

32.2 million 

EFRAG 

PIOB 

Total amount 

3.36 million 

0.33 million 

8.3million 

23.5 million 

  2.3 million 

58.0 million 

Note: Deviations may be caused because of the rounding up; for exact amounts please refer to 
the Legislative Financial Statement of the draft Regulation  

In  the  case  of  the  IFRS  Foundation,  we  took  into  account  only  the  expected  inflation  rate 
(2%)13.  Ideally,  the  EU  share  of  financing  should  be  commensurate  with  its  weight  in  the 
global economy. In the current Programme, the co-financing stemming from the EU aims at 
covering 20-25% of the IFRS Foundation's budget (together with the voluntary contribution 
of Member States) in line with the EU’s weight in the global economy (based mainly on the 
GDP  figures).  Since  the  increased  use  of  IFRS  globally  and  the  associated  necessary 
expansion  of  the  organisation  results  in  a  significant  increase  in  the  Foundation's  costs  and 
total  budget,  this  rate  is  unlikely  to  be  maintained  by  the  current  proposition.    Should  the 
budget projections of the IFRS Foundation prove correct, the EU co-financing ratio may even 
drop to 10%. This would mean that either the Foundation will not have sufficient resources to 
carry  out  its  public  interest  mission  in  a  satisfactory  manner,  or  new  founding  sources  will 
have to be found.  

In the case of EFRAG, the expected inflation rate (2%) and the current austerity context were 
taken into account. The proposed co-financing level does not allow for the additional tasks to 
be  taken  up  and  increased  activities  performed  by  EFRAG;  such  activities  will  have  to  be 
financed by EFRAG's own resources. 

In the case of the PIOB it is proposed to keep the same level of co-financing as in the previous 
programme (300.000 euro per year) adjusted by a reasonable expected annual rate of inflation 
(2%)  from  2014  onwards.  We  also  took  into  account  the  EU  weight  in  the  international 
financial  and  economic  systems  which  imply  a  level  of  co-financing  around  22%  of  total 
eligible expenses, what is similar to the previous programme. This represents a base funding 
of 306.000 euro in 2014 and a total for the seven year programme of 2.274.891 euro. 

For more details please refer to the respective chapters on the beneficiaries.   

Finally,  management  of  the  Community  programme  would  entail  related  administrative 
work by the services of the European Commission. It is estimated that no additional posts 
for  officials  in  the  financial  field  would  need  to  be  created  as  the  new  Programme  will  not 
create significant additional workload compared to the current Programme.  

1.7. 

Performance indicators 

The  ultimate  aim  of  the  Commission  in  the  area  of  financial  reporting  is  to  ensure 
comparability and transparency of company accounts throughout the EU and to ensure a level 
playing field for European  companies at the world market.  Thus, the current  programme (i) 

13  

The ECB aims at inflation rates of below, but close to, 2% over the medium term. 

8 

 
 
                                                 
aims  at  supporting  the  smooth  functioning  of  the  EU's  internal  market  of  financial  services 
and (ii) is part of the external dimension of the Europe 2020 strategy.  

The  performance  indicators for the assessment of the proposed co-financing  programme  are 
aligned to the above objectives: 

•  The  acceptability  of  IFRS  for  the  EU's  purposes  can  be  measured  by  the  number  of 
standards issued by the IASB compared to the number of standards endorsed. The aim 
is to arrive at 100% by 2020. 

•  The success of the external dimension is measured by the global acceptance of IFRS; 
i.e. the number of countries using IFRS around the world. The target is a significant 
increase in the number of countries using IFRS.  

In  the  field  of  auditing,  the  Commission  aims  to  introduce  International  Auditing  Standards 
(ISAs)  in  the  EU  and  to  promote  convergence  and  high  quality  international  standards  for 
auditing  all  over  the  world.  The  commensurate  indicator,  once  the  EU  has  adopted  ISAs, 
should  therefore  be  the  number  of  countries  with  advance  economies  applying  the 
International Auditing Standards (ISAs). The objective is to arrive at 100% by 2020. 

9 

 
 
2. 

PROPOSED  UNION  FUNDING  OF  THE  INTERNATIONAL  FINANCIAL  REPORTING 
STANDARDS FOUNDATION (IFRS FOUNDATION) 

2.1. 

Background 

Accounting standards play a critical role to ensure the effective operation of capital markets 
and of the broader economy. By ensuring that investors, creditors and other stakeholders have 
access  to  reliable  and  relevant  information  about  the  financial  condition  of  companies, 
accounting  standards  inter  alia  allow  companies  to  raise  funds  and  facilitate  contractual 
relations  with  their  suppliers  and  customers.  Accounting  standards  can  also  have  important 
tax implications and regulatory impacts, notably for regulated financial institutions. 

The  Community  first  adopted  harmonised  accounting  requirements  for  limited  liability 
companies in 1978 in  the form of the 4th  company  law  directive  on  annual  accounts14. This 
was  followed  in  1984  by  the  7th  company  law  directive  on  consolidated  accounts15.  After 
almost  20  years  which  saw  no  major  changes  to  the  Community's  accounting  legislation,  a 
major breakthrough was made in 2002 with the adoption of Regulation (EC) No 1606/2002 
on international accounting standards (the IAS Regulation)16. 

The adoption of the IAS Regulation took place in the context of a broader Financial Services 
Action  Plan  (FSAP)  whose  objective  was  to  promote  the  integration  of  European  capital 
markets. The use of IFRS is also required pursuant to the Transparency Directive17 and to the 
Prospectus  Directive18,  two  major  elements  of  the  EU's  securities  markets  legislation  that 
were also adopted in the context of the FSAP. 

The  IAS  Regulation  foresees  that  the  European  Commission  may,  subject  to  certain 
conditions, decide on the applicability of International Financial Reporting Standards (IFRS) 
and related interpretations to the consolidated accounts of companies with securities listed on 
a  regulated  market  within  the  Community.  Pursuant  to  this  Regulation,  IFRS  have  been  in 
force  in  the  EU  since  2005.  New  standards  are  periodically  adopted  by  the  Commission, 
subject to a regulatory comitology procedure. So far the Commission has adopted all IFRS in 
full, with one partial exception related to the accounting standard on financial instruments. 

The  IAS  Regulation  includes  an  option  allowing  Member  States  to  extend  the  scope  of 
application of IFRS to the annual accounts of listed companies or to the accounts of non-listed 
companies. Several Member States have taken advantage of this option, especially in relation 

14  

15  

16  

17  

18  

Directive 78/660/EC of 25 July 1978 based on Article 54 (3) (g) of the Treaty on the annual accounts of 
certain types of companies, OJ L 222, 14.8.1978, p. 11. 
Council  Directive  83/349/EEC  of  13  June  1983  based  on  the  Article  54  (3)  (g)  of  the  Treaty  on 
consolidated accounts, OJ L 193, 18.7.1983, p. 1. 
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, 11.09.2002, p. 1. 
Directive  2004/109/EC  of  the  Council  and  o  the  European  Parliament  of  15  December  2004  on  the 
harmonisation of transparency requirements in relation to information about issuers whose securities are 
admitted to trading on a regulated market and amending Directive 2001/34/EC, OJ L 390, 31.12.2004, 
p. 39. 
Directive  2003/71/EC  of  the  European  Parliament  and  of  the  Council  of  4  November  2003  on  the 
prospectus to be published when securities are offered to the public or admitted to trading and amending 
Directive 2001/34/EC, OJ L 345, 31.12.2003, p. 64. 

10 

 
 
                                                 
to regulated financial institutions, including two Member States that require the use of IFRS 
for all limited liability companies. 

The incorporation of IFRS into Community law and into the national law of Member States 
means  that  these  standards  play  a  major  role  to  ensure  the  effective  operation  of  the  Single 
Market and of the EU's economy. Although the Commission can in principle refuse to adopt 
standards  that  do  not  meet  the  relevant  criteria  –  and  has  made  use  of  this  option  in  one 
occasion – this option has serious disadvantages and is only to be used as a last resort. The 
Community  therefore  has  a  direct  interest  to  ensure  that  the  process  through  which  these 
standards  are  developed  delivers  accounting  standards  that  are  consistent  with  the  public 
interest (e.g. financial stability) and with the Community's legal framework. One aspect that 
must be considered in this context is the funding of the standard-setting process. 

IFRS and related interpretations are issued by the International Accounting Standards Board 
(IASB) and by the IFRS Interpretations Committee, two bodies of the International Financial 
Reporting  Standards  Foundation  (IFRS  Foundation).  The  Foundation  is  a  not-for-profit 
corporation  incorporated  in  the  State  of  Delaware,  USA.  Its  operating  office  is  based  in 
London, United Kingdom. It provides the overall governance and funding framework for the 
IASB  and  the  IFRS  Interpretations  Committee.  Figure  1  shows  a  simplified  diagram  of  the 
current  structure  of  the  IFRS  Foundation  and  of  its  standard-setting  bodies.  The  IFRS 
Foundation is a legal successor of the IASCF. 

Figure 1: IFRS Foundation's current structure (simplified) 

11 

 
 
 
Monitoring Board 
Monitoring Board 
Monitoring Board 
(Public authorities) 
(Public authorities) 
(Public authorities) 

IFRS Foundation 
IFRS Foundation 
IFRS Foundation 
(Trustees) 
(Trustees) 
(Trustees) 

IASB 
IASB 
IASB 
(issues IFRSs) 
(issues IFRSs) 
(issues IFRSs) 

IFRS Interpretations 
IFRS Interpretations 
IFRS Interpretations 
Committee 
Committee 
Committee 
(issues IFRICs) 
(issues IFRICs) 
(issues IFRICs) 

2.2. 

Governance of the IFRS Foundation 

The cornerstones of the Foundation's public accountability are: 

•  The Monitoring Board: The Trustees have established a formal public accountability 

link to a Monitoring Board of public capital market authorities.  

•  The  Constitution  Review:  The  Constitution  of  the  IFRS  Foundation  requires  the 

Trustees to undertake a formal, public, five-yearly review of the Constitution.  

•  Due  process:  A  formal  due  process  for  the  IASB,  the  IFRS  Interpretations 
Committee and  XBRL  ensures  extensive  outreach,  which  includes  mandatory  public 
consultation.  Comment  letters  received  in  response  to  formal  proposals  are  made 
public on the website.  

•  Public meetings: All meetings (other than meetings on administrative matters) of the 
bodies of the IFRS Foundation, including the IASB, the Interpretations Committee and 
its  formal  advisory  bodies,  are  held  in  public  and  are  webcast.  Meeting  notes  are 
available to the public as observer notes.  

The Trustees’ effectiveness in exercising their functions is assessed annually by the Trustees’ 
Due Process Oversight Committee. The Trustees' Due Process Oversight Committee (DPOC) 
is  responsible  for  approving  due  process  and  overseeing  the  IASB’s  compliance  with  due 
process, and reviewing the Trustees’ fulfillment of their oversight function in accordance with 
the Constitution of the IFRS Foundation. 

12 

 
 
 
The  European  Commission  has  sought  fundamental  reforms  of  the  IFRS  Foundation's 
governance  arrangements,  including  of  its  funding  regime,  in  order  to  address  the  concerns 
expressed by the Community legislators.19  

The  most  important  issues  related  to  the  governance  reforms  of  the  IFRS  Foundation  are 
described in more detail below. 

2.2.1.  Accountability and oversight role of the IFRS Foundation Trustees 

In  accordance  with  the  requirements  of  its  Constitution,  the  IFRS  Foundation  (IASCF) 
launched  a  five-yearly  constitutional  review  in  March  2008.20  A  discussion  document 
proposing  changes  to  the  public  accountability  of  the  IFRS  Foundation  (IASCF)  and  to  the 
composition of the IASB was published in July 2008.21 Following a public consultation and 
several  roundtables,  the  Trustees  concluded  part  one  of  the  Constitution  Review  at  their 
meeting  in  New  Delhi  on  15  and  16  January  200922  and  issued  a  report  setting  out  the 
conclusions of phase one in April 2009.23 

The  first  phase  of  the  IFRS  Foundation's  (IASCF's)  Constitutional  Review  has  led  to  two 
changes: 

–  the establishment of a Monitoring Board; 

–  changes to the composition of the IASB. 

The composition of the IASB is discussed under point 2.2.2 below.  

The  Monitoring  Board  is  an  independent  body,  without  legal  personality,  separate  from  the 
IFRS Foundation and governed by its own Charter. Its relationship with the IFRS Foundation 
is  set  out  in  a  bilateral  Memorandum  of  Understanding.  The  Monitoring  Board's  aim  is  to 
ensure the accountability of the IFRS Foundation to public authorities responsible for setting 
statutory accounting standards. Its principal powers and responsibilities are: 

•  to participate in the nomination of Trustees and to approve the latter's appointment;  

•  to review the Trustees' oversight of the IASB's work; and  

•  to  assess  the  adequacy  of  the  IFRS  Foundation's  funding  arrangements  with  a  view 

towards promoting a non-voluntary, transparent and stable funding platform.  

•  The Monitoring Board also has the possibility to refer matters of broad public interest 

for consideration by the IASB on a "comply or explain" basis.24  

19  

20 
21 
22 
23 
24 

See  the  Commission  staff  reports  on  governance  developments  in  the  IASB  and  IASCF  available  at 
http://ec.europa.eu/internal_market/accounting/iascf_iasb_governance_en.htm 
http://tinyurl.com/mrj3dz. 
http://tinyurl.com/marhsu. 
http://tinyurl.com/blqaze. 
http://tinyurl.com/nx77hg. 
The Monitoring Board's Charter and its Memorandum of Understanding with the IFRS Foundation are 
available at http://www.iasb.org/Monitoring+Board/Monitoring+Board.htm. 

13 

 
 
                                                 
The Monitoring Board meets two to three times a year. 

The G20 has welcomed the establishment of the Monitoring Board, pointing out that this "will 
enhance the IASB’s accountability, governance and legitimacy"25. 

The second phase of the IFRS Foundation's Constitutional Review started with the publication 
of a discussion document in December 2008. The review was completed in early 2010.  

In  February  2012  the Trustees  of  the  IFRS  Foundation,  the  oversight  body  of  the  IASB, 
concluded their review of the strategy of the IFRS Foundation26. The review was initiated at 
the end of 2010 as the IFRS Foundation was entering its second decade of existence and was a 
result  of  the  IFRS  Foundation’s second  Constitution  Review  that  was  completed  in  early 
2010.  

The  Trustees’  strategy  review  sought  to  articulate  a  clear  strategy  and  vision  for  the 
organization by considering the mission, governance, standard-setting process and financing 
of  the  IFRS  Foundation.  To  obtain  input  from  its  stakeholders,  the  Trustees  published  two 
consecutive consultation documents. Both sets of reviews were subjected to extensive global 
public  consultation  with  interested  parties,  and  included  public  round  tables  in  Hong  Kong, 
London,  New  York  and  Tokyo.  For  more  information,  see  the  timetable  of  the  strategy 
review.  

The Trustees agreed to co-ordinate their activities with those of the Monitoring Board of the 
IFRS  Foundation,  which  was  conducting  its  own  independent  wide-ranging  review  at  the 
same  time.  As  a  result,  the  Trustees  of  the  IFRS  Foundation  and  the  Monitoring  Board 
published their respective reports jointly on 9 February 2012.27 

The  Monitoring  Board  primarily  reviewed  institutional  aspects  of  governance,  focussing  on 
the  composition  and  the  respective  roles  and  responsibilities  of  the  Monitoring  Board, 
Trustees and the IASB. Its main recommendations are the following: 

•  Expand  the  Monitoring  Board  membership28  to  include  major  emerging  markets, 

based on use of IFRSs domestically (Basel Committee to continue as observer) 

• 

• 

• 

Improved procedure for IASB agenda referrals 

Improved procedure for IASB Chair selection 

Increased transparency of MB functions and activities 

•  Clarification of criteria and process for Trustee nominations 

25 

26  
27  
28  

Report of G20 Working Group on Reinforcing International Cooperation and Promoting Integrity in 
Financial Markets  
http://www.astrid-online.it/Dossier--d1/Documenti/The-London/G20_wg2_27_03_09.pdf , p. 24. 
http://www.ifrs.org/Alerts/PressRelease/Strategy+review+Feb+2012.htm 
http://www.ifrs.org/News/Press+Releases/trustee+monitoring+board+joint+statement+2011.htm 
The MB is currently composed of 5 members: the EC, the US SEC, the Japanese FSA, IOSCO technical 
committee and IOSCO emerging markets committee. 

14 

 
 
                                                 
• 

Improve IASB management structure and segregation of staff functions. 

Thus,  the  Monitoring  Board  review  introduces  a  dynamic  framework  for  the  membership 
selection,  based  on  the  principle  that  "domestic  use  of  IFRS"  is  a  condition  to  become  a 
member of the Monitoring Board,  comprising a  transitional period for new members before 
acquiring  permanent  membership  and  regular  reviews  for  existing  members.  Another 
important criterion of Membership is the contribution towards the IFRS Foundation's budget. 

At the same time, funding should not be directly linked with influence on the content of IFRS. 
The  Foundation’s  fund  raising  activities  are  separate  from  the  accounting  standard-setting 
activities  of  the  IASB,  the  independent  standard-setting  body  of  the  Foundation.   This 
separation  was  recently  enhanced  following  the  review  above.  The  Trustees  changed  the 
Foundation’s  Constitution to remove the title of  Foundation Chief  Executive Officer (CEO) 
from  the  IASB  Chair  and  reassigned  functions  “to  ensure  segregation  of  responsibilities  for 
IASB  operations  from  any  oversight  or  funding  matters  which  may  create  an  actual  or 
perceived conflict of interest in standard-setting”. 

The IASB actively seeks the input and views of a wide range of stakeholders but ultimately it 
is the 15 independent members of the IASB that debate and decide the content of accounting 
standards.  These principles for the IASB are outlined in the Foundation’s constitution. 

The  Trustees  in  their  strategy  review  recommended  four  areas  that  the  IFRS  Foundation 
should focus on:  

•  mission  (in  particular  improved  definition  of  the  public  interest  served  by  the 

Foundation's work);  

•  governance (improved accountability and independence);  

•  standard setting process (ensure that standards are of high quality and are implemented 

consistently); and  

•  stable financing. 

2.2.2.  Adequate representation of stakeholders 

The changes adopted in the first phase of the IFRS Foundation's current Constitutional review 
include  a  requirement  to  ensure  a  balanced  geographical  membership  of  the  IASB.  The 
revised  Constitution  introduces  a  geographical  basis  for  appointing  IASB  members  and 
increases the Board's maximum size. Six members (out of a maximum of 22 members) will be 
from  Europe.  The  Constitution  was  also  amended  to  explicitly  require  that  members  of  the 
IASB formally commit to act in the public interest in all matters. 

The current composition of the IASB broadly ensures a balanced sectoral membership drawn 
from investors, preparers, auditors, regulators and standards-setters. 

2.2.3.  Role of the Advisory Council (former Standards Advisory Committee (SAC)) 

In February 2009, the IFRS Foundation's Trustees announced changes to the membership of 
the SAC. An important departure from previous practice, members are no longer appointed in 

15 

 
 
a purely personal capacity but as representatives of relevant organisations with an interest in 
accounting  standards-setting.  The  Trustees  also  announced  two  vice-chairmen  to  serve 
alongside  Paul  Cherry,  including  Mr.  Patrice  Marteau,  Chairman  of  ACTEO29  and  of  the 
Accounting Committee of Business Europe.30 

The changes to the membership of the SAC enhanced its representativity. The active role of 
the new SAC Chairman has also enhanced the SAC's effectiveness.  

2.2.4.  Due process with stakeholders 

The  interaction  between  accounting  standards,  prudential  regulations  and  financial  stability 
has  been  brought  to  the  fore  by  the  current  financial  crisis.  While  the  primary  purpose  of 
accounting  standards  is  to  provide  investors  with  access  to  timely  and  relevant  information 
about a company's financial position, the IFRS Foundation's Constitution recognises a broader 
objective "to help participants in the world’s capital markets and other users make economic 
decisions."  Moreover,  the  IASB's  Due  Process  Handbook  recognises  that  the  regulatory 
environment and regulatory requirements should be considered as part of the Board's agenda- 
and standard-setting process.  

Several  organisations  in  the  field  of  prudential  regulation  and/or  financial  stability  are 
represented in the reconstituted Advisory Council, including the Basel Committee on Banking 
Supervision,  the  International  Association  of  Insurance  Supervisors  and  the  International 
Organization  of  Securities  Commissions.  Both  the  European  Securities  Market  Authority 
(ESMA) and the European Central Bank are also represented in the Advisory Council.  

In  addition,  the  IFRS  Foundation  started  its  first  formal  public  agenda  consultation  in  June 
2011. 

2.3. 

Funding arrangements of the IFRS Foundation 

According to Article 9.4 of Decision 716/2009 of the European Parliament and the Council (the 
legal base of the current EU grant programme), the Commission will report on whether the IFRS 
Foundation has made significant progress towards ensuring that neutral funding arrangements form 
a majority of its total funding, including from third-country participants. The present chapter thus 
analyses the funding arrangements of the IFRS Foundation.  

2.3.1.  On the way towards independent, non-voluntary funding 

In order to ensure the independence of the IASB, the IFRS Foundation is expected to move 
towards non-voluntary, stable and transparent funding arrangements with a broad geographic 
basis. In line with this objective, the European Parliament and the EU's Member States have 
established  a  legal  basis  (the  current  co-financing  Programme)  allowing  the  Commission  to 
provide co-funding to the IFRS Foundation up to a maximum of €12.75 million from 2011 to 
2013, i.e. €4.25 million per annum.  

Association pour la participation des entreprises françaises à l'harmonisation comptable internationale. 

29 
30 
http://www.ifrs.org/News/Press+Releases/Trustees+announce+membership+of+reconstituted+Standards+Advis
ory+Council.htm 

16 

 
 
                                                 
The  IFRS  Foundation  itself  is  aware  of  the  need  for  a  reform  in  its  funding  structure.  The 
“Trustees’  Strategy  Review  2011”  and  Monitoring  Board’s  “Final  Report  on  the  Review  of  the 
IFRS  Foundation’s  Governance”  (see  above  footnote  27)  issued  in  February  2012  prominently 
included  discussions  on  the  importance  of  independence  and  financing.   These  are  matters 
considered at the highest levels in the organisation.  

Regarding  voluntary  funding,  the  US  is  the  only  country  where  the  Foundation  seeks 
voluntary  contributions  in  addition  to  the  global  voluntary  funding  provided  by  the  major 
accounting firms.  Non-voluntary contributions from the US were anticipated to significantly 
replace accounting firm contributions.  In 2011, voluntary funding from US corporations and 
the major accounting firms amounted to about 35% of total contributions compared to 42% in 
2007.  Due  to  the  recent  SEC  document  concerning  the  US  adoption  of  IFRS31,  voluntary 
funding is expected to continue until the SEC decides on a central funding mechanism. The 
Foundation's staff continues to work with the US SEC on possible public funding alternatives.  

Funding  is  requested  from  new  countries  in  the  course  of  their  adoption  of  IFRS.   Several 
countries are in this category including:  Russia, Turkey, Mexico, Indonesia, Argentina, Chile, 
Israel and Saudi Arabia. 

The  Foundation  computes  the  amount  of  country  funding  requested  to  meet  the  financing 
needs of their working programme both with and without the support of the major accounting 
firms.   In  this  way  they  are  working  with  the  contributing  countries  to  increase  the 
Foundation's funding in an effort to phase out contributions from the major accounting firms. 
This is a long term project that could take several years to achieve.   

The  above  developments  and  efforts  are  expected  to  lead  to  the  establishment  of  a  non-
voluntary,  transparent  and  stable  funding  platform  for  the  IFRS  Foundation  and  the  IASB 
towards which the EU would need to contribute.  

2.3.2.  Financial highlights 

The two main sources of the Foundation's income are the revenues from publications and other 
copyrighted activities and the income from contributions as shown in table 1.  

Table 1: IFRS Foundation's sources of operating income for 2009 and 2010 

INCOME 

2009  

2010  

Contributions
Interest income 
Other income
Revenue of publications and related activities
TOTAL INCOME 

16,640 (73%)
271       (1%) 
58

16,584 (73%)
377       (2%)
34
5,654    (25%) 5,804    (25%) 
22,649 

22,773 

31  

“Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the 
Financial  Reporting  System 
July  13,  2012 
http://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf 

Issuers  Final  Staff  Report 

for  U.S. 

17 

 
 
 
                                                 
Source:http://www.ifrs.org/NR/rdonlyres/EB99AF27-22F7-45AF-A033-
75A36CDC3549/0/IFRSANNUALREPORT_ALL_12July.pdf 

Contributions form the main part of the budget's revenue side (73%). Contributors come both from 
the  private  and  the  public  sector.  Public  sector  contribution  can  be  based  either  on  a  voluntary 
system (as it was the case in Germany in 2010) or by a levy-like system, where contributions are 
collected by a public body (e.g. in Japan). Private sector contributors are: (i) contributions of the 
'big4' accounting firms (their financing covering 24% of the IFRS Foundation's budget) and (ii) the 
majority  of  the  contributions  coming  from  the  US  are  private  as  well.  Altogether  the  share  of 
private funding in all contributions was approximately 45%, whereas it amounted to ca. 33% of the 
total budget.  

In 2011, the EU co-financing started. Thus, the funding situation changed significantly: only 35% 
of  contributions  are  clearly  coming  from  the  private  sector.  In  that  year  the  US  was  the  only 
remaining  place  where  the  IFRS  Foundation  still  sought  direct  contributions  from  companies.32 
The breakdown is illustrated by Figure 2 below.  

32  

http://www.ifrs.org/news/features/ifrs+foundation+financing.htm 

18 

 
 
                                                 
Figure 2: The IFRS Foundation's contributors in 2010 and 201133 

Source:  Draft  annual  report  of  the  IFRS  Foundation  2011,  final  report  on  the  2011  Grant 
Agreement with the European Commission 

As  the  figure  clearly  shows,  the  European  Union  (the  EU  grant  and  certain  individual  Member 
States together) were among the main contributors to the IFRS Foundation's budget in 2011. This 
is in line with the EU's role as the biggest region applying IFRS and supports the Commission in 
international negotiations.  

In  the  coming  year  further  changes  can  be  expected  in  the  breakdown  of  funding:  the  IFRS 
Foundation's 2012 funding goal34 for the US is to increase their contributions from £1.7 million to 
£3.2  million  primarily  with  government  funding.  At  the  same  time,  the  change  is  dependent  on 
adoption of IFRS by the US.  

It  should  be  noted  that  individual  EU  Member  States  may  consider  lower  or  abandon  their 
contributions to the IFRS Foundation's budget given the current context of  sovereign debt crisis 
and austerity measures. The table below shows their contributions so far. 

33  

34  

Private funding: financing coming from the international accounting firms and mainly that coming from 
the US; public funding is all the rest.  
A  target  level  of  funding  received  from  the  given  jurisdiction  based  on  its  respective  weight  in  the 
global economy. 

19 

 
 
 
                                                 
Table  2:  Contributions  to  the  IFRS  Foundation's  budget  by  Member  States  2010  and  in 
2011(in thousand GBP) 

Funding in 2010 

Funding in 2011 

Country 

(in £) 

(in  %  of  total 
contributions)

(in £) 

(in  %  of  total 
contributions) 

Germany 

1,048,546 6% 

France 

860,733 

5% 

United 
Kingdom 

Italy 

Spain 

855,000 

628,246 

430,585 

Netherlands  339,126 

Bulgaria 

Cyprus 

Greece 

Ireland 

5,240 

4,441 

17,239 

6,205 

Portugal 

16,504 

5% 

4% 

3% 

2% 

0% 

0% 

0% 

0% 

0% 

952.120 

853.679 

860,730 

661.117 

348.281 

333.978 

0 

0 

0 

0 

0 

4% 

4% 

4% 

3% 

2% 

2% 

0% 

0% 

0% 

0% 

0% 

MS Total 

4,256,865 26% 

3.653.314 18% 

0% 
Source: Data received from the IFRS Foundation; exchange rate: 1.1462 EUR/GBP 

7,663,218 37% 

EU grant 

0 

2.4. 

Problem Definition 

2.4.1.  Reliance  on  non-diversified,  voluntary  and  precarious  funding  from  interested 

parties and its negative consequences 

There have been long-standing concerns about the IFRS Foundation's funding arrangements, a 
subject  that  has  been  repeatedly  highlighted  by  the  ECOFIN  Council  in  its  conclusions 
adopted  in  July  200635  and  July  200736.  In  its  conclusions  of  8  July  2008,  the  ECOFIN 
Council also referred to the urgent need to secure appropriate funding for the IASCF (IFRS 
Foundation).37  The  European  Parliament  (EP)  has  also  criticised  the  IASCF's  funding 
arrangement  and  called  on  "the  Community  to  examine  under  what  conditions  and  in  what 
form  it  might  consider  contributing  to  that  funding."38  The  pace  of  progress  achieved  in 
reforming  the  IFRS  Foundation's  funding  arrangements,  is  one  of  the  elements  that  will 

35  
36  
37  
38  

http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/90465.pdf 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/95233.pdf 
http://www.iasplus.com/europe/0807ecofingovernance.pdf 
See paragraph 16 of the EP's Resolution on International Financial Reporting Standards (IFRS) and the Governance of the International Accounting Standards 

Board  (IASB)  adopted  on  24  April  2008,  http://tinyurl.com/http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A6-2008-

0032+0+DOC+PDF+V0//EN 

20 

 
 
                                                 
influence the EP's willingness to accept future IFRS. In its opinion dated 10 September 2008, 
the Committee on Economic and Monetary Affairs of the EP reiterated that "sufficient funding 
must  be  set  aside  for  […]  international  accounting  standard  setting,  in  particular  to  the 
International  Accounting  Standards  Committee  Foundation,  including  the  International 
Accounting  Standards  Board."39  The  IFRS  Foundation  has  responded  to  the  concerns 
expressed by the EU institutions by attempting to secure and diversify its funding base. “The 
expanding  funding  regime  now  includes  the  participation  of  thousands  of  market 
participants.”40 

Since 2006 the Trustees have sought to establish national financing regimes41, proportionate 
to  a  country’s  relative  GDP,  that  establish  a  levy  on  companies  or  provide  an  element  of 
publicly supported financing.  Now the great majority of the Foundation’s finances are based 
on  such  regimes,  and  this  approach  has  been  particularly  successful  in  Asia-Oceania  and 
Europe.    In  2010,  the  IFRS  Foundation  saw  the  continued  advancement  to  those  types  of 
regimes. 

The  IFRS  Foundation's  financial  dependence  on  the  voluntary  contributions  of  key 
stakeholder groups gives rise to continued concerns about the latter's potential influence over 
the  IASB's  standard-setting  process.  This  situation  undermines  the  IASB's  operational 
independence, an indispensable requirement in the case of the EU as the standards issued by 
the IASB are bound to become EU law. Similar concerns about the funding arrangements of 
the  US  Financial  Accounting  Standards  Board  (FASB)  led  to  the  enactment  of  a  non-
voluntary funding regime pursuant to the Sarbanes-Oxley Act of 200242.  

In addition, there is no guarantee that these voluntary funding contributions will continue to 
be available in the future: companies could withdraw funding in protest against the adoption 
of accounting standards they do not favour or due to financial difficulties.  

Funding  of  the  IFRS  Foundation  raised  within  the  EU  comes  currently  from  two  main 
sources:  the  operational  grants  from  the  EU  budget  and  contribution  of  certain  individual 
Member  States.  To  date,  national  funding  schemes  have  been  established  in  only  seven 
Member  States43  either  through  privately-arranged  voluntary  funding  schemes  or,  in  a 
minority  of  cases,  via  statutory  levies  on  companies  with  listed  securities.44  This  situation 
raises  concerns  of  equity  (stakeholders  in  some  Member  States  bear  the  cost  of  the  IFRS 
Foundation's  funding,  while  those  in  other  Member  States  do  not)  which  may  lead  some 
existing national funding schemes to withdraw funding, thus threatening the continuity of the 
IASB's operations. There is clear and present risk that such a withdrawal could occur in the 

39 http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-407.786+02+DOC+PDF+V0//EN&language=EN 
40 

http://www.ifrs.org/News/Press+Releases/Update+on+Funding+for+2008.htm 

and 
http://www.ifrs.org/Archive/INSIGHT+journal/Q1+and+Q2+2008/Four+principles+ensuring+sustainab
le+funding.htm 
Non-voluntary system of contributions to be collected by a Member State 
The Sarbanes–Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 29, 2002), also known as 
the  'Public  Company  Accounting  Reform  and  Investor  Protection  Act'  (in  the  Senate)  and  'Corporate 
and  Auditing  Accountability  and  Responsibility  Act'  (in  the  House)  and  more  commonly  called 
Sarbanes–Oxley, Sarbox or SOX, is a United States federal law that set new or enhanced standards for 
all  U.S. 
firms. 
boards,  management 
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act 
France, Germany, Italy, Spain, Sweden, Denmark and the United Kingdom 
Mandatory levies on listed companies exist in Italy, Spain and the United Kingdom.  

accounting 

company 

public 

public 

and 

41  
42  

43  
44  

21 

 
 
                                                 
near future. In addition, considering the current context of budget austerities, several Member 
States may consider decreasing their contributions.  

Failure  to  reform  the  IFRS  Foundation's  funding  arrangements  risks  undermining  the 
acceptability  and  legitimacy  of  IFRS  in  the  EU.  That  could  in  turn  lead  to  the  non-
endorsement of IFRS for use in the EU. A refusal by the European Parliament and Council to 
endorse one or more IFRS would undermine the implementation of the IAS Regulation, of the 
Transparency  Directive  and  of  the  Prospectus  Directive,  possibly  triggering  a  damaging 
political debate about the continued appropriateness of IFRS as a whole for the EU. Such an 
outcome would undermine the functioning of the Single Market and, in particular, of the EU's 
capital market. 

2.5. 

Objectives 

2.5.1. 

Strategic objective 

The  strategic  objective  to  be  achieved  by  the  proposed  funding  arrangement  is  to  ensure 
stable, diversified, sound and adequate funding to enable the IFRS Foundation to carry out its 
public  interest  mission  in  a  way  that  ensures  its  independent  and  efficiency,  as  well  as  the 
high quality of the accounting standards produced by the IASB. 

Another  strategic  objective  is  to  preserve  the  EU’s  weight  in  the  international  financial 
reporting arena: only jurisdictions contributing the IFRS Foundation’s budget can be members 
of the Monitoring Board overseeing the organisation. 

2.5.2.  Operational objectives 

2.5.2.1.  Avoid reliance on precarious, voluntary funding from interested parties thus ensuring 

stability and independence of the IFRS Foundation's work 

The first operational objective is to guarantee the IFRS Foundation's financial independence 
from voluntary contributions from parties with a direct interest in accounting standards, while 
at the same time ensuring sound, stable and sustainable funding arrangements. For the reasons 
explained in section 3.2., this in practice implies that the IFRS Foundation's funding should 
rely  mainly  on  non-voluntary  contributions.  In  particular,  the  IFRS  Foundation  should  in 
future no longer rely on voluntary contributions from the four major international accounting 
networks  which  currently  contribute  US$8  million  per  annum.  This  funding  needs  to  be 
replaced from new sources. 

2.5.2.2.  Ensure a level playing field for all stakeholders within the Internal Market 

The second operational objective is to reform the IFRS Foundation's funding regime to allow 
the Community to contribute in a manner that ensures a fair burden sharing for stakeholders 
throughout the EU. This could in principle be achieved by establishing non-voluntary funding 
schemes  in  all  Member  States  (involving  a  statutory  levy  on  all  listed  companies  in  each 
Member  State  or  a  direct  contribution  from  the  Member  States'  national  budgets)  or  by  a 
direct contribution from the Community budget. 

22 

 
 
2.5.2.3.  Promote the international acceptance of IFRS in the world's major capital markets 

A third operational objective is to support the Community's financial reporting strategy, which 
seeks  to  promote  the  international  use  and  acceptance  of  IFRS,  in  particular  in  the  world's 
major capital markets. 

This  is  particularly  relevant  in  relation  to  the  US.  The  EU  has  implemented  a  multi-annual 
joint  work  programme  with  the  US,  in  particular  with  the  Securities  and  Exchange 
Commission  (SEC)  and  accounting  standard-setter  (FASB)  to  facilitate  the  convergence  of 
US accounting requirements with IFRS, with a view to the latter's eventual implementation in 
the US. Consequently, the US SEC has adopted a roadmap towards the full implementation of 
IFRS by US listed companies by 2015.45 Based on this roadmap and the US announcements, a 
decision of the implementation/adoption of IFRS in the US can be expected by mid-2012. 

Should  the  US  decide  to  fully  implement  IFRS  in  the  US,  it  would  require  the  SEC  to 
recognise  the  IASB  as  a  standard-setting  body  pursuant  to  the  Sarbanes-Oxley  Act,  which 
inter alia mandates that recognised standard-setting bodies must be funded in a manner that 
ensures their independence from those parties directly affected by accounting standards.46 In 
practice,  recognition  of  the  IASB  by  the  SEC  would  require  all  or  a  majority  of  the  IFRS 
Foundation's  funding  to  be  raised  through  non-voluntary  sources.  A  contribution  from  the 
Community budget to the IFRS Foundation's budget (our preferred policy option as described 
below) would align the latter with the requirements set out in the Sarbanes-Oxley Act, thus 
facilitating the IASB's recognition as a standard-setting body by the SEC and supporting the 
Community's objective of achieving global acceptance of IFRS. 

2.5.2.4.  Achieve  the  above  objectives  within  a  reasonable  period  of  time  considering  their 

urgency in the current EU and international context 

A final operational objective is to achieve the abovementioned objectives within a reasonable 
period  of  time  considering  their  urgency  in  the  context  of  the  current  financial  crisis.  In 
particular,  given  the  anticipated  timetable  of  the  reform  of  the  IFRS  Foundation's  funding 
arrangements (2010-11), it is important to complete preparations within the EU – including, if 
necessary to create a legal basis – for this commitment as soon as possible. If an EU legal basis 
needs to be created, it needs to be adopted before the end of the current parliamentary term, 
failing which the EU risks being unable to participate in the reform of the IFRS Foundation's 
funding  regime,  thus  putting  at  risk  the  achievement  of  the  objectives  set  out  in  section 
3.3.2.1. to 3.3.2.3. 

45  
46  

http://www.sec.gov/news/press/2008/2008-184.htm 
This issue was for example raised on 14 November 2007 by US Senator Christopher Dodd, Chairman 
of the US Senate Committee on Banking, Housing and Urban Affairs, and Senator Jack Reed, Chairman 
of the Subcommittee on Securities, Insurance and Investment, in a letter to the Chairman of the SEC, in 
which  they  stated  that  "The  IASB's  lack  of independent  funding  sources is  troubling  and  inconsistent 
with the framework set by Congress for the SEC's recognition of any accounting principles established 
by a standards-setter other than the SEC itself." 

23 

 
 
                                                 
2.6. 

Available Policy Options 

It is therefore necessary to reform the IFRS Foundation's funding arrangements in a manner 
that achieves the objectives set out in section 3.3. The remainder of this section describes the 
available policy options. 

2.6.1.  Baseline scenario: Discontinuing the EU co-financing (no action) 

In the absence of a policy intervention by the Union, we judge that Member States and/or the 
private  sector  would  not  be  able  to  undertake  a  co-ordinated  initiative  to  enhance  the  IFRS 
Foundation’s  funding.  While  the  IFRS  Founding  continues  its  efforts  to  raise  funding  from 
additional  Member  States,  little  or  no  progress  has  been  made  in  the  last  year  towards 
establishing  national  funding  schemes  in  all  Member  States.  Moreover,  based  on  informal 
contacts  with  Member  States  and  with  European  stakeholders  it  is  our  assessment  that  no 
significant  further  progress  in  this  direction  can  be  expected.  Thus,  the  current  Union  grant 
cannot  be  substituted  from  that  source.  In  addition,  it  is  unrealistic  to  expect  current 
contributors to the IFRS Foundation’s budget to increase, since – as shown in Figure 2 above 
– contributors are already struggling to meet their current funding target. 

The no policy intervention therefore implies that the objectives identified in section 2.5. are 
unlikely to be achieved. This risks undermining the acceptability and legitimacy of IFRS in the 
EU,  which  could  in  turn  lead  to  the  non-endorsement  of  IFRS  for  use  in  the  EU.  Such  a 
development could undermine the implementation of the IAS Regulation, of the Transparency 
Directive  and  of  the  Prospectus  Directive.  Failure  to  achieve  the  objectives  identified  in 
section 2.5. would also risk triggering the withdrawal of funding from one or more national 
funding schemes in EU Member States, leaving the IASB with inadequate resources to fulfil 
its  standard-setting  role.  Either  outcome  would  undermine  the  goal  of  global  financial 
reporting  standards,  thus  the  acceptance  of  standards  used  by  European  companies  in  the 
world’s  major  capital  markets  –  consequently  the  functioning  of  the  Single  Market  and,  in 
particular, of the EU's capital market. 

2.6.2. 

Status quo: Continuing the Grant Programme 

The  Union  currently  co-finances  the  IFRS  Foundation  since  2011.  Although  we  do  not  yet 
have a sufficiently long experience in the co-financing to draw conclusions, this policy option 
is  likely  to  contribute  to  achieving  the  first  objective  (guarantee  the  IASB's  financial 
independence)  if/when  all  or  a  majority  of  the  Foundation’s  funding  are  drawn  from  non-
voluntary or public funds. A financial contribution from the Union alone is not sufficient to 
achieve  this  and  co-ordination  and  co-operation  among  the  jurisdictions  with  major  capital 
markets, in particular the EU, Japan and US, is necessary to implement the necessary reforms 
of the IFRS Foundation’s funding regime. The 2012 February report of the Monitoring Board 
and the report of the Trustees' Strategy Review 2011 are a step forward in this direction.  

This policy option should also strongly contribute to achieving the second objective (ensure a 
level  playing  field  for  stakeholders  throughout  the  EU),  while  it  also  facilitates  the  IASB's 
recognition  as  a  standard-setting  body  by  the  US  SEC.  As  the  US  moves  towards 
implementing  IFRS,  it  will  also  modify  its  funding  arrangements  towards  the  IFRS 
Foundation  by  implementing  a  non-voluntary  contribution,  since  this  is  requirement  for 
recognising  the  IASB  as  a  standard-setting  body  pursuant  to  sections  108  and  109  of  the 

24 

 
 
Sarbanes-Oxley  Act  (see  section  3.3.2.3.  above).  We  understand  that  the  current  voluntary 
funding  of  £1.8  million  raised  in  the  US  is  expected  to  be  replaced  by  central  funding. 
However,  this  change  is  dependent  on  US  adoption  whose  date  is  yet  uncertain.  We  expect 
other major jurisdictions to do likewise as they move towards implementing IFRS47. 

In order to maintain the status quo, a legal basis for the EU co-financing should be adopted 
before  2014.  This  would  also  allow  the  Community  to  fully  participate  in  and  contribute 
towards the reform of the IFRS Foundation’s funding arrangements, thus meeting one of the 
Monitoring Board membership criteria.  

2.6.3.  Establishment of national funding schemes in all Member States (public financing or 

levy on industry) 

If  the  EU  is  not  contributing  from  the  Union  budget,  another  option  is  to  see  the  Member 
States  increase  their  contributions.  Existing  national  funding  mechanisms  in  EU  Member 
States take the form either of privately-arranged voluntary funding schemes or, in a minority 
of  cases,  of  statutory  levies  on  companies  with  listed  securities.  If  the  IFRS  Foundation’s 
funding continues to rely on such national funding schemes, as explained in section 2.., such 
schemes should provide for non-voluntary contributions to the Foundation’s budget. This in 
turn implies a non-voluntary national funding regime and the need for a statutory (legal) basis 
for these funding schemes. 

In  order  to  create  such  a  legal  basis,  the  Commission  could  propose  a  legal  act  requiring 
Member  States  to  finance  the  IFRS  Foundation,  for  example  via  a  statutory  levy  on 
companies  with  listed  securities.  This  option  was  assessed  by  the  Commission  services 
already in 2005. The conclusion is that the Treaty does not provide an explicit legal basis to 
require  Member  States  to  finance  the  IFRS  Foundation  nor  to  impose  a  mandatory  levy  on 
listed companies across the EU (in form of direct taxation). Even assuming such a legal basis 
for a statutory levy could be found, adoption of the relevant legal act would require unanimity 
in the Council. This is highly unlikely to be achieved for political reasons irrespective of the 
IFRS Foundation, as a number of Member States oppose Union intervention in fiscal matters. 
The adoption of a harmonised statutory levy is thus not feasible for a combination of legal and 
political considerations. This possibility should therefore be discarded. 

Alternatively,  the  Commission  could  rely  on  moral  persuasion  to  encourage  stakeholders 
(private  sector  and/or  public  authorities)  to  establish  national  funding  schemes  in  those 
Member States where none exist for the time being. This approach was already suggested in 
the  conclusions  of  the  ECOFIN  Council  of  July  200648,  but  experience  has  shown  that  the 
Commission's moral persuasion has not yet yielded results.  

2.6.4.  Establishment of an EU accounting standard-setting agency 

The Union could establish a European accounting standard-setting body, either in the form of 
a private body or by establishing a Union agency, to take over the role currently performed by 
the IASB. However, this approach has two major disadvantages: 

47  

48  

Mexico and Turkey are expected to make an initial contribution for 2012 but those have not yet been 
confirmed. Contributions from Indonesia and Russia are under active discussion.  
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/90465.pdf 

25 

 
 
                                                 
1.  The EU's financial reporting policy aims at achieving a single set of globally accepted 
accounting standards in order to facilitate cross-border investment and the integration 
of global capital markets (especially the trans-Atlantic capital market). It is therefore 
of  paramount  importance  to  avoid  the  emergence  of  regional  accounting  standards 
which would inevitably undermine this objective. Consequently, the establishment of 
a European standard-setter, be it private or public, is not compatible with the Union’s 
financial reporting policy. 

2.  In  addition,  the  establishment  of  either  a  private  or  public  European  accounting 
standard-setter is unlikely to be possible without Union funding comparable in amount 
to the financial contribution to the IFRS Foundation’s funding (since an agency would 
ultimately  be  funded  entirely  from  the  Union  budget).  Moreover,  the  Commission's 
management  of  the  financial  contribution  to  and/or  co-ordination  with  a  European 
standard-setting  body  would  imply  administrative  costs  for  the  Commission  which 
would also be comparable to that associated with a financial contribution to the IFRS 
Foundation’s  budget.  From  the  Commission's  point  of  view,  this  policy  option 
therefore  does  not  present  any  significant  budgetary  or  administrative  advantages 
compared to the status quo. 

3.  Article 2 of the IAS Regulation specifically defines international accounting standards 
as  "International  Accounting  Standards  (IAS),  International  Financial  Reporting 
Standards  (IFRS)  and  related  Interpretations  (SIC-IFRIC  interpretations),  subsequent 
amendments to those standards and related interpretations, future standards and related 
interpretations  issued  or  adopted  by  the  International  Accounting  Standards  Board 
(IASB)." An amendment to the IAS Regulation would therefore be required in order to 
allow the Commission to adopt accounting standards developed by a body other than 
the IASB.  

2.6.5.  Comparison of options 

The matrix below is used to compare the relative merits of four competing options based on a 
qualitative assessment as reliable data are not available. 

The criteria used for the comparison of options are considered equally important.  

The  option  'stop  financing'  ('no  action',  option  1)  used  as  the  baseline  with  maintained 
budgetary  intervention  from  the  Union  is  compared  to  the  three  other  options  based  on  the 
three following main criteria: 

• 

• 

• 

the degree of effectiveness of their implementing process; 

their impact on costs for the EU; and 

the level of risk of not reaching the objectives above-mentioned in section 2.5. 

26 

 
 
Table 2: Summary of policy options 

ASSESSMEN
T of  

1.  Achievement 
of objectives 

2. Feasibility 

3.Political 
consequences 

OPTIONS 

All (+++) 

Some (+/-) 

Option 1 

- - - 

Discontinuin

Straightforwar
d 

(+++) 

N/A 

Positive  

(+ to +++) 

- - - 

Option 2 

+++ 

+++ 

+++ 

Maintaining 
the  EU  co-
financing
Option 3 

up 

Setting 
national 
funding
Option 4 

Setting  up  a 
dedicated EU 

+/- 

- - -  

+/- 

+/-  

- 

- 

4. Implication 
EU 
for 
budget 

Overall 
Assessme
nt 

Positive  

Positive  

++ 

- - 

++ 

- -  

- - - 

+++ 

- 

 - 

A
Our analysis is summarised in Table 2.  

Option 1 incurs no direct costs to the Union budget. However, it leaves the IFRS Foundation’s 
funding  regime  unchanged,  does  not  provide  any  guarantees  about  the  stability  or 
independence of this funding regime and would not achieve the objectives set out in section 
2.5. This option thus carries unacceptable political risks. We therefore have an adverse opinion 
about this option, which we discard. 

Option  3  likewise  incurs  no  direct  costs  to  the  Union  budget  but  is  not  feasible  for  a 
combination of legal and political considerations. This option thus also carries unacceptable 
political  risks.  We  therefore  also  have  an  adverse  opinion  about  this  option,  which  we 
similarly discard. 

Option 4 is inconsistent with the Union’s legal framework and with the Union’s policy in the 
field  of  financial  reporting.  Moreover,  this  policy  option  does  not  present  any  significant 
budgetary  or  administrative  advantages  compared  to  the  option  1,  the  status  quo  (our 
preferred policy option). 

Although option 2 – maintaining the Union contribution to the IFRS Foundation’s budget – 
carries significant direct budgetary and administrative costs to the Community budget, it is the 
only  policy  option  that  can  achieve  the  pursued  objectives  described  in  section  2.5.  We 
therefore have a positive opinion about this option, which we retain for the following reasons: 

27 

 
 
 
 
 
 
 
• 

• 

• 

• 

it enhances the IASB’s financial independence from stakeholders with a direct interest in 
accounting  standards  while  at  the  same  time  contributes  to  sound,  stable  and  sustainable 
funding arrangements; 

it ensures a level playing field for stakeholders throughout the EU; 

it facilitates the IASB's recognition as a standard-setting body and the acceptance of IFRS 
in other major capital markets, in particular the US; 

it strengthens the Union’s negotiating position in the broader discussions about the reform 
of the IFRS Foundation’s governance and is the only way for the Union to be represented 
at the Monitoring Board. 

2.6.6.  Method of implementation for the selected option 

As the Union’s financing of the IFRS Foundation would not entail a purchase of goods and 
services, the most appropriate means to finance the Foundation is via a grant. 

As a general rule, financial support from the Union budget could be provided either: 

1.  by contributing to the overall budget of the body (via operating grants); or 

2.  by co-financing specific targeted activities of the body (via grants for action). 

Concerning publicity rules, the possibility of providing a grant following a call for proposal 
should  be  excluded  from  the  outset  since  the  beneficiary  (the  IFRS  Foundation)  is  in  a 
situation of legal monopoly in accordance with 190 (1)(c) RAP49. 

In  view  of  the  public  policy  objectives  and  the  type  of  beneficiary,  it  is  considered  that  a 
direct financial contribution from the EU budget by way of an operating grant constitutes the 
best solution to address the proposed funding. Indeed, the choice to provide an operating grant 
to the IFRS Foundation seems the most appropriate because, unlike a grant for action, which 
helps to co-finance a one-off action over a given period of time, an operating grant allows co-
financing of the whole institution's functioning from a much broader perspective. 

Regarding  the  IFRS  Foundation  as  a  possible  eligible  beneficiary  of  an  operating  grant,  it 
complies with the requirements laid down in Article 121(1)(b) of the Financial Regulation50 
because this organisation has an objective forming part of, and supporting, the Union policy 
in the field of financial reporting and is a non-profit organisation (has been authorised and is 
regulated as a US not-for-profit foundation). 

49  

50  

Commission  Delegated  Regulation  (EU,  Euratom)  No  …./..  of  29  October  2012  on  the  rules  of 
application of Regulation (EU, Euratom) No 966/2012 of the European Parliament and of the Council 
on the financial rules applicable to the general budget of the Union 
Regulation  (EU,  Euratom)  No  966/2012  of  25  October  2012  on  the  financial  rules  applicable  to  the 
general budget of the Union 

28 

 
 
                                                 
2.6.7.  Volume of appropriation, human resources and other administrative expenditure The 

IASB's expenses for 2009 and 20010 are shown in Table 2. 

Table 3: IFRS Foundation's expenses for 2009 and 2010 

EXPENSES 

2009  

2010  

Direct cost of sales from publications & related (3,260)
Salaries, wages and benefits 
Trustee fees
Cost of meetings and associated travel
Accommodation 
Other costs
TOTAL EXPENSES 

(14,000)
(506)
(2,441)
(1,285)
(1,464)
(22,956) 

(3,246)
(15,089) 
(639)
(2,629) 
(1,319) 
(1,221)
(24,143) 

Source:http://www.ifrs.org/NR/rdonlyres/EB99AF27-22F7-45AF-A033-
75A36CDC3549/0/IFRSANNUALREPORT_ALL_12July.pdf 

The IFRS Foundation's budget has been growing over the past years as a natural consequence 
of  more  and  more  countries  using  IFRS51  and  the  high  level  of  standard-setting  activities, 
including  the  convergence  agenda  with  the  US  standard  setters  (FASB).  Although  the 
convergence work should soon be completed and a 'period of calm' is expected to start soon in 
the  IASB's  activities,  an  ever  growing  number  of  stakeholders  and  jurisdictions  applying 
IFRS  (among  them  such  big  economies  as  China),  the  IFRS  Foundation's  expenses  are 
expected  to  grow  steadily.  Indeed,  as  the  head  of  financial  reporting  at  accounting  body 
ICAEW  pointed  out:  "I  can't  see  how  the  IASB  alone  can  undertake  its  responsibilities 
without a huge increase in resources. Having the global standard setter alone would soon get 
out of touch with reality on the ground".52 

In  addition,  the  IASB  has  an  important  role  to  play  following  the  crisis:  the  accounting 
standards became high on  the political agenda. Among  others, the organisation will need to 
fulfil its G20 mission of converging the IFRS with the US GAAP, and the standard about the 
financial instruments (IFRS 9) has to revised, too. 

At  the  same  time,  some  trends  point  in  the  direction  that  the  IFRS  Foundation's  sources  of 
income should be boosted irrespective of the expanding expenditure side of the budget. Some 
individual EU Member States that currently contribute to the IFRS Foundation's budget have 
informally signalled that they may be considering lowering or scrapping their contribution in 
the current context of austerity measures. Also, the voluntary funding received from private 
companies – mainly the 'big four' accounting firms – should also be replaced by 'neutral' i.e. 
public funding.  

51  
Over 100 countries have introduced IASB rules for use in listed company reporting over the past decade 
52  "IASB:  cutting  disclosure  overload  a  key  priority"  by  Huw  Jones    http://www.reuters.com/article/2012/03/07/accounting-iasb-
idUSL5E8E61JY20120307 

29 

 
 
 
                                                 
Based on the historical figures and the trends, the budgetary and administrative impact of our 
preferred policy option may be estimated as summarized in table 4 below.  

Table 4: IFRS Foundation's budget projections and proposed EU grant 

Million EUR 

2013  2014 

2015 

2016 

2017 

2018 

2019 

2020  TOTAL

IFRS  Foundation 
total budget 

EU 
co-financing  
 (based  on  GDP 
requirement) 

co-financing 
MARKT 

EU 
(DG 
proposal) 

26.4  29.2 

32.0 

34.8 

37.6 

40.4 

43.2 

45.9 

263.0 

4.3 

6.1 

6.7 

7.3 

7.9 

8.5 

9.1 

9.7 

55.3 

4.25  4.3 

4.4 

4.5 

4.6 

4.7 

4.8 

4.9 

32.2 

Exchange rate used: 1.148 EUR/GBP 

Note: Minor deviations may be caused because of the rounding up; for exact amounts please 
refer to the Legislative Financial Statement of the draft Regulation 

The proposed amount of the EU grant is based on the 2013 grant amount (the last year of the 
current EU co-financing programme), takes into account the expected inflation rate (2%) but 
allows  for  no  expansion  of  the  IFRS  Foundation;  although  some  expansion  is  expected  as 
more and more countries adopt IFRS. As it is demonstrated in table 4 above, the proposed EU 
grant is currently below the expected EU contribution based on the EU's weight in the global 
economy53. However, the individual Member States' voluntary contributions should be taken 
into account. Although there is a risk that the number of Member States contributing and the 
amount of their contribution decrease, it is our hope that after the crisis will have ended, more 
EU countries will contribute. So the gap could be closed and thus Europe could continue to 
show example.  

It has to be noted that co-financing has become a criterion for membership in the Monitoring 
Board.  Therefore,  the  EU  co-financing  needs  to  be  continued  if  the  Commission  wishes  to 
keep its seat at the Monitoring Board. 

The  envisaged  funding  would  not  entail  additional  administrative  work  by  the  European 
Commission.  DG  MARKT  already  has  sufficient  administrative  resources  to  manage  the 
grants.  

2.7. 

Conclusion 

In  view  of  the  above  and  in  order  to  increase  the  IFRS  Foundation’s  independence,  the 
stability  of  its  funding  sources  and  the  quality  of  international  accounting  standards,  we 
consider  that  it  is  important  that  the  Union  contributes  to  the  funding  of  IFRS  Foundation. 

53  

The current EU co-financing ratio is 17%, whereas the EU’s weight in the global economy (based on 
mainly GDP figures) is between 20-25%. 

30 

 
 
                                                 
Specifically,  we  conclude  that  the  best  way  forward  is  to  co-finance  the  Foundation  and 
accordingly  reduce  the  contribution  from  the  'Big  4'  accounting  networks  as  well  as  the 
Foundation’s reliance on income from the sale of publications. Specifically, it is proposed to 
provide the IFRS Foundation with a financial contribution in the form of an operating grant 
for a total sum of no more than €32.228 million for the 2014-2020 period. 

The  Union  contribution  will,  among  other  things:  (i)  increase  the  IFRS  Foundation’s 
independence  from  voluntary  contributions  by  stakeholders  with  a  direct  interest  in 
accounting standards; (ii) simplify funding and ensure a level playing field at EU level; and 
(iii) promote the international adoption of IFRS in other major capital markets. 

2.8. 

Follow-Up: Arrangements for Monitoring, Reporting and Evaluation 

The  Commission  would  closely  monitor  the  application  and  evaluate  the  impact  of  the 
proposed  funding  to  make  sure  that  the  money  has  been  used  in  accordance  with  the 
principles of economy and cost-effectiveness. To this end, the Commission will: 

•  analyse the IFRS Foundation’s annual reports; 

•  evaluate the financial statements and the auditor's report; 

•  discuss matters with other fund providers; 

•  use the Monitoring Board meetings, in which the Commission will remain a member, to 

discuss and clarify funding issues; 

•  arrange  visits  to  the  IFRS  Foundation’s  premises  when  deemed  necessary  to  verify 

budgetary systems and controls. 

Finally, in line with current financial regulations and practices, the programme as a whole will 
be properly evaluated in order to determine its possible renewal in 2020. 

31 

 
 
2.9. 

Glossary of Acronyms 

ECOFIN:       Economic and Financial Affairs Council 

EP: 

European Parliament 

FASB: Financial Accounting Standards Board (the US accounting standards-setter) 

FSAP:  Financial Services Action Plan 

IAS: 

International Accounting Standards (now referred to as International Financial 

Reporting Standards or IFRS) 

IFRS Foundation: 
successor of the International Accounting Standards Committee Foundation, the IASCF) 

International  Financial  Reporting  Standards  Foundation 

(legal 

IASB:  International Accounting Standards Board 

IFRIC: Interpretations issued by the IFRS Interpretations Committee 

IFRS:  International  Financial  Reporting  Standards  (previously  referred  to  as  International 
Accounting Standards or IAS) 

JFSA:  Financial Services Authority of Japan 

SEC:  Securities and Exchange Commission (the US securities regulator) 

32 

 
 
3. 

PROPOSED  UNION  FUNDING  OF  THE  EUROPEAN  FINANCIAL  REPORTING 
ADVISORY GROUP (EFRAG) 

3.1. 

Background 

Since  2005,  all  companies  listed  in  a  stock-exchange  of  an  EU  Member  State  have  to 
apply  for  their  consolidated  accounts  the  international  accounting  standards  as  they  are 
adopted  in  the  European  Union  by  regulations54.  New  standards  are  adopted  by  the 
Commission  as  and  when  they  are  published  by  the  International  Accounting  Standards 
Board  (IASB)  or  the  IFRS  Interpretations  Committee  (two  bodies  of  the  International 
Financial  Reporting  Standards  Foundation  (IFRS  Foundation)55  and  subject  to  a 
regulatory  comitology  procedure  with  scrutiny  (thus  involving  the  Member  States,  the 
European Parliament and stakeholders). 

Based  on  Regulation  No.  1606/2002  (the  IAS  Regulation),  the  Commission  adopts 
international  accounting  standards  as  Community  law  under  the  comitology  procedure. 
Before the Commission starts the comitology procedure on adopting new standards, DG 
Internal  Market  invites  –  in  accordance  with  recital  (10)  of  the  IAS  regulation56  –  the 
European  Financial  Reporting  Advisory  Group  (EFRAG)  to  provide  its  (non-binding) 
advice  on  the  technical  soundness  of  new  international  accounting  standards.  The 
endorsement process is shown in the figure below. 

54  

55  

56  

See Regulation 1606/2002 (the ‘IAS Regulation’), Directive 2004/109 (the ‘Transparency Directive’) and Directive 2003/71 (the 
‘Prospectus Directive’) 
The IFRS Foundation is a not-for-profit corporation incorporated in the State of Delaware, USA. In 
a  nutshell,  the  IASB  is  in  charge  of  setting  the  IFRS,  the  IFRS  Interpretations  Committee  is  in 
charge  of  issuing  consistent  interpretations  of  such  standards.  They  both  function  under  the 
umbrella  of  the  IFRS  Foundation.  For  more  information  about  the  IFRS  Foundation,  the  IASB 
and  the  IFRS  Interpretations  Committee,  see  annex  of  the  ex  ante  evaluation  on  the  proposed 
community funding for the IFRS Foundation. 
"An accounting technical committee should provide support and expertise to the Commission in 
the assessment of international accounting standards." 

33 

 
 
                                                 
(See section 4.7. for further explanation of acronyms) 

EFRAG57 was set up in 2001 to assist the European Commission by providing it with the 
above-mentioned  endorsement  advice.  It  is  a  private  association  representing  the  main 
European parties interested in financial reporting (EFRAG's "founding fathers"). EFRAG 
is located in Brussels and  it was  formed  as a non-profit association in accordance with 
the Belgian law of 25 October 1919. 

3.1.1.  Context 

EFRAG is engaged in three main activity areas:  

•  providing  the  Commission  with  endorsement  advice  –  related  to  final  standards 

issued by the IASB; 

• 

issuing comment letters – related to draft standards published by the IASB; and 

•  early-stage  pro-active  work  –  stimulating  debate  in  the  EU  and  influencing  the 

IASB's thinking before a draft standard is published. 

57  

http://www.efrag.org/ 

34 

 
 
 
 
                                                 
 
EFRAG's governance 

EFRAG's organisation is somewhat complex, reflecting the need to balance independence 
and the representation of the interest of different sectors and Member States. 

(founding) 

current  member 

following: 
EFRAG's 
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).  

organisations 

the 

are 

In  order  to  ensure  an  increased  public  oversight  and  accountability,  EFRAG's 
governance  structure  underwent  a  major  enhancement  in  2008.  As  a  result  of  those 
reforms, today the representation in EFRAG's governing bodies (most importantly in the 
Supervisory  Board)  is  no  longer  tied  to  the  contribution  to  EFRAG's  funding;  the 
Member  Organisations  are  no  longer  represented  in  the  governance  ex  officio.  In 
addition,  regular  liaison  with  the  European  Commission  was  put  in  place  at  relevant 
levels;  the  meetings  of  EFRAG's  bodies  became  open  to  the  public.  Nomination 
processes  became  open  and  wider  consultations  are  held  than  in  the  past.  Greater 
transparency is ensured also through regular reports in addition to the annual reports – 
among  others  to  the  Accounting  Regulatory  Committee  and  the  relevant  European 
institutions.  

EFRAG's General Assembly consists of the member (funding) organisations, where the 
votes of the members depend on their respective contribution to the financing of EFRAG. 
EFRAG's  Supervisory  Board  is  appointed  by  the  General  Assembly,  following 
recommendations of the Governance and Nominating Committee.  

The Supervisory Board has 17 members appointed in their personal capacity with a wide-
spread  nationality  and  background  (preparers,  users,  SMEs,  financial  institutions  and 
public policy). The roles of the General Assembly and the Supervisory Board are limited 
to  the  administrative  issues  and  appointment  of  the  Technical  Expert  Group  (TEG) 
members.  

The  TEG  is  the  core  of  EFRAG's  professional  work.  Any  decision  and  advice  on  the 
international  accounting  standards  is  taken  by  the  TEG,  which  acts  independently. 
EFRAG's chairman chairs the meetings and EFRAG has its own secretariat. Endorsement 
advices and comment letters form the bulk of its work but all technical papers have to be 
approved by the TEG.  

The  Planning  and  Resource  Committee  is  the  platform  for  the  early  stage  pro-active 
work. In this committee, National Standard Setters and EFRAG co-operate to foster the 
accounting debate in Europe and influence the IASB's thinking already before issuing a 
draft standard. 

The national standard setters of Member States continue to participate in the professional 
work of EFRAG as non-voting members of the TEG and the body set-up as a result of 

35 

 
 
the governance reform (Planning and Resource Committee) responsible for the pro-active 
work. The Commission Services may attend as observers all EFRAG meetings. 

EFRAG's activities 

At present, the objectives of EFRAG fall in two main categories: 

a)  advising the European institutions in connection with the international accounting 
standards: providing technical opinions to the European Institutions confirming or 
rejecting  international  accounting  standards  and  related  interpretations  for 
application  in  the  European  Union,  and  helping  them  in  their  assessment  of 
possible  non-conformity  of  the  international  accounting  standards  with  the  EU 
law (i.e. the "original" objective), and 

b)  influencing the IASB on behalf of EFRAG stakeholders before a new standard is 
issued,  commenting  draft  standards  via  comment  letters  (i.e.  the  pro-active 
work). 

There  are  parallels  between  the  role  of  EFRAG  and  the  national  (accounting)  standard 
setters but EFRAG is not a European standard setter. 

The above-described upstream input has attracted growing political interest as a way of 
ensuring that the IASB's standard-setting process properly reflects the needs and interests 
of EU stakeholders. More and more jurisdictions (including the US and China) decide or 
are considering to move towards and apply international accounting standards. Applying 
these  standards  naturally  awakes  the  desire  to  have  an  influence  on  their  development. 
The  increasingly  wide  adoption  of  international  accounting  standards  at  international 
level  has  given  rise  to  concerns  that  Europe's  influence  over  the  IASB  will  diminish 
given  the  significant  resources  and  expertise  that  other  jurisdictions,  especially  the  US, 
can  mobilise.  These  concerns  have  been  expressed  several  times  by  the  Council  of 
Ministers, the European Parliament58 and by Member States in the Accounting Regulatory 
Committee  as  well.  Thus,  for  all  these  reasons,  it  is  rational  to  continue  financing 
EFRAG. 

58  

of 

July 

2003, 

conclusions 

See  in  particular  (i)  ECOFIN  Council  conclusions  of  8  July  2008,  pp  12-13,  available  on 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/101742.pdf  and  (ii) 
on 
ECOFIN  Council 
15 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/76683.pdf  See 
in 
particular  (i)  Report  of  the  European  Parliament  on  International  Financial  Reporting  Standards 
(IFRS)  and  the  Governance  of  the  International  Accounting  Standards  Board  (IASB) 
(2006/2248(INI))  ("Radwan  Report")  5  February  2008,  pp  7  and  11,  available  on 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A6-2008-
0032+0+DOC+PDF+V0//EN&language=EN  and  (ii)  Written  question  n°  E-3992/08  by  Klaus 
on 
Heiner 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+WQ+E-2008-
3992+0+DOC+XML+V0//EN&language=EN 
http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2008-3992&language=EN) 

Commission, 

(PPE-DE) 

available 

available 

available 

answer 

Lehne 

(with 

Item 

the 

on 

to 

7, 

36 

 
 
                                                 
3.1.2.  Experiences of the EU co-financing since 2010 

Currently, an EU co-financing programme is in place which was established by Decision 
716/2009  of  the  European  Parliament  and  the  Council.  On  that  basis  the  Commission 
concluded  grant  agreements  with  EFRAG  in  2010,  2011  and  2012.  Therefore  we  have 
experience  with  the  co-financing,  although  it  may  be  a  too  short  period  to  measure  the 
achievements of the long-term objectives of the programme. 

Based  on  the  ex  ante  evaluation  of  the  current  programme,  co-financing  of  EFRAG 
aimed at achieving the following objectives: 

•  Avoid  reliance  on  precarious/voluntary  funding  from  interested  parties  thus 

ensuring credibility and independence of its work 

•  Boost the international reputation, attractiveness and acceptance of the standards 

•  Ensure fair burden sharing within the EU in the financing of EFRAG 

•  Ensure that the relevant bodies are adequately equipped with the financial means 
to carry out EU or EU-related public interest mandates or activities (staffing and 
experts) 

The experiences of the co-financing programme are analysed below on the basis of those 
objectives. 

1.  Avoid  reliance  of  on  precarious/voluntary  funding  from  interested  parties  thus 

ensuring credibility and independence of its work 

This objective has been partly met.  

In  2008,  i.e.  before  the  EU  co-funding  started,  EFRAG  had  a  total  budget  of 
approximately  €3.25  million,  of  which  ca. 
€1.6  million  was  funded  via  voluntary  cash 
contributions  from  its  members  and  the  rest  via  staff  contributions  from  various 
resources.  All  TEG  members,  including  the  TEG  chairman,  as  well  as  members  of  the 
specialized working groups worked without any charge for EFRAG. They were paid by 
the  organisation  employing  them  –  national  standards  setters  (basically  the  French, 
German,  the  UK,  the  Italian  and  the  Swedish  standard  setters),  organisations  from  the 
accountancy  and  audit  profession,  preparers,  users  and  academic  institutions.  This 
contribution  by  delegating  experts  for  free  to  take  part  in  the  work  of  EFRAG  on  an 
independent  basis  is  considered  as  "contribution  in  kind"  to  EFRAG's  budget.  A 
declaration  of  the  experts  is  however  not  enough  for  the  independency  credentials  of 
EFRAG.  These  experts  also  need  to  be  perceived  as  independent  by  the  outside  world. 
Thus an additional financing of EFRAG was partly used to put certain current experts on 
EFRAG's payroll, whereas the other part went to an increase in the number of its staff. 
The  grant  programme  allowed  EFRAG  to  pay  also  the  TEG  chairman,  thus  one  of  the 
key concerns of independence could be eliminated. However, EFRAG still needs the so 
called in-kind contributions, i.e. secondment of experts form its stakeholders to meet its 
staffing needs.  

37 

 
 
Prior to the governance reforms of EFRAG in 2008, the Standards Advisory Review 
Group  (SARG)  was  set  up  by  a  Commission  decision  of  2006  to  address  the 
concerns  regarding  whether  EFRAG's  endorsement  advice  is  independent.  The 
members of that group received no remuneration for their professional services. The 
Commission only reimbursed their costs related to their meetings. Although SARG's 
additional  advice  about  the  independence  of  EFRAG's  opinion  had  been  seen  as  a 
solution in the case of endorsements, a similar system of additional opinions is from 
a  practical  point  of  view  totally  impossible  when  it  comes  to  influencing  the 
international  standard  setting  process  (the  "pro-active"  work).  Thus,  independence 
has  to  be  an  inherent  feature  of  the  body  responsible  for  the  pro-active  work.  In 
parallel to the establishment of the grant programme, EFRAG’s governance reforms 
were  completed  that  enhanced  its  independence,  accountability,  transparency  and 
the public policy aspects in its operations. The EU grant ensured that those reforms 
did  not  lose  ground.  SARG  could  be  dissolved.  The  funders  of  EFRAG  accepted 
that  their  influence  in  the  organisation  diminished,  whereas  their  level  of 
contributions had to be maintained. 

However, there are still concerns that EFRAG may be taken as a hostage of those 
four big Member States that altogether contribute 70% of EFRAG’s own resources. 
The current EU grant Programme is designed to “double” EFRAG’s own resources 
(the  Commission  may  finance  up  to  50%  of  EFRAG’s  total  budget),  any  loss  in 
those Member States’ contribution results in a double loss for EFRAG's budget. A 
solution  would  be  to  encourage  more  Member  States  to  contribute  to  EFRAG’s 
budget;  however,  in  the  current  economic  and  legal  context  this  is  not  a  feasible 
option. Therefore, the current proposal for the new EU grant Programme for 2014-
2020  proposes  to  contribute  by  a  fix  amount  of  grant  instead  of  laying  down  the 
percentage.  Such  an  arrangement  is  more  calculable  also  for  the  Commission 
budget. 

2.  Boost the international reputation, attractiveness and acceptance of the standards  

EFRAG  reported  that  without  the  additional  staff  that  the  EU  grant  allowed  to 
employ,  EFRAG  would  not  have  been  able  to  cope  with  the  IASB’s  level  of 
activities. Moreover, the additional funding allowed EFRAG to be more pro-active 
in on-going projects. At several instances, the IASB has reconsidered its position in 
line with EFRAG’s comments, put a project on hold following EFRAG’s objection, 
deferred a deadline to follow robust due process as also recommended by EFRAG, 
has  started  to  publish  Review  Drafts  that  ERFAG  called  for,  selected  pro-active 
projects which have been taken up by the IASB, for instance. More details on what 
difference EFRAG made in the financial reporting arena you find in the Annex. 

The EU co-financing, and the expansion of its budget also allowed EFRAG to take 
up  new  activities.  Most  importantly,  the  pro-active  European  input  to  the  IASB’s 
standard setting process is now institutionalised: EFRAG’s Planning and Resource 
Committee  has  been  set  up.  This  committee  provides  a  stable  platform  for  views 
from all over Europe (not only the big Member States) and continuity in the actions 
(as opposed to ad-hoc projects previously). An indicator for the success of this type 
of activities is that the vast majority of the pro-active projects selected by EFRAG 

38 

 
 
became high also on the IASB’s agenda. EFRAG is now regularly asked to present 
its pro-active projects at the World Standard-setters’ Meeting.  

EFRAG  started  to  organise  so-called  outreach  events,  where  it  goes  out  to 
stakeholders  instead  of  waiting  for  them  to  take  up  contact.  Another  new  type  of 
activity is the field tests, which also allows for EFRAG to gather the widest possible 
input  across  sectors  from  all  over  Europe.  Both  the  outreach  events  and  the  field 
tests are highly appreciated by the stakeholders.  

Increased  communication  was  also  made  possible  from  the  additional  funding 
EFRAG received from the EU budget. For example, EFRAG started to prepare and 
circulate  newsletters  that  draw  the  attention  of  stakeholders  to  current  issues  and 
fosters the debate and dialogue in the field of financial reporting in the EU. A first 
stakeholders’ meeting with the IASB was organised. Work has started to launch the 
"user enhancement" communication programme to boost the representation of users 
in EFRAG’s work.  EFRAG regularly meets with the national funding mechanisms 
and its member organisations, and the relationship with the academia started to be 
developed. It started to hold agenda-consultation on its pro-active work.  

EFRAG  developed  its  international  relationships.  Contacts  have  been  established 
with five key international partners: the US Financial Accounting Standards Board 
(FASB), China, Japan, Latin-America and Asia-Oceania. 

We  can  conclude  that  the  EU  grant  has  contributed  to  this  objective,  as  more  and 
more  countries  move  to  IFRS.  Also,  the  Union  is  about  to  accept  the  national 
accounting standards (GAAPs) of three countries (South-Korea, China and Canada, 
in  addition  to  the  US  and  Japan)  for  an  unlimited  period  of  time.  In  addition,  the 
European  views  remained  well-represented  even  if  the  EU  is  gradually  losing  its 
advantage as the most important interlocutor of the IASB and user of IFRS.  

3.  Ensure fair burden sharing within the EU in the financing of EFRAG 

Representatives of Member States with fewer resources (such as BE, DK, AT, PL) 
often  remark  that  their  only  chance  to  influence  the  IASB  is  to  do  it  through 
EFRAG. They would not have the capacity to do themselves the work that EFRAG 
does for them. Based on the feedback received from those standard setters, they feel 
sufficiently  associated  to  EFRAG's  work.  It  is  therefore  important  that  EFRAG 
received  sufficient  financing  for  representing  the  views  of  those  smaller  Member 
States. Indeed,  the EU grant  serves the purposes to allow for forming a truly pan-
European  accounting  view,  where  all  Member  States'  interests  are  taken  into 
account irrespective of their financial or other resources. 

The  idea  of  "shared  due  process"  also  serves  the  aim  to  involve  as  many  national 
standard  setters  as  possible  in  EFRAG's  work.  The  goal  is  to  rationalize  the 
preparatory  work  (e.g.  field  tests,  outreach  events)  forming  the  ground  for  the 
European  accounting  opinion  –  sometimes  work  is  doubled  at  national  and  at 
EFRAG's level. According to the shared due process, the four big national standard 

39 

 
 
setters (UK, FR, DE, IT) do part of the technical work, whereas EFRAG does that 
on  behalf  of  all  other  Member  States.  In  this  regard,  again,  EFRAG  is  the  only 
platform through which also the smaller Member States can have a say and thus the 
technical  documents  issued  by  EFRAG,  the  input  given  to  the  IASB  can  truly 
represent a pan-European view.  

In line with the current trend where national standard setters form alliances and set 
up  their  co-ordinating  organisations  (see  in  Latin-America  and  Asia-Oceania), 
EFRAG should also develop into a regional group. The IASB prefers working with 
regional groups instead of individual countries. Although EFRAG is not a standard 
setter and standard setters are not its members, it is the representative of the single 
European accounting voice and consequently the views of the European region. This 
role involves that the interests of all Member States are/need to be represented. 

Based on the above, this objective is mostly met by the EU grant.  

In  fact,  EFRAG  encounters  difficulties  in  ensuring  that  all  stakeholders  (users, 
preparers, auditors, SMEs etc.) and a wide range of Member States are represented 
in the TEG and the Supervisory Board. The fact that working for the TEG and the 
Supervisory Board requires a significant amount of time, and these positions are not 
remunerated  (not  even  the  costs  of  taking  part  in  meetings  is  reimbursed)  makes 
recruitment difficult from companies/sectors and Member States with less resources 
– in particular from SMEs and the Member States which joined since 2004.  

4.  Ensure that the relevant bodies are adequately equipped with the financial means 
to carry out EU or EU-related public interest mandates or activities (staffing and 
experts) 

This objective has been partly met, as EFRAG managed to employ more staff and 
take over its chairman on EFRAG payroll. Nevertheless, EFRAG is still somewhat 
understaffed:  some  activities  are  not  undertaken  and  the  current  staff  is  under 
workload pressure.  

An  important  area  where  EFRAG  should  be  more  active  is  the  pro-active 
interpretations  effort  to  foster  consistent  application  of  the  standards.  The 
interpretation of the standards is the role of the standard setter – i.e. the IASB and 
the IFRS Interpretations Committee, whereas EFRAG should provide input to that. 
Interpretation cannot fall in the remit of enforcers (e.g. the European Securities and 
Markets Authority, ESMA) as the rule-setting and enforcement of the rules should 
always be separated. To make the EU institutional setting clear and respond to the 
criticisms quickly, it should be enabled (mainly financially) via EFRAG to take up a 
pro-active role in the interpretation of financial reporting standards. 

3.2. 

Problem Definition 

Should  the  current  EU  grant  programme  discontinue,  we  would  face  the  following 
problems. 

40 

 
 
3.2.1.  Reliance  on  non-diversified,  voluntary  and  precarious  funding  from  interested 

parties and its negative consequences 

EFRAG is financed from three main sources: contributions by its founding fathers59, the 
national  funding  mechanism  of  certain  Member  States  and  the  EU  grant.  Additionally, 
EFRAG may receive voluntary contributions from EU professional associations.  

The founding fathers usually commit to a multi-annual contribution to EFRAG's budget. 
However,  in  the  current  economic  climate,  in  the  recent  years  members  have  indicated 
their  intention  to  reduce  their  contributions  or  left  EFRAG  because  they  could  not 
contribute.  Also,  it  is  difficult  to  persuade  businesses  to  finance  activities  that  are  a 
"common good" when they themselves are focussed on cost-cutting and restructuration. 

Private or public national funding mechanisms, set up in certain Member States provide 
EFRAG with voluntary funding. EFRAG's financing needs to be reconfirmed on a yearly 
basis.  Only  a  limited  number  of  such  national  funding  mechanisms  exist  and  four  big 
Member States' mechanisms (UK, FR, IT and DE) contribution amounts to almost 70% 
of  EFRAG's  own  resources  (if  the  EU  grant  is  not  taken  into  account).  This  situation 
implies  two  negative  consequences:  the  risk  of  EFRAG  being  taken  hostage  by  a  few 
national  interests,  and  the  difficulty  of  the  smaller  Member  States  –  although  more 
numerous – to make their voice heard in EFRAG's decision-making. 

Also,  the  annual  and  voluntary  nature  of  the  own  resources  leads  to  an  unstable  and 
unpredictable  situation,  where  EFRAG  cannot  engage  the  needed  experts  –  staff  in 
sufficient quantity and quality. At the same time, the value added by EFRAG lies in the 
expertise produced by its staff and professionals.  

3.2.2. 

Insufficient financial means to carry out EU public interest missions 

EFRAG has been taking up the role of the 'single European accounting voice'. Without 
EFRAG being well-equipped to represent the Union, the European interests are not well 
taken  into  account  at  the  international  level.  International  accounting  standards  are 
developed  by  bodies  (IASB  and  the  IFRS  Interpretations  Committee)  in  which  the 
European interest is not guaranteed. These standards are endorsed in the European Union 
after having taken into account many views and interests from stakeholders. If then the 
European view was not well taken into account at the level of the IASB, due to lack of 
resources that would allow to set up and maintain some kind of think-tank that is able to 
properly  influence  the  international  standard  setting  process,  problems  may  arise  in  the 
course of the endorsement procedure. 

Such  problems  were  in  the  past  temporarily  solved  by  not  endorsing  the  international 
accounting  standard  in  question  in  full  (referred  to  as  "carve-outs")60.  However,  this 
solution  can  only  be  regarded  as  temporary,  since  the  use  of  international  accounting 

59  

60  

EFRAG's  current  member  (founding)  organisations  are  the  following:  BUSINESSEUROPE 
(European  Business  Federations),  FEE  (European  Federation  of  Accountants),  CEA  (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). 
See for example the case of IAS 39 in connection with hedge accounting 

41 

 
 
                                                 
standards  in  Europe  will  fulfil  its  function  only  if  it  corresponds  entirely  to  the 
international  accounting  standards  and  interpretations  issued  by  the  IASB/IFRS 
Interpretations Committee as used elsewhere in the world. 

The  real  solution  is  thus  not  to  create  a  maze  of  carve-outs  but  to  make  sure  that  the 
accounting  standards  that  we  are  about  to  endorse  properly  reflect  the  interest  of  the 
European stakeholders. Consequently, we have to influence the standard-setting process 
at the earliest stage possible. 

In  order  to  create  a  European  representation  at  the  level  of  the  international  standard 
setting  as  quickly  as  possible,  the  Proactive  Accounting  Activities  in  Europe  (the 
PAAinE)  initiative  was  launched  in  2005.  Through  this  initiative,  EFRAG  and  the 
national standard setters61 of the largest Member States pooled some of their resources in 
order  to  stimulate  a  debate  in  Europe  on  the  most  important  international  accounting 
standards  under  development.  PAAinE  was  a  coordination  mechanism,  which  aimed  at 
the  largest  extent  possible  to  ensure  that  the  messages  Europe  gives  to  the  IASB  are 
consistent – however, this was constrained by circumstances which are inherent features 
of the system. 

Therefore, in 2009 EFRAG's Planning and Resource Committee took up this important 
proactive work to provide consistency (in PAAinE different projects are led by different 
groups) and accountability. Thus, a possibility of creating a truly single European voice 
was created, as EFRAG now offers continuity in the pro-active work. Also, the interests 
of the smaller Member States, that otherwise could not contribute to a pro-active project 
on their own, may be represented.  

Even though not all Member States are always interested in contributing to a particular 
pro-active project, EFRAG can step in and put up the resources for some still important 
projects. To allow EFRAG taking up this truly pan-European role, the organisation has to 
be provided with sufficient funding from a pan-European source. 

3.3. 

Objectives 

Further to the above-described issues, a solution has to be found that meets the following 
strategic and operational objectives. 

3.3.1. 

Strategic objective 

The strategic objective to be achieved by the proposed funding arrangement is to ensure 
stable,  diversified,  sound  and  adequate  funding  to  enable  EFRAG  to  carry  out  its 
European public interest mission in an independent, efficient and satisfactory way. 

3.3.2.  Operational objectives 

3.3.2.1. Ensure credibility and independence of EFRAG work 

61  

National standard setters can be both private non-profit or public organisations depending on the 
actual constituency. 

42 

 
 
                                                 
A  first  operational  objective  is  to  ensure  credibility  and  independence  of  EFRAG 
standard-setting  related  activity  (influencing  the  standard  setting  process  and  reviewing 
the newly issued standards) before the endorsement of these standards in the EU law. 

For the credibility of a single European accounting voice it is indispensable that EFRAG 
is  perceived  as  independent.  Currently,  the  organisation  relies  on  the  voluntary 
contributions received from stakeholders interested in financial reporting. Their financial 
commitment often needs to be re-confirmed on an annual basis. These stakeholders that 
have a direct interest in the result of EFRAG's work have  also  voting and appointment 
rights in the governing bodies of the organisation. Making the financing of EFRAG more 
independent  from  the  voluntary  contributions  of  interested  parties  can  guarantee  the 
operational  independence  of  EFRAG  from  inappropriate  pressure  coming  from  the 
business community. 

3.3.2.2. Boost the international reputation, attractiveness and acceptance of the standards 

A  second  operational  objective  is,  in  addition  to  the  above,  to  boost  the  international 
reputation,  attractiveness  and  acceptance  of  the  standards  set  by  the  IASB/IFRS 
Interpretations Committee and part (or bound to become part) of the EU acquis. 

When  EFRAG  is  successful  in  its  pro-active  work,  the  European  context  is  taken  into 
account in the course of developing international accounting standards. This means that 
the  European  Community  will  play  an  active  role  in  the  international  standard  setting 
process  –  instead  of  passively  being  bound  to  adopt  accounting  standards  that  are 
designed for the need of other jurisdictions, companies with backgrounds different from 
that of the European ones. 

In  addition,  it  will  also  ease  the  EU's  international  relations  in  the  field  of  accounting. 
The argument for accepting the European entities financial reports in third countries will 
be well-founded. This applies in particular to the US, where a number of large European 
players raise funds. As a bonus, if European accounting standards fully correspond to the 
international  accounting  standards,  decisions  on  whether  third  country  accounting 
practices are equivalent to those of the EU is more easily taken. 

3.3.2.3. Ensure fair burden sharing within the EU in the financing of EFRAG 

A third operational objective is to ensure fair burden sharing within the EU in EFRAG's 
financing. 

Putting  in  charge  one  single  European  body  to  represent  the  European  interest  at  the 
international standard setting level also brings the need of ensuring fair burden sharing. 
EFRAG used to be mainly financed by its members and the contributions provided by the 
Member  States'  national  funding  mechanisms  come  mainly  only  from  the  four  largest 
constituencies.  The  previous  PAAinE  mechanism  worked  also  on  the  basis  of 
contributions  only  from 
in  placing 
unintentionally  the  others  in  an  unfair  free-rider  position.  Naturally,  financing  means 
greater influence – thus a truly European voice is difficult to be formed when only certain 
(big) Member States put up the money for a particular pro-active project. 

largest  Member  States,  which  results 

the 

43 

 
 
Since  EFRAG  took  up  the  pro-active  work,  it  is  able  to  represent  the  interest  of  all 
Member  States  –  not  only  the  largest  ones  that  can  raise  sufficient  funds  to  also 
individually  operate  a  lobby-procedure  at  the  IASB/IFRS  Interpretations  Committee. 
Thus, a single, truly European voice can be developed. 

In  addition,  currently  the  Supervisory  Board  members  and  TEG  members  are  not 
remunerated  for their  work  even  if it takes up a considerable share of their time  (this is 
true  in  particular  for  TEG  members  who  work  30-60  hours  per  months  for  EFRAG  on 
average). The fact, that not even their travelling and accommodation costs are reimbursed, 
makes  recruitment  from  smaller  Member  States  even  more  difficult.  EFRAG's  budget 
should be expanded in order to be able to carry such additional costs. 

3.3.2.4. Ensure that the relevant bodies are adequately equipped with the financial means 
to carry out EU or EU-related public interest mandates or activities 

A  fourth  operational  objective  is  that  EFRAG  is  adequately  equipped  with  the  financial 
means  to  carry  out  its  EU  public  interest  mandate  of  pro-actively  influencing  the 
international standard setting process. 

Technical competence is the best way of increasing EU influence in the IASB. To build 
respect  and  status,  EFRAG  needs  to  give  top  quality  advice  and  provide  technically 
sound opinions. EFRAG needs to engage staff at a solid basis and have a critical mass of 
experts.  Only  a  critical  mass  of  experts  is  able  to  manage  the  workload  and  match  the 
expertise and personnel of our international counterparts. We need professionals that are 
appropriate for this work both in quantity and quality. We need the best people to be able 
to  speak  the  technical  language  that  the  IASB/IFRS  Interpretations  Commitee  speaks. 
The experience  of our European experts has to  meet that of their US colleagues. When 
trying  to  attract  and  recruit  the  best  quality  people,  EFRAG  competes  with  the  private 
sector  including  leading  audit  networks.  This  implies  the  need  to  pay  competitive 
salaries62, which represent EFRAG's main cost. Should EFRAG not be able to afford to 
pay the best people, the objective of developing a powerful European voice would not be 
met. 

3.4. 

Available Policy Options 

3.4.1.  Baseline scenario (no action): Discontinuing the EU funding 

Under this scenario, EFRAG returns to its old funding model: it would be financed by its 
founding  organisations  and  the  national  funding  mechanisms  operating  in  some  of  the 
Member States. The Community is not involved in the organisation's financing. 

While  this  scenario  has  no  implications  for  the  Community  budget,  its  disadvantages 
clearly  overshadow  the  advantages  of  this  option.  If  the  number  of  EFRAG's  staff  is 
decreased, the absence or leave of one colleague may make it impossible to continue to 
work  on  a  whole  project,  as  they  have  no  back-ups.  The  decrease  of  the  funding  will 
undermine the fulfilment of the objectives described above under point 3.3. 

62  

EFRAG already encounters problems in attracting people from Germany and the UK because of 
its net salary levels. 

44 

 
 
                                                 
Also, considering that the same people have to work on issuing the endorsement advice 
and  developing  the  pro-active  input  at  the  same  time,  clearly  the  first  would  be 
prioritised.  This  prioritising  is  understandable  if  we  consider  that  providing  the 
Commission with endorsement advice is EFRAG's original objective as agreed by their 
founding (and funding) organisations. Providing endorsement advice is even a task which 
is more measurable, visible and also, more pressing since if this is not done, the adoption 
of  accounting  rules  within  the  European  Community  would  come  to  a  complete  halt. 
Clearly, in case of a collision of duties, less attention and time would be left for the pro-
active work. It is even possible that from time to time the pro-active projects underway 
have to be set aside in order to be able to manage the workload of advising the European 
Commission  on  the  endorsement  of  the  already  issued  standards.  So  the  objective  of 
developing a single and influential European accounting voice is not met. 

This option does not solve the problems of passive adoption, non-equivalence and carve-
outs either. At the same time, we would give up Europe’s influence and would leave it to 
other jurisdictions to get involved in the international standard setting process. 

The  absence  of  Union  funding  would  also  be  seen  by  others  as  demonstrating  the 
weakness  and  the  low-standing  of  EFRAG.  Discontinuation  would  send  a  bad  political 
signal.  Thus,  in  the  end,  this  scenario  would  worsen  EFRAG's  current  reputation  and 
status as opposed to just not improving it. 

3.4.2.  Renewing the co-financing under the Community budget 

Continuing the current EU co-funding is a solution worth considering. 

A grant agreement without a call for tender is a viable option. Following Article 121 of 
the Financial Regulation63, grants can be used to finance the functioning of a body which 
pursues  an  aim  of  general  European  interest  or  has  an  objective  forming  part  of,  and 
supporting, a Union policy. 

The grant is designed to co-finance the functioning (basically the staff costs) of EFRAG 
(operating grants). By definition, such co-financing has no direct link to any deliverables. 
On  the  other  hand,  the  Commission  contributes  only  to  financing  the  actual  costs 
incurred by EFRAG without allowing for a profit margin. 

This option has clear advantages. Co-funding from the European Union ensures that the 
missing resources can be brought up to achieve the objectives above (see chapter 3.1.2 
above on the experiences of the current Programme) and a stable solution providing for 
continuity in the funding of EFRAG. It is possible to extend the grant in time and transfer 
it  into  long-term  financing.  The  independence  and  thus  the  credibility  of  EFRAG  are 
enhanced, while a level playing field is ensured for all listed companies  irrespective  of 
their nationalities. 

63  

Regulation (EU, Euratom) No 966/2012 of 25 October 2012 on the financial rules applicable to 
the general budget of the Union 

45 

 
 
                                                 
This option enjoys the support of the European Parliament and the Council as highlighted 
several times by the ECOFIN Council and by the European Parliament.64 

The  articulation  of  a  single  European  voice  is  of  a  broader  European  interest,  thus, 
coordinated  actions  at  European  level  should  be  able  to  count  on  support  from  the 
European budget. 

3.4.3. 

Increase voluntary contributions from the member organisations 

EFRAG could ask for an increase in the contributions of its member organisations. This 
option would not solve the current problems. EFRAG's level of independence would, if 
not  decreased,  at  least  be  perceived  to  be  decreased  by  the  general  public.  In  addition, 
since EFRAG's independence had to be increased in line with its public interest activities, 
individual stakeholders financing EFRAG had to give up much of their previous (prior to 
the 2008 enhancement) influence in EFRAG. In this context, it does not seem reasonable 
to  expect  them  to  double  their  current  amount  of  contribution  to  EFRAG's  budget. 
Adding to that the prevailing economic downturn and crisis, it is already a challenge to 
maintain  their  current  level  of  contributions;  and  it  is  almost  impossible  to  expect 
additional funding from those organisations.  

3.4.4. 

Setting up national funding schemes (public financing or levy over industry) 

National  funding  mechanisms  have  been  designed  to  support  the  various  accounting 
standard  setting  activities  (e.g.  standard  setting  at  national  level,  influencing  the 
international standard setting process) for the benefit of the stakeholders of one particular 
country.  The  private  and  public  funding  systems  for  national  standard  setters  (i.e. 
national funding mechanisms) are equally common65. In case of private funding systems, 
the  accountancy  profession  and  preparers  (industry)  together  with  the  stock  exchanges 
are the most common providers of funding where the national funding system works on a 
non-voluntary  basis.  There  are  also  some  cases  of  mixed  funding  systems  where 
government  participates  in  a  mainly  private  system  or  private  contributions  are  paid  to 
mainly government funded standard setters. 

64  

See  in  particular  (i)  ECOFIN  Council  conclusions  of  8  July  2008,  pp  12-13,  available  on 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/101742.pdf  and  (ii) 
ECOFIN  Council 
on 
http://www.consilium.europa.eu/ueDocs/cms_Data/docs/pressData/en/ecofin/76683.pdf 

conclusions 

available 

2003, 

Item 

July 

15 

of 

7, 

See  in  particular  (i)  Report  of  the  European  Parliament  on  International  Financial  Reporting 
Standards  (IFRS)  and  the  Governance  of  the  International  Accounting  Standards  Board  (IASB) 
(2006/2248(INI))  ("Radwan  Report")  5  February  2008,  pp  7  and  11,  available  on 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A6-2008- 
0032+0+DOC+PDF+V0//EN&language=EN  and  (ii)  Written  question  n°  E-3992/08  by  Klaus 
on 
to 
Heiner 
http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+WQ+E-2008- 
3992+0+DOC+XML+V0//EN&language=EN 
http://www.europarl.europa.eu/sides/getAllAnswers.do?reference=E-2008-3992&language=EN)  

Commission, 

(PPE-DE) 

available 

available 

answer 

Lehne 

(with 

the 

on 

65  

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-
407.786+02+DOC+PDF+V0//EN&language=EN 
In  Northern  Europe  standard  setters  are  primarily  financed  by  the  private  sector;  whereas  in 
Southern Europe, there is mainly public financing. 

46 

 
 
                                                 
 
 
However, counting on the increased contribution only from this source has considerable 
disadvantages.  National  funding  mechanisms  exist  currently  only  in  some  Member 
States66.  Setting  these  up  is  time-consuming,  whereas  the  need  for  a  sound  EU 
representation  at  the  international  accounting  level  is  urgent.  And  even  if  such  funding 
mechanisms  were  set  up  in  all  Member  States,  this  solution  would  not  lead  to  an 
appropriate  increase  in  EFRAG's  budget.  Reluctance  to  levy  a  tax,  lack  of  political 
willingness  to  create  another  tax-like  system,  mean  that  these  funding  mechanisms 
cannot  sufficiently  increase  their  contribution  to  the  work  of  EFRAG.  This  option  also 
implies that the Member States would be entitled to decide on the level of their national 
contribution.  Since  those  contributing  more expect  a  bigger  influence,  it  would  mean  a 
danger  to  EFRAG’s  independence.  This  may  result  in  a  lack  of  level  playing  field  for 
listed companies of different nationalities.  

While Member States are reluctant to increase the levies on national levels, imposing an 
EU-wide tax-like levy is not a feasible option. It would require unanimous support from 
the Member States. There is no provision in the Treaty that would allow the Community 
to impose a fee on private companies in favour of another private body or association. 

3.4.5. 

Setting up a dedicated EU Agency 

Establishing  a  new  agency  could  also  be  an  option  to  be  considered.  The  Commission 
would  set  up  an  Advisory  Accounting  Agency  (replacing  EFRAG),  financed  directly 
from the Community budget. This agency would take over all current tasks of EFRAG. 
However, the setting up of an agency is time-consuming. The need for financing the pro-
active  accounting  work  is  urgent;  therefore,  this  scenario  would  lead  to  missing  our 
unique opportunity to get involved in the international accounting standard setting at the 
right time. Later we may not have the chance to do so as more and more jurisdictions are 
moving to IFRS and the EU’s relative weight at the IASB is anyway shrinking. 

In addition, the establishment of an agency is unlikely to be possible without Community 
funding  comparable  in  amount  to  the  financial  contribution  to  the  EFRAG  funding 
foreseen  under  the  preceding  option  as  an  agency  would  ultimately  be  funded  entirely 
from  the  Community  budget.  Moreover,  the  Commission's  management  of  the  financial 
contribution to and/or co-ordination with an Agency would imply administrative costs for 
the  Commission  which  would  also  be  comparable  to  that  associated  with  a  financial 
contribution to the EFRAG budget. 

3.4.6. 

"Internalize" functions within the Commission 

Under  this  scenario,  the  technical  expertise  provided  by  EFRAG  would  be  carried  out 
internally by the services of the European Commission. 

Besides  the  difficulties  this  scenario  would  represent  from  a  human  resources  point  of 
view  (as  it  would  imply  a  substantial  recruitment  of  accounting  experts),  it  is  not 
desirable as the Commission would find itself in the situation where it would have to take 

66  

National funding schemes have been established to date in six Member States (France, Germany, 
Italy, Sweden, Denmark and the United Kingdom). Such schemes are being currently set up in the 
Netherlands, Finland and Spain. 

47 

 
 
                                                 
the decision to endorse accounting standards on the basis, inter alia, of a technical advice 
which  by  its  nature  should  be  seen  as  independent.  It  is  thus  not  desirable  that  the 
missions of EFRAG are carried out "in-house" by the Commission. 

If only the pro-active work would be taken up by the Commission, experts in appropriate 
quantity and quality would have to be recruited. The implication for the Union budget is 
likely to be even bigger than providing only co-financing to these activities.  

3.4.7.  Comparison of options 

The table below is used to compare the relative merits of the above options based on a 
qualitative assessment as reliable data are not available. 

In  the  case  of  EFRAG  the  criteria  are  considered  equally  important  in  testing  the  cost-
effectiveness of each option.  

The  option  "status  quo"  (option  1)  used  as  the  baseline  with  maintained  budgetary 
intervention  from  the  Union  is  compared  to  the  five  other  options  based  on  the  four 
following main criteria: 

•  The degree of achieving the objectives described above, 

•  Political consequences of the implementation,  

•  Feasibility, and 

• 

Implication for the EU budget. 

ASSESSMENT 
OPTIONS 

Achievement 
of objectives 

Political 
consequences 
of 
implementatio
n 

All (+++)
- - - 

P iti
- - - 

N/A 

Option 1 

Discontinuing 
EU 
the 

Feasibility 

Implication 
for EU budget 

Straightforward

Positive 

(+ to +++)  

Negative
++ 

Overall 
Assessme
nt 

Positive 

- - - 

Option 2 

+++ 

+++ 

+/- 

- -  

+++ 

Maintaining 
the  EU  co-
financing
Option 3 

Increase 
contribution
s from the

+/- 

- - 

+/- 

++ 

- 

48 

 
 
 
 
 
 
 
 
Option 4 

+/- 

- 

- - - 

++ 

-  

up 

Setting 
national
Option 5 

Setting 
up 
dedicated  EU 
EU

Option 6 

Internalizing 
EFRAG's 

+++ 

- - - 

+/- 

++ 

+/- 

+/- 

+/- 

+/- 

++ 

+/- 

Option 1, which leaves the funding of EFRAG to the private member organisations and 
the  big  Member  States,  can  be  assessed  as  the  worst  case  scenario  from  the  EU 
perspective  as  that  would  make  impossible  the  achievement  of  a  single  European 
financial reporting voice. The funding would be sufficient for EFRAG only to focus on 
its endorsement advice-issuing role. Most likely the national funding mechanisms would 
pull  out  of  EFRAG’s  financing  and  the  big  Member  States  would  develop  and  submit 
their own views to the IASB with a doubtful amount of advance previous coordination 
with  each  other.  Most  importantly,  the  discontinuation  of  the  EU  co-financing  would 
give  the  political  signal  that  EFRAG  has  lost  its  credibility,  importance  and  high-
standing. Thus this option would be detrimental not only to EFRAG’s funding but also 
would make it impossible to fulfil its pro-active influencing role. Therefore, this option 
should be discarded. 

On the contrary, the strongest benefits are to be expected from option 2, maintaining the 
status  quo.  Providing  EFRAG  with  co-funding  from  the  EU  budget  has  the  following 
important advantages: 

•  it continues to give a positive political signal and support EFRAG’s high 

standing;  

•  it  considerably  enhances  EFRAG's  independence  from  the 
stakeholders  and  support  its  current  governance  structure  that 
aims 
and 
accountability, 

increasing  EFRAG's  public  oversight 

at 

•  it  provides  a  more  stable  source  of  funding  also  in  the  long-
term compared to annually approved member contributions, 

•  it  increases  EFRAG's  general  recognition  and  gives  its 
the 

the  necessary  weight  and 

importance  at 

opinion 
international scene, 

•  it  also  signals  to  all  parties  concerned  the  EU  public  interest 
and  role  of  EFRAG  and  encourage  other  public  bodies  and 

49 

 
 
 
institutions to contribute to EFRAG's financing.67 

In  sum,  maintaining  Community  co-funding  of  EFRAG  clearly  represents  the  quickest 
solution  which  is  also  in  line  with  EFRAG's  public  interest  activities  and  international 
role. 

3.4.8.  Method of implementation for the selected option 

Further  to  the  above,  the  optimal  solution  combines  certain  of  the  above  options.  The 
solution could be co-financing EFRAG via operating grants from the Community budget 
and  at  the  same  time  raising  additional  resources  from  third  parties.  EFRAG  is 
mobilising the following additional resources: 

•  staff  allocations  by  national  accounting  standard  setters,  either  detached  to 
EFRAG  or  to  participate  in  joint  working  groups  (in  the  long-run  these  in-kind 
contributions may be transformed into cash contributions); 

•  additional  cash  contributions  from  national  funding  mechanisms  and/or  the 
private organisations that founded EFRAG, including negotiations to increase the 
number of countries contributing68; 

•  co-funding from the Community budget. 

Based  on  the  financial  rules  governing  the  management  of  the  Union  budget,  financial 
support from the Union budget could be provided either in the form of operating grants 
(i.e. contributing to the overall budget of a body) or in the form of action rants (i.e. co-
financing specific targeted activities of a body). 

In the case at hand, the aim is to finance mainly the pro-active work of EFRAG; therefore 
the option of co-financing EFRAG via action grants has also to be considered. However, 
the activities  of  EFRAG are highly interdependent. The same  experts  do the pro-active 
work and the tasks related to endorsement advice. Therefore, it seems almost impossible 
to determine which costs should be considered as eligible for financing and which relate 
to activities that would not be the subject of the Community funding. Consequently, it is 
rational to co-finance EFRAG via an operating grant. 

EFRAG,  as  a  possible  eligible  beneficiary  for  an  operating  grant,  complies  with  the 
requirements  laid  down  in  Article  121(1)(b)  of  the  Financial  Regulation69.  This  is  an 
organisation which has an objective forming part of, and supporting, the Union policy in 
the field of financial reporting. 

67  

68  
69  

Since the EU co-funding started in 2010, two new Member States started to contribute (DK and 
DE). An EEA country, NO also joined the contributors. The Member States that are expected to 
start financing EFRAG in the near future: ES, NL and FI. EFRAG took up contact with Poland 
with the aim of starting a national funding mechanism there.  
Funding from Spain, the Netherlands and Finland is envisaged to start in the coming years. 
Regulation (EU, Euratom) No 966/2012 of 25 October 2012 on the financial rules applicable to 
the general budget of the Union 

50 

 
 
                                                 
Since  EFRAG  is  in  a  de  facto  monopoly  position  as  described  in  Article  190  (1)(c) 
RAP70, these grants may be awarded to EFRAG without a call for proposals. 

3.4.9.  Volume  of  appropriation,  human  resources  and  other  administrative 

expenditure 

At  present  the  operating  costs  of  EFRAG  are  financed  from  three  main  sources:  its 
European  member  organisations,  the  national  funding  mechanisms  of  certain  Member 
States  and  the  European  Union.  In  addition,  stakeholders  contribute  in-kind  to  the 
operation of EFRAG by providing the organisation with experts who are on their payroll 
but  who  work  for  EFRAG  part-time  or  full-time.  Occasionally,  EFRAG  receives 
voluntary contributions from stakeholders. 

The current budget of EFRAG is presented in the following table. 

Income Statement 

(in-kind  contributions  are  not 
included)
Members' Contributions 

Year 

2010 

825 

National Funding Mechanisms 

1063 

Voluntary Contributions 

European Commission grant 

Total Contributions 

Personnel costs 

Building 

Travel 

Special events 

Publications 

Meeting costs 

Other costs 

Expenses in kind 

Operating Profit or Loss 

Financial Result 

50 

2252 

5469 

-3135 

-300 

-150 

-20 

-28 

-47 

-213 

-1279 

297 

15 

NET PROFIT or LOSS 
Source: EFRAG annual report 201071 

312 

Year 

2009 

825 

1020 

63 

0 

2407 

-1458 

-217 

-87 

0 

-19 

-44 

-166 

-499 

-83 

19 

231 

70  

Commission  Delegated  Regulation  (EU,  Euratom)  No …/…  of  29.10.2012  on  the  rules  of 
application  of  Regulation  (EU,  Euratom)  No  966/2012  of  the  European  Parliament  and  of  the 
Council on the financial rules applicable to the general budget of the Union 

51 

 
 
 
                                                 
Please note that the above figures are all cash-based accounts, and they exclude the in-
kind  contributions  of  the  stakeholders  and  the  maintained  in-kind  contributions  of  the 
national standard setters. Based on the data received from EFRAG, these are estimated to 
reach approximately €1.3 million  annually. 

The table above shows that apart from the EU grant, EFRAG is dependent on the funding 
received from four large Member States (UK, FR, IT and DE). A discontinuation of the 
EU co-funding may affect as a minimum the perception of its independence and role as 
the ‘European accounting voice’. 

As  the  figures  show  clearly,  the  bulk  of  the  budget  is  spent  on  staff  costs.  Since  these 
depend on the actual pace of recruitment, these figures cannot be set precisely, and thus 
the exact amount of the Union contribution cannot be predicted precisely. 

In  the  2014-2020  period,  the  depth  of  involvement  of  EFRAG's  current  activities72  is 
expected to develop further. In the past years EFRAG has started several new activities in 
order  to  build  closer  relationship  and  contacts  with  European  stakeholders:  outreach 
events, direct outreach private workshops and meetings, field tests, post-implementation 
reviews etc. Most likely, EFRAG will need to invest additional time and effort in those 
activities  so  as  to  fully  share  the  IASB  due  process  and  to  have  a  deeper  and  more 
relevant understanding of issues encountered in practice. From 2012 onwards EFRAG is 
developing an active and broad systematic outreach to users so that the investor and other 
capital  provider  community  can  exercise  an  appropriate  influence  on  EFRAG  TEG 
technical positions. 

In  addition  to  the  existing  activities,  EFRAG  is  planning  to  get  engaged  in  educational 
activities.  Principle-based  standards  create  new  difficulties  in  implementation  and 
understanding  that  may  benefit  from  being  supported  by  some  educational  effort.  The 
ultimate  goal  is  to  respond  to  the  criticism  (mainly  from  the  US)  and  support  the 
consistent application of the standards all over Europe. 

With  a  view  to  consistent  application,  EFRAG  and  ESMA  should  get  engaged  in 
coordinated  activities  which  may  also  require  new  staff  and  some  resources  from 
EFRAG. 

For the sake of independence, EFRAG should also consider start to reimburse travel and 
accommodation costs incurred by TEG and Supervisory Board members associated with 
their attendance at meetings at EFRAG's premises in Brussels. 

Despite the above, taking into account the current context of austerity in public spending 
both at national and EU level, EFRAG's budget, the requested and the proposed EC grant 
reach the following amounts: 

71 

72  

http://www.efrag.org/WebSites/UploadFolder/1/CMS/Files/EFRAG%202010%20ANNUAL%20
REVIEW%2012%20May%202011%20.pdf 
EFRAG  is  engaged  a  wide  range  of  activities,  from  research  activities  to  endorsement  advice 
associated to the development of IFRS, from early-stage influencing through commenting on draft 
standards to field testing. EFRAG is also becoming gradually the natural forum in Europe where 
all forms of accounting or financial reporting issues are being developed. 

52 

 
 
                                                                                                                                                 
Million € 

2013  2014  2015  2016  2017  2018  2019  2020  TOTAL

EFRAG 
expenses 
projections) 

total 
(EFRAG 

EU 
(EFRAG request) 

co-financing  

EU 
(DG 
proposal) 

co-financing 
MARKT 

7.0 

7.5 

7.9 

8.2 

8.4 

8.7 

8.9 

9.0 

65.6 

3.2 

3.5 

3.9 

4.0 

4.1 

4.3 

4.4 

4.4 

28.6 

3.1 

3.162  3.225 3.290 3.356 3.423 3.491  3.561  23.507 

Note:  Minor  deviations  may  be  caused  because  of  the  rounding  up;  for  exact  amounts 
please refer to the Legislative Financial Statement of the draft Regulation 

Volume of appropriation 

Considering  the  additional  tasks  and  activities  that  EFRAG  is  about  to  take  on,  the 
additional  reimbursement  of  costs,  it  is  reasonable  to  expect  a  natural,  incremental 
increase of the organisation. The expected inflation rate is approximately 2%. Therefore, 
it seems rational to calculate with a 5-7% increase in EFRAG's budget annually. 

At the current juncture, taking into account the sovereign debt crisis, it is proposed that 
the current level of funding in real terms is kept with the possibility to increase the co-
financing due course. Any decrease in the funding would be politically detrimental, as it 
would send the wrong message to our international and European counterparts. It would 
endanger EFRAG's standing and role as the single European accounting voice. It could 
also  cause  the  contribution  of  other  funders  decrease,  a  downsizing  in  the  staff  –  and 
ultimately it may jeopardize the functioning of EFRAG and the fulfilment of its public 
interest role.  

It is considered reasonable that the Community intervention contributes approximately € 
3.4  million  on  average  annually,  corresponding  to  somewhat  less  than  50%  of  the 
EFRAG's  projected  total  expenses.  The  current  contribution  of  the  European  member 
organisations  and  national  standard  setters  would  not  be  reduced  –  they  would  be 
maintained or, if possible, increased. Moreover, the proposed EFRAG co-funding would 
be  part  of  a  Community  programme  which  is  intended  to  last  for  seven  years  (2014–
2020) in order to be aligned with the duration of the financial perspectives. As described 
earlier,  it  is  expected  that  this  level  of  Community  funding  would  signal  to  all  parties 
concerned the Community interest in international solutions and encourage other public 
bodies and institutions to increase their contributions to EFRAG. 

Expected impact of community funding 

53 

 
 
 
In  the  coming  years,  EFRAG's  current  3-tier  financing  structure  is  planned  to  be 
maintained:  contributions  from  the  industry  (Member  Organisations),  the  National 
Funding Mechanisms of Member States and the European Commission's grant. 

The main sources of EFRAG financing (expressed in %) in 2012 are illustrated in the pie 
chart  below.  It  is  expected  that  the  share  of  the  various  financing  sources  will  remain 
stable. 

54 

 
 
Sources of EFRAG's financing 2012 

Source: EFRAG data 

Impact on human resources and other administrative expenditure 

Taking into consideration that the envisaged funding would finance operating costs, this 
will entail related administrative work by the European Commission. Since DG MARKT 
already has in place most of the administrative resources for managing such a significant 
amount  of  money  compared  to  our  budget  line,  there  will  be  no  need  for  additional 
specialist financial officers. Additional financial training for existing staff starting to deal 
with  the  file  may  be  envisaged,  which  is  estimated  under  section  1.4.8.  of  the  general 
section of the ex ante evaluation. 

3.5. 

Conclusion 

In view of the above, considering the public interest role that EFRAG plays at present in 
the  endorsement  of  the  international  accounting  standards  the  acquis,  and  as  the  single 
accounting voice of the EU, pro-actively influencing the international standard setter, it is 
rational  and  important  that  this  organisation  is  supported  also  financially  by  European 
public  money  in  carrying  out  its  tasks.  Therefore,  it  is  proposed  to  continue  to  provide 
EFRAG  from  2014  with  a  co-financing  of  on  average  approximately  €3.4  million 
annually  via  operating  grants.  This  would  mean  a  total  amount  of  €23.5  million  in  the 
whole period of 2014-2020. 

The Community contribution inter alia: (i) provides a stable funding that enables EFRAG 
to  carry  out  its  public  interest  activities  (ii)  demonstrate  Community  interest  in 
international solutions, and (iii) incite other public bodies or institutions to provide funds 
to EFRAG. 

55 

 
 
 
 
3.6. 

Follow-Up: Arrangements for Monitoring, Reporting and Evaluation 

In order to make sure that the Community money is spent to the purposes it was targeted 
at and in a cost-effective way, the Commission closely monitors EFRAG's operation by 
participating  in  its  various  bodies  and  by  monitoring  the  fulfilment  of  its  work 
programme. EFRAG’s governance is periodically reviewed (every five years) in order to 
ensure that the organisation is still capable of fulfilling its public interest mission in an 
independent, transparent and an accountable way.  

The  Commission  will  closely  monitor  the  application  and  evaluate  the  impact  of  the 
proposed  funding  to  make  sure  that  the  money  has  been  used  in  accordance  with  the 
principles of economy and cost-effectiveness. To this end, the Commission will: 

•  analyse the EFRAG annual reports; 

•  evaluate the financial statements and the auditor's report; 

•  discuss matters with other fund providers; 

•  use  the  Supervisory  Board  meetings,  in  which  the  Commission  will  be  an 

observer, to discuss and clarify funding issues; 

•  arrange  visits  to  the  EFRAG  premises  when  deemed  necessary  to  verify 

budgetary systems and controls. 

Evaluation should also include the assessment of the quality and efficiency of EFRAG's 
technical work, and should be based on its work programme and the issued documents. 

•  Efficiency  would  be  measured  by  scrutinizing  whether  EFRAG  delivered  the 
documents  (e.g.,  comment  letters,  input  to  the  IASB's  discussion  papers) 
envisaged in its work-programme. 

•  Quality could be measured by delivering the documents on time and possibly by 
examining the percentage of EFRAG's comments taken into consideration by the 
IASB. 

Finally,  in  line  with  current  financial  regulations  and  practices,  the  programme  as  a 
whole will be properly evaluated in order to determine its possible renewal in 2020. 

We  do  not  see  any  feasible  and  appropriate  solution  to  make  the  "common  European 
voice" in accounting well-founded (and funded) without sufficient Community support. 

56 

 
 
3.7. 

Glossary of Acronyms 

EFRAG: European Financial Reporting Advisory Group 

IASB:  International Accounting Standards Board 

IFRIC: Interpretations issued by the IFRS Interpretations Committee 

IFRS Foundation: International Financial Reporting Standards Foundation 

AISBL:  Association  internationale  sans  but  lucratif  (international  not-for  profit 
association) 

PAAinE: Proactive Accounting Activities in Europe 

TEG:  Technical Expert Group of EFRAG 

57 

 
 
Annex: The difference EFRAG made in the financial reporting arena 

It  is  worthwhile  to  examine  whether  EFRAG  makes  a  difference  and  has  effectively 
influenced  the  IASB.  Undeniably,  significant  convergence  is  formed  around  the  positions 
defined by EFRAG. It is difficult to judge to what extent this is due to EFRAG's influence 
or other factors (such as coincidence). However, EFRAG’s views are widely shared as the 
following examples illustrate. 

•  On  the  IAS  37  revision  in  relation  to  the  measurement  of  liabilities,  EFRAG 
questioned  at  an  early  stage  whether  an  expected  value  measurement  technique 
should  be  extended  to  all  liabilities,  including  litigations.    The  IASB  decided  to 
resume its work at a later stage and expose a full redraft of the revised proposals. The 
IASB  is  addressing  when,  and  to  what  extent,  expected  value  measurement 
techniques  should  be  used  and  when  other  measurement  techniques  may  be  more 
appropriate.  

•  The  IASB  no  longer  requires  a  single  statement  of  comprehensive  income  and 
decided not to go ahead with the project acknowledging that a debate on performance 
reporting  is  needed.  When  he  IASB  attempted  to  force  a  single  comprehensive 
income statement as the price to pay for relevance in the Financial Instruments and 
Employee Benefits Projects, EFRAG objected strongly when the IASB attempted to 
force a single comprehensive income statement and advocated that the IASB should 
launch a fundamental debate of what difference there should be between a net income 
and  other  items  of  comprehensive  income  (OCI),  and  whether  elements  of  OCI 
should be recycled. EFRAG identified in its comment letter to the IASB on the IASB 
agenda  consultation  that  enhancing  the  Conceptual  Framework  is  crucial.  In 
enhancing  the  Conceptual  Framework  performance  reporting  including  OCI  should 
be a priority. In the various forms of feedback that the IASB has given to date on the 
agenda  consultation  performance  reporting  including  OCI  is  indeed  identified  as  a 
priority.  

•  The IASB work on derecognition has been limited to disclosures. 

•  The  IASB  has  revised  the  measurement  of  financial  liability  proposals  following 
EFRAG  claiming  that  reflecting  changes  in  own  credit  risk  in  net  income  is  not 
meaningful. 

•  There  are  indications  that  the  EFRAG  recommendations  on  the  reporting  entity  in 
relation to the definition of control and the application of joint control as part of the 
revision of the Conceptual Framework will be followed. 

•  The  IASB  met  EFRAG  concerns  in  relation  to  IAS  12  concerning  the  scope  of  the 
exception  to  the  measurement  principles  which  is  now  limited  to  investment 
properties measured at fair value rather than to all property, plant and equipment and 
intangible measurement using the revaluation model of IAS 16 or IAS 38. 

•  EFRAG’s recommendations in relation to IFRS Interpretation Committee's Rejection 
Notices  have  been  followed.  Following  EFRAG’s  comment  letters  on  put  options 

58 

 
 
written  over non-controlling interests and the calculation of value  in use  under  IAS 
36 impairment of assets the IFRS Interpretation Committee has amended the text of 
the rejection notices. 

•  EFRAG’s  recommendations  in  relation  to  the  amendments  to  IAS  19  have  been 
partly followed in relation to risk sharing features of certain pension plans. EFRAG 
urged the IASB to undertake a comprehensive review of employee benefit accounting 
that deals with defined contribution and defined benefit plans which an employer and 
employees share certain risks. 

• 

In the deliberations on the core projects which the IASB notable the re-deliberations 
of  the  Revenue  Recognition  and  the  Leases  projects  included  all  significant  issues 
EFRAG has raised. The results of EFRAG’s outreach activities were presented to the 
IASB  in  the  public  joint  IASB–EFRAG  meeting  in  June  2011.    Subsequently  the 
IASB  has  decided  to  re-expose  the  Lease  project,  meeting  one  of  EFRAG’s  most 
prominent requests, and the Revenue Recognition project. 

•  On Financial Instruments, in particular on Impairment (need for simplification of the 
model) and the Fair Value Option (exception for inclusion of changes in own credit 
risk in other comprehensive income that would result in an accounting mismatch such 
as would be the case in the specific Danish mortgage bank asset liability management 
model) there are indications that EFRAG recommendations have been followed.  

•  The  IASB  decided  in  the  summer  of  2011  to  defer  the  effective  date  of  IFRS  9, 

meeting EFRAG’s recommendations. 

• 

IASB and FASB have confirmed in spring 2011 that the June 2011 date was a target 
not a deadline. A target date should not take priority over a thorough and robust due 
process. The decisions by the IASB and FASB made to extend the timetable for some 
additional  months  satisfy  recommendations  that  EFRAG  has  been  expressing  in 
various ways and forms since the end of 2010 and gives European stakeholders the 
comfort that their concerns will be properly addressed. 

•  The  IASB  decided  in  autumn  of  2011  to  open  IFRS  9  for  “limited  modifications”. 
The  IASB  and  FASB  have  agreed  to  investigate  opportunities  for  convergence  in 
classification  and  measurement  for  financial  instruments.    EFRAG  expressed  in  its 
comment letter on IFRS 9 concern unequal treatment of bifurcation of derivatives and 
prepared a paper on bifurcation of embedded derivatives for both financial assets and 
financial liabilities. There are indications that the approach suggested by EFRAG will 
be followed. 

•  EFRAG called for the issuance of Review Drafts before finalisation of IFRS in order 
to  give  a  chance  to  constituents  to  assess  whether  their  major  concerns  have  been 
solved  appropriately  and  to  find  whether  there  are  any  implementation  issues  and 
drafting  issues  that  could  be  addressed  before  the  final  standard  is  issued.  In  April 
2011  IASB  announced,  following  EFRAG’s  recommendations,  the  publication  of 
Review  Drafts  for  public,  large  scale,  fatal  flaw  review  where  re-exposure  is  not 
necessary. 

59 

 
 
•  EFRAG and the UK ASB issued in January 2011 a Discussion Paper on Considering 
the effects of Accounting Standards. The IFRS Foundation Due Process Committee 
made  decisions  which  meet  the  EFRAG  recommendations.  The  IASB  agenda 
consultation results show a strong call for evidence based agenda setting. This echoes 
the  comments  made  by  EFRAG  for  fully  developed agenda proposals supported by 
evidence  that  further  development  of  IFRS  is  needed  (improvement  of  an  existing 
standard  is  needed,  or  a  gap  in  financial  reporting  standards  needs  to  be  filled)  and 
that benefits justify the development and implementation efforts. 

• 

IASB’s  involvement  in  EFRAG’s  outreach  activities  across  Europe  has  been 
influential  in  IASB’s  deliberation  on  existing  projects  and  in  shaping  the  IASB’s 
thinking about future projects: 

•  Outreach on financial statement presentation in 2010 
•  Outreach on EDs on Leasing and Revenue Recognition in the first half of 2011 
•  Outreach on  IASB agenda consultation in the second half of 2011 

•  EFRAG’s  input  to  the  IASB  agenda  consultation  and  the  results  of  the  outreach 
activity  can be well recognised in the first feedback on the outcomes of the agenda 
consultation: 

•  Completion of the four current core projects as a priority 
•  Request for a period of calm (stability) 
•  Completing  the  revisions  of  the  Conceptual  Framework,  addressing  performance 

as priority, including the treatment of  OCI (see above) 

•  EFRAG  is  running  several  proactive  projects  that  directly  feeding  into  the  IASB’s 

priorities as identified in the IASB agenda consultation 

•  Need for evidenced based agenda setting (research led approach whereby projects 
will  only  be  added  to  the  standard  setting  phase  when  the  problem  is  properly 
defined  and  identified  solutions  are  feasible,  of  high  quality  and  implementable) 
(see above) 

•  Business  Combinations  under  Common  Control  (EFRAG  issued  a  Discussion 
Paper  in  autumn  2011  in  partnership  with  the  OIC  on  Accounting  for  Business 
Combinations under Common Control).   

•  Framework  for  Notes  to  the  Financial  Statements  (EFRAG  proactive  project  in 
partnership with the ASB and ANC): FASB decided in second half of 2011 to join 
forces  with  EFRAG  on  the  project.    The  IASB  has  now  made  public  statements 
that it is commencing work on this project and is keenly awaiting the output of our 
project. 

•  EFRAG’s  evolving relationship with the FASB in the EFRAG proactive project in 
partnership  with  the  ASB  and  ANC  on    a  Framework  for  Notes  to  the  Financial 
Statements is  a clear recognition of EFRAG’ s standing in the global standard setting 
community.    It  also  represents  another  means  of  influencing  the  development  of 
global financial reporting. 

• 

In  relation  to  the  Questions  and  Answers  issued  as  implementation  guidance  in 
relation to IFRS for SMEs EFRAG expressed concerns about the level of detail, the 
narrow scope of the issues and the number of Q&As the IASB SME Implementation 

60 

 
 
Group is addressing. The IASB has considered its approach and in its February 2012 
Update the IASB SME Implementation Group  announced that it  does not expect to 
issue  many,  if  any,  additional  draft  Q&As  before  the  start  of  the  comprehensive 
review of IFRS for SMEs. 

61 

 
 
4. 

CONTINUATION  OF  THE  EU  CO-FUNDING  OF  THE  PUBLIC  INTEREST 
OVERSIGHT BOARD (PIOB) FOR THE PERIOD 2014-2020 

4.1. 

Background 

Unreliable  financial  reporting  seriously  constrains  investments  or  divestments  on 
financial  markets.  Inefficient  or  underperforming  financial  markets  carries  out  a  heavy 
toll  on  companies  and  other  productive  actors,  having  as  a  result  a  significant  negative 
impact on the whole economy. 

Audit as a public interest activity 

Many decades ago it became mandatory for companies, in many jurisdictions all over the 
world,  to  have  their  financial  statements  audited.  The  purpose  of  an  audit  is  to  give 
reasonable  assurance  to  the  public,  notably  to  shareholders  and  other  investors,  that 
financial statements are free from material misstatements and provide a true and fair view 
of a company’s financial position. 

It  was  also  decided  that  audit  services,  in  spite  of  its  public  interest  nature,  should  be 
provided by private auditors and audit firms and not by public authorities or regulatory 
agencies.  

In  the  EU,  Community  legislation73  requires  a  company’s  financial  statements  to  be 
audited  by  statutory  auditors74  who  should  provide  an  independent  opinion  about  a 
company's  financial  position,  as  reflected  in  the  financial  statements.  This  will  be 
particularly  important  in  the  case  of  auditing  public  interest  entities75  (e.g.  listed 
companies, banks and insurance companies).  

Need for International standards for auditors 

Investors  today  increasingly  invest  or  divest,  directly  or  indirectly  (e.g.  through 
investment  funds),  in  companies  of  all  sizes  (whether  listed  or  not)  incorporated  in 
foreign  jurisdictions  and,  therefore,  regulators,  standard  setters,  issuers,  and  other 
stakeholders  can  no  longer  view  financial  markets  from  an  exclusive  domestic 
perspective.  

Auditing  standards  are  standards  to  be  followed  by  auditors  when  fulfilling  their 
professional  responsibilities  in  the  audit  of  financial  statements  and  related  data. 
International  standards  for  auditors  are  developed  by  independent  committees  of  the 
International Federation of Accountants (IFAC), which is the global, private organization 

73 

74      

Fourth Council Directive 78/660/EEC of 25 July 1978 on the annual accounts of certain types of companies; 
Seventh  Council  Directive  83/349/EEC  of  13  June  1983  on  consolidated  accounts;  Council  Directive 
86/635/EEC  of  8  December  1986  on  the  annual  and  consolidated  accounts  of  banks  and  other  financial 
institutions; Council Directive 91/674/EEC of 19 December 1991 on the annual and consolidated accounts of 
insurance undertakings. 
As defined in Article 2.2 of Directive 2006/43/EC (the 8th  Company Law Directive) 

75      

As defined in Article 2.13 of Directive 2006/43/EC (the 8th  Company Law Directive) 

62 

 
 
                                                 
 
representing the accounting profession. The most relevant IFAC committee is the IAASB 
(the  International  Auditing  and  Assurance  Standards  Board)  which  develops  ISAs 
(International Standards for Auditors).  

Article  26  of  Directive  2006/43/EC  (the  8th  Company  Law  Directive)  foresees  the 
possibility  of  adopting  the  ISAs  in  the  EU  if  developed  and  adopted  with  proper  due 
process, public oversight and transparency subject to a regulatory comitology procedure 
(thus involving Member States and the European Parliament).  

Investors benefit the most from an independent audit opinion when this opinion is based 
on high quality standards. The financial scandals which took place years ago (e.g. Enron 
and WorldCom in the US or Parmalat in Italy) called into question the work of auditors 
and their independence. This created a global movement towards reinforcing oversight of 
auditors  by  public  authorities.  At  international  level  a  reform  of  IFAC  was  deemed 
necessary.  As  part  of  such  reform,  the  Monitoring  Group76  in  co-operation  with  IFAC, 
decided to create the PIOB (Public Interest Oversight Board) to carry out the oversight of 
the standard setting activities of, inter alia, the IAASB77.  

The  main  objective  of  the  PIOB  is  to  ensure  that  IFAC  standard  setting  activities  are 
responsive to the public interest.  

76  

77   

The  Monitoring  Group  (MG)  is  the  international  organization  responsible  for  monitoring  the 
implementation  of  IFAC  Reform.  The  MG  nominates  PIOB  members  and  engages  in  dialogue 
with  the  international  accountancy  profession,  receives  operating  and  financial  reports  from  the 
PIOB,  and  updates  the  PIOB  regarding  significant  events  in  the  regulatory  environment.  The 
current members of the MG are the BCBS, IAIS, IOSCO, the FSB, the IFIAR, the World Bank 
and the European Commission. 
The  PIOB  also  carries  out  the  oversight  of  the  two  other  standard  setting  committees  of  IFAC, 
namely, the International Ethics Standards Board for Accountants (IESBA) and the International 
Accounting  Education  Standards  Board  (IAESB).  These  three  committees  form  part  of  IFAC's 
Public  Interest  Activity  Committees  (PIACs).  Consultative  Advisory  Groups  are  constituted  to 
provide  advice,  including  technical  advice,  to  each  of  the  IAASB,  IAESB  and  IESBA.  Regular 
interaction  between  each  CAG  and  its  respective  standard  setting  board  is  part  of  the  board’s 
formal consultation processes. The PIOB oversees the work of each CAG. 

63 

 
 
                                                 
Source: Third public report of the PIOB, page 10 – May 200878 

In  the  US  the  Sarbanes-Oxley  Act  was  adopted.  At  EU  level  the  8th  Company  Law 
Directive  of  1984  was  modernised  and  expanded  in  2006  (Directive  2006/43/EC)  to 

78  

The PIOB public reports are annual reports published in May of the following year (the latest is 
the 
in 
http://www.ipiob.org/sites/default/files/public_reports/PIOB_Sixth_Public_Report.pdf  

in  May 

published 

public 

report 

found 

2012; 

sixth 

can 

be 

it 

64 

 
 
 
                                                 
require,  among  other  things,  the  creation  of  national  public  oversight  bodies  and  of 
publicly controlled external quality assurance systems for auditors.  

On 30 November 2011 the European Commission adopted new proposals79 in the field of 
auditing  to  take  into  account  the  lessons  learned  in  the  financial  crisis  and  with  the 
objective of increasing audit quality across the board and all over the EU.  

At  world  level  a  new  forum  denominated  IFIAR80  was  created  in  2006  by  national 
independent  auditors'  oversight  bodies  to  exchange  experiences  and  co-ordinate 
activities. 

The European Commission continues fully involved in the works of the IAASB, and to a 
lesser extent in the works of the IESBA, as observer with right to the floor. The European 
Commission is also a member of the IAASB CAG. 

The PIOB started its operations on 1 March 2005. On 15 December 2005 (registered on 8 
February  2006)  a  non-for-profit  Spanish  Foundation  offering  legal  personality  to  the 
PIOB was set up in Madrid. The Foundation is governed by a Board of Trustees in which 
each member of the PIOB is a trustee. The PIOB has been renewed in March 2011 for 
another three-year period.  

The  Monitoring  Group  (MG)  is  responsible  for  the  selection  and  appointment  of  the 
PIOB members, including its Chairman. This is done through the Nominating Committee 
of the Monitoring Group which includes all MG members. The Nominating Committee 
makes  a  collective  decision  to  nominate  not  only  individual  members  of  the  PIOB  but 
also  the  entire  Board  in  order  to  guarantee  that  the  PIOB  as  a  whole  is  appropriately 
qualified  to  complete  its  mission  satisfactorily.  Two81,  out  of  the  ten,  PIOB  members 
were  appointed  by  the  European  Commission  in  February  2008  and  renewed  in  March 
2011. The Nominated Committee is bound by a Memorandum of Understanding (MoU) 
signed by all MG members on 9 April 2008.  

The PIOB has a small full time secretariat made up of the Secretary-General, an assistant 
and two advisors. For the 10 PIOB members, it is a part-time job.  

The diagram below, extracted from the Third PIOB Public Report, provides a mapping of 
the PIOB work in the context of ensuring a strong "international public interest". In this 
representation, the international public interest is ensured all along the on-going flow of 
activities  that  move  through  various  phases  starting  by  a  credible  setting  up  of 
international auditing standards, followed by their adoption, implementation, monitoring 
and  evaluation  in  order  to  enhance  the  confidence  of  the  users  of  accountancy  services 
(e.g. investors) and eventually of the whole financial system. 

79  
80  
81    

See http://ec.europa.eu/internal_market/auditing/reform/index_en.htm  
See https://www.ifiar.org  
Sir Bryan Nicholson and Professor  Kai-Uwe Marten  

65 

 
 
                                                 
                      Source: Third Public Report of the PIOB, page 22 – May 2008 

Main PIOB activities include the following:  

–  Activities related to the implementation and monitoring of due process in the 
development and adoption of international auditing standards issued or under 
preparation by the IAASB; 

–  Activities related to the implementation and monitoring of due process in the 
development  and  adoption  of  other  IFAC  public  interest  activities  such  as 
those in the field of Ethics (IESBA) and Education (IAESB); 

–  Activities  intended  to  ensure  that  due  process  is  followed  in  the  IFAC's 

compliance programme; 

–  Conferences,  workshops  and  other  events  aiming  at  stimulating  debate  or 
raising awareness about international auditing standards among stakeholders;  

66 

 
 
 
 
–  Running of its Secretariat, including the remuneration of its members and the 

organisation of their missions.  

As  summarised  by  its  Chairman;  "The  PIOB  pays  special  attention  to  how  the 
procedures  and  deliberations  in  the  PIACs  reflect  the  public  interest,  by  ensuring 
that an open and free debate takes place, that all opinions are heard, and that the 
arguments put on the table in the consultations, especially in the CAGs, are taken 
into account. Apart from an overall check, these steps ensure that the standards as 
finally adopted reflect the public interest, embodied in the diversity of opinions as 
expressed in the standard-setting process"82. 

4.2. 

Problem definition 

To  guarantee  that  the  standard  setting  process  in  IFAC  is  responsive  to  the  public 
interest, it is subject to the independent oversight of a public body (the PIOB).  

This  standard  setting  model  is  supposed  to  profit  from  both:  (i)  the  knowledge  and 
experience  of  the  standard  setting  committees  of  IFAC  and  (ii)  a  public  oversight 
designed to ensure that public interest is safeguarded all around the process comprising 
the proposal, development and adoption of international standards for auditors.  

However, and because of the private character of IFAC, the Monitoring Group members 
considered important from the very beginning to make sure that the governance rules of 
the  new  standard  setting  arrangement,  including  the  funding  of  the  PIOB,  should  be 
sound  and  effective  to  ensure  acceptance  and  wide  applicability  of  the  international 
auditing standards. 

Specifically, given the particular mandate of the PIOB, it is considered essential to ensure 
its  financial  independence  and  to  avoid,  in  particular,  any  real  or  perceived  risk  of 
conflict of interests with the audit profession.  

PIOB Funding diversification  

Funding contributions to the PIOB were, therefore, expected to come from a variety of 
stakeholders  from  all  over  the  world  but  primarily  from  the  other  members  of  the 
Monitoring Group. However, the usual difficulties associated to international co-funding 
arrangements  have  been  exacerbated  in  recent times  by  the  financial  restrictions  facing 
all  international  bodies  and  institutions  due  to  the  negative  prevailing  financial  and 
economic  climate.  As  a  result,  at  present,  only  IFAC  and  the  EU  have  a  co-finance 
programme for the PIOB 

On the basis of EU financing Decision of 16 September 2009, the EU contribution to the 
PIOB in 2010 fiscal year was €286.231. Such an amount represented 22% of the PIOB's 
total eligible expenses (€1.301.050) . The EU contribution to the PIOB in 2011 fiscal year 

82  

PIOB 7th Public Report, May 2012, page 3 

67 

 
 
 
 
                                                 
was €288.991,78, which also represents 22% of the  PIOB eligible expenses for that year 
(€1.313.599). 

The EU financing Decision, and in particular Article 9.4, requires that the PIOB should 
not continue to benefit from Community funds if, after the first 2 years thereof they have 
not made significant  progress  towards ensuring neutral (i.e. independent from the audit 
profession) ,funding arrangements form a majority of their total funding, including from 
third-country  participants.  The  Decision  also  requires  the  Commission  to  report  to  the 
European Parliament and the Council on such progress. 

In  a  letter  sent  by  Commissioner  Michel  Barnier  on  22  July  2011  to  the  European 
Parliament  (Ms  Sharon  Bowles,  Chairperson  of  the  ECON  Committee)  and  to  the 
Council  (Mr  Jan  Vincent  Rostowski,  Polish  Minister  of  Finance)  it  is  explained  the 
Commission  experience  in  PIOB  funding  and  the  progress  made  in  involving  other 
relevant parties:   

It is indicated, in particular, the PIOB co-funding experience by the EU has been up to 
now  positive.  The  European  Commission  has  had  the  opportunity  to  visit  the  PIOB 
premises twice (March 2010 and April 2011) and to verify their financial controls.  The 
European  Commission  also  trained  its  staff  on  EU  budgetary  procedures.  From  a 
practical point of view the activities involved in the management of the operating grant 
for the 2010 and 2011 fiscal years have been a very useful learning experience for both 
sides.  This  has  paved  the  way  for  a  straight  and  more  efficient  management  of  future 
funding contributions.  

The  EU  co-financing  of  the  PIOB  has  become  an  example  for  other  potential 
contributors. As a result, several international institutions are expected to provide funds 
to  the  POIB  already  for  the  2013  fiscal  year83.  Moreover,  the  Monitoring  Group,  the 
PIOB and IFAC have created a Task Force to select and convince a group of donors from 
all over the world to provide funding to the PIOB on a stable and long-term basis. 

The new Monitoring Group chairman, Ethiopis Tafara, has also pledged to continue and 
reinforce the PIOB diversification funding efforts. In view of this there should not be any 
obstacle  for  the  continuation  of  the  EU  contribution  to  the  PIOB  funding  all  over  the 
2010-2013 funding programme. 

Linking  public  oversight  with  independent  funding  is  a  traditional  policy  measure  also 
enshrined in Community legislation. For instance, Article 32(7) of the 8th Company Law 
Directive  when  referring  to  the  principles  of  public  oversight  in  the  field  of  auditing 
stipulates  that:  "The  system  of  public  oversight  shall  be  adequately  funded.  The 
funding…shall  be  secure  and  free  from  any  undue  influence  by  statutory  auditors  and 
audit  firms".  The  same  principles  are  repeated  in  the  same  Directive  in  Article  29.1(c) 
and  (b)  when  referring  to  external  quality  assurance  systems  and  they  are  further 

83  

Indeed, the EU contribution to the PIOB is inciting other stakeholders to provide funding as well.  
It has been reported that several organisations such as IOSCO and the BIS are ready to provide 
sizable funds to the PIOB for the 2013 fiscal year. 

68 

 
 
                                                 
developed  in  Articles  8  and  9  of  the  2008  Commission  Recommendation  on  Quality 
Assurance84.  

An  independent  PIOB,  in  view  of  its  special  mandate,  will  be  uniquely  positioned  to 
ensure that due process, oversight and transparency have been respected in the proposal, 
development and adoption of the international standards for auditors. 

4.3. 

Objectives 

The  main  strategic  and  operational  objectives expected  to  be  achieved  by  the  proposed 
funding arrangement for the PIOB are the following: 

4.3.1. 

Strategic objective 

The strategic objective is to ensure a stable, diversified, sound and adequate funding to 
enable the PIOB to carry out its public interest mission in an independent, efficient and 
satisfactory way. 

It is widely accepted that the best way to achieve independent funding for the PIOB, or 
similar  bodies,  is  to  have  a  well-diversified  array  of  contributors  mainly  from  public 
sources  at  global  level  which  will  reduce,  accordingly,  the  current  IFAC  contribution. 
This  is  also  the  desire  from  the  beginning  of  the  PIOB  which  indicates  that:  "in  the 
opinion  of  the  PIOB…it  is  in  the  public  interest  –  both  real  and  perceived-  that  the 
current funding arrangements be diversified and expanded…"85. 

4.3.2.  Operational objectives 

4.3.2.1.  Avoid  excessive  reliance  of  the  PIOB  on  voluntary  funding  from  interested 

parties thus ensuring credibility and independence of its work 

The  key  objective  is  to  avoid  any  real  or  perceived  risk  of  conflict  of  interest 
with other parties and in particular with IFAC. 

4.3.2.2.  In  addition  to  the  above,  boost  the  international  reputation,  attractiveness  and 

acceptance of the standards  

Because  of  the  private  character  of  IFAC,  the  Monitoring  Group  members  considered 
important  from  the  very  beginning  to  make  sure  that  the  governance  rules  of  the  new 
standard  setting  arrangement,  including  the  funding  of  the  PIOB,  should  be  sound  and 
effective  to  ensure  acceptance  and  wide  applicability  of  the  international  auditing 
standards. 

84     

85    

Commission  Recommendation  2008/362/EC  of  6  May  2008  on  external  quality  assurance  for 
statutory auditors and audit firms auditing public interest entities 
Page 5 of the First Annual Public Report of the PIOB – May 2006 

69 

 
 
 
                                                 
4.3.2.3.   Achieve  the  above  objectives  within  a  reasonable  period  of  time  considering 

both the EU and international context  

The  last  operational  objective  is  to  achieve  the  above  objectives  within  a 
reasonable  period  of  time.  Whereas  the  IFAC  contribution  has  always  been 
considered a good solution for the short term, or as a transitory situation, there 
is a consensus in the Monitoring Group that a diversified and stable funding for 
the PIOB is the only reasonable way forward. 

4.4. 

Policy options 

The  following  two  options  have  been  considered  with  a  view  to  compare  how  the 
objectives identified in chapter 3 are fulfilled and whether they constitute good value for 
money. 

4.4.1.  Option 1: Baseline scenario: Discontinuing the EU co-financing (i.e. no action) 

Under this scenario the EU will not provide further funding one the current programme 
expires on 31 December 2013. This implies that we will return to the pre-2010 situation. 
IFAC,  representing  auditors  and  accountants  from  all  over  the  world,  will  continue 
providing most of the funds to the PIOB.  

Such  an  approach  clearly  risks  damaging  the  image  of  the  PIOB.  Moreover,  the  heavy 
reliance  on  a  single  contributor  should  always  be  considered  more  risky  than  funding 
coming from a more diversified basis.  

4.4.2.  Option 2: Continuing the Grant Programme 

Under this scenario the EU will update and extend the current programme for the period 
2014-2020 building on the lesson and experiences learned up to now in our co-funding of 
the PIOB.  

From  a  global  perspective,  a  contribution  from  the  Commission  will  also  incite  other 
institutions, and in particular those represented in the Monitoring Group, to provide a fair 
portion of public funding to the PIOB. 

Such  support  to  the  PIOB  funding  will  signal  to  other  international  actors  that  the 
European  Union  is  engaged  in  finding  global  solutions  for  the  benefit  of  all  parties 
concerned.  

4.4.3.  Comparison of options 

The matrix below is used to compare the relative merits of two competing options based 
on a qualitative assessment as reliable data are not available.  

One should consider as a first priority the need to achieve the objectives set out for the 
PIOB,  as  this  is  the  most  crucial  issue  at  the  moment  (avoid  reliance  on  voluntary 
funding from interested parties, boost attractiveness and acceptance of ISAs).  

70 

 
 
 
A second priority should be the criteria of feasibility (from a legal and or political point 
of view). The fact that the PIOB is an international, not-for-profit organisation in charge 
of  the  oversight  of  an  international  standard  setter  may  entail  a  certain  degree  of 
complexity to the analysis.  

A third priority should be the time needed for implementation 

A fourth priority should be the implications for the EU budget. 

71 

 
 
ASSESSME
NT 

2. 
Feasibility 

1. 
Achievemen
t 
of 
objectives 

Time 
for 

3. 
needed 
implementa
tion 

4. 
Implication 
for 
EU 
budget 

Overall 
Assessment 

High (+++) 

Medium 
(+/-) 

Low (- - -) 

Straightfor
ward (+++) 

Medium 
(+/-) 

Complex (- - 
-) 

High (+++) 

Positive  

Medium 
(+/-) 

Low (- - -) 

(+ to +++) 

Negative  

(- to - - - ) 

Positive  

(+ to +++) 

Negative  

(- to - - - ) 

_ _ _ 

+ + + 

+++ 

+ + + 

-- -- -- 

+/-- 

--- 

+++ 

+ /-- 

       +++ 

OPTIONS 

Option 1 

Baseline 
scenario: 
Discontinui
ng  the  EU 
co-financing 
(no action) 

Option 2 

Continuing 
the  Grant 
Programme 

72 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comparing the two cases:  

Option 2 is, on the whole, clearly superior to option 1:  
– 

it would preserve PIOB's operational independence from the audit profession by ensuring 
that a significant portion of its funding comes from public sources, 

– 

– 

– 

it  enhances  the  European  stance  in  international  bodies  and  in  particular  in  those 
responsible for monitoring and setting up international standards, 

it would signal to all parties concerned the Community interest in international solutions 
and encourage other public bodies and institutions to provide funds to the PIOB,  

it  would  enhance  the  reputation  of  the  PIOB  by  international  standard  users,  securities 
issuers and investors, 

In  summary  then,  in  terms  of  the  pursued  public  interest  objectives,  the  continuation  of 
Community  co-funding  of  the  PIOB,  via  the  European  Commission,  clearly  represents  the 
less risky solution and would yield the most positive returns.  

4.4.4.  Method of implementation for the selected option 

As a general rule, financial support from the Community budget could be provided either (i) 
by contributing to the overall budget of the body (via operating grants) or (ii) by co-financing 
specific targeted activities of the body (via action grants).  

Concerning publicity rules, the possibility of providing a grant following a call for proposal 
should be excluded from the outset since the beneficiary (the PIOB) is in a situation of legal 
monopoly in accordance with Article 190 (1)(c) RAP86. 

In  view  of  the  public  policy  objectives  and  the  type  of  beneficiary,  it  is  considered  that  a 
direct  financial  contribution  from  the  EU  budget  by  way  of  an  operating  grant,  as  it  was 
already the case in the EU 2010-2013 PIOB funding Programme, constitutes the best solution 
to address the proposed funding.  

Indeed  the  choice  to  provide  an  operating  grant  to  the  PIOB  seems  the  most  appropriate 
because:  

•  Whereas  some  organisations  work  on  an  activity-based  budgeting  (ABB)  system,  the 
PIOB, given its size and mandate, operates on a cash budget basis which is not conceived 
for the monitoring of the implementation of specific activities; 

•  Unlike a grant for action, which helps to co-finance a one-off action over a given period 
of time, an operating grant allows co-financing of the whole institution's functioning from 
a much broader perspective. 

•  It will ensure continuity to the current 2010-2013 PIOB funding Programme. 

Regarding  the  PIOB  as  a  possible  eligible  beneficiary,  it  continues  complying  with  the 
requirements  laid  down  in  Article  121(1)(b)  of  the  Financial  Regulation87.  This  is  an 

86  

Commission Delegated Regulation (EU, Euratom) No …/… of 29.10.2012 on the rules of application 
of  Regulation  (EU,  Euratom)  No  966/2012  of  the  European  Parliament  and  of  the  Council  on  the 
financial rules applicable to the general budget of the Union 

73 

 
 
                                                 
organisation which has an objective forming part of, and supporting, the Union policy in the 
field of auditing and is a non-profit organisation (legally speaking has been authorised and is 
regulated as a Spanish not-for-profit foundation). 

Volume  of  appropriations,  human  resources  and  other  administrative 
expenditure 

At present the operating costs of the PIOB are covered primarily by IFAC and the EU. 

IFAC has committed to fund the operating expenses of the PIOB up to a limit of €1.317.000 
per  year.  The  EU,  under  the  2010-2013  Programme  has  committed  to  provide  up  to  a 
maximum of €300.000 per year. 

The amount of money provided by the EU fully replaces the amount of money otherwise to be 
provided IFAC. 

In the table below are indicated the amounts of the key components of the PIPOB expenses in 
the most recent years: 

 PIOB Expenses by activity 

                              (in euro) 

Year 

2011 

Year 

2010 

Board-related operating costs 

            Oversight Programme 

671.374 

666.408 

            External relations Program 

149.496 

320.291 

            Monitoring Group 

157.428 

       --- 

            Foundation Board Meetings 

122.585 

107.697 

            Other on-going operating costs 

216.052 

210.027 

Total Expenses  

1.316.934 

1.304.423 

      Source: PIOB 2011 Annual Accounts 

Whereas  some  expenses  are  fixed  or  highly  predictable  (e.g.  the  members'  remuneration), 
other parts of the PIOB budget have far greater variability which cannot be fully predicted or 
confidently priced in advance. These concern notably: 

•  The inflation which affects almost every budget category; 

87  

Regulation  (EU,  Euratom)  No  966/2012  of  25  October  2012  on  the  financial  rules  applicable  to  the 
general budget of the Union 

74 

 
 
 
 
  
 
 
 
 
                                                                                                                                                         
•  The variability of certain categories of costs (e.g. the total travel needs are difficult to 
foresee)  due  in  particular  to  the  volatility  of  the  Euro/United  States  Dollars  (USD) 
exchange rate and the geographical origin of the future PIOB members 

•  The outcome of the public consultations88 launched by the Monitoring Group and the 
PIOB on 28 March 2012 which may entail further responsibilities for the PIOB. 

In order to determine a precise volume of the Community contribution several considerations 
have to be taken into account. In particular: 

•  The amount to be proposed has to be proportionate to the pursued objectives, 
•  The  EU  weight  in  international  affairs  has  to  be  fairly  respected  (this  is  often  
measured either by its geographical weight, wealth share, share of global economy,  or 
share of international capital markets what makes a proportion between 1/4th and 1/3rd 
of the total), 

•  The possible PIOB budget fluctuations due to inflation or new responsibilities 
•  The experience accumulated up to now in the 2010-2013 Programme 

In view of the above, it is proposed to keep the same level of co-financing as in the previous 
programme  (300.000  Euros  per  year)  adjusted  by  a  reasonable  expected  annual  rate  of 
inflation  (2%)  from  2014  onwards.  We  also  took  into  account  the  EU  weight  in  the 
international financial and economic systems which imply a level of co-financing around 22% 
of total eligible expenses, what is similar to the previous programme. This represents a base 
funding  of  306.000  Euros  in  2014  and  a  total  for  the  seven  year  programme  of  2.274.891 
Euros. 

The proposed EU funding would reduce accordingly, by the same amount, the potential IFAC 
contribution.  

Whereas the proposed EU funding would still leave IFAC providing more than half of total 
funding,  it  is  expected  that  such  a  level  of  Community  commitment  would  encourage,  as 
indicated earlier, other public bodies and institutions to provide stable funds to the PIOB to 
the point where IFAC contribution is not so relevant. 

Finally,  in  terms  of  workload  implications,  the  proposed  funding  will  certainly  continue 
implying  some  related  administrative  work  in  the  relevant  services  of  the  European 
Commission. 

4.5. 

Conclusion 

In  view  of  the  above  and  in  order  to  ensure  both  the  PIOB  credibility  and  its  key  role  in 
enhancing  audit  quality,  it  is  considered  important  for  the  Community  to  continue 
contributing fairly to the funding of the PIOB and reduce accordingly the IFAC contribution. 

Specifically, it is proposed to provide the PIOB, starting in 2014, the sum of 306.000 Euros, 
updated by an annual inflation rate of 2%, making a total contribution of 2.274.891 Euros for 
the whole 2014-2020 period. 

88  

See http://ec.europa.eu/internal_market/auditing/news/index_en.htm  

75 

 
 
 
                                                 
The Community contribution will, among other things: (i) demonstrate Community interest in 
international  solutions,  and  (ii)  incite  other  public  bodies  or  institutions  to  provide  stable 
funding to the PIOB.  

76 

 
 
4.6. 

Follow-up: Arrangements for monitoring, reporting and evaluation 

The Commission will closely monitor the application and evaluate the impact of the proposed 
funding  to  make  sure  that  the  money  has  been  used  in  accordance  with  the  principles  of 
economy and cost-effectiveness. To this end, the Commission will: 

•  Analyse the PIOB (annual) Public Reports 

•  Evaluate the PIOB Financial Statements and the Auditor's Report  

•  Discuss matters with other possible fund providers 

•  Use the Monitoring Group meetings, where the Commission is a member, to discuss 

and clarify funding issues 

•  Arrange  visits  to  the  PIOB  premises  when  deemed  necessary  to  verify  financial 

systems and controls 

Finally, in line with current financial regulations and practices, the programme as a whole will 
be properly evaluated in 2019 in order to determine its possible renewal. 

77 

 
 
GLOSSARY  

Basel  Committee  on  Banking  Supervision  (BCBS):  the  international  body  comprised  of 
central  banks  and  banking  supervisory  authorities  from  certain  key  markets  that  formulates 
and encourages convergence towards broad supervisory standards, guidelines and statements 
of best practice. 

Consultative  Advisory  Group  (CAG):  the  group  constituted  to  provide  advice,  including 
technical advice, to each of the IAASB, IAESB and IESBA. Regular interaction between each 
CAG  and  its  respective  standard  setting  board  is  part  of  the  board’s  formal  consultation 
processes. The PIOB oversees the work of each CAG. 

Financial  Stability  Board  (FSB):  The  FSB  has  been  established  to  coordinate  at  the 
international level the work of national financial authorities and international standard setting 
bodies  and  to  develop  and  promote  the  implementation  of  effective  regulatory,  supervisory 
and  other  financial  sector  policies  in  the  interest  of  financial  stability.  It  brings  together 
national  authorities  responsible  for  financial  stability  in  24  countries  and  jurisdictions, 
international  financial  institutions,  sector-specific  international  groupings  of  regulators  and 
supervisors, and committees of central bank experts.  

International  Auditing  and  Assurance  Standards  Board  (IAASB):  the  independent 
standard setting board that develops international standards and other pronouncements dealing 
with  auditing,  review,  other  assurance,  quality  control  and  related  services.  The  PIOB 
oversees the work of the IAASB. 

International  Association  of  Insurance  Supervisors  (IAIS):  the  global  organization  that 
represents insurance regulators and supervisors, issues global insurance principles, standards 
and guidance papers, provides training and support on related issues, and promotes effective 
insurance supervisory regimes. 

International Accounting Education Standards Board (IAESB): the independent standard 
setting  board  that  develops  international  standards  and  other  pronouncements  dealing  with 
education, practical experience and tests of professional competence for accreditation, and the 
nature  and  extent  of  continuing  professional  education  for  professional  accountants.  The 
PIOB oversees the work of the IAESB. 

International  Ethics  Standards  Board  for  Accountants  (IESBA):  the  international 
standard  setting  board  that  develops  ethical  standards  and  other  pronouncements  for  use  by 
professional accountants. The PIOB oversees the work of the IESBA. 

International Federation of Accountants (IFAC): the global organization representing the 
accountancy  profession.  IFAC  is  committed  to  protecting  the  public  interest  by  developing 
high  quality  international  standards,  promoting  strong  ethical  values,  encouraging  quality 
practice,  and  supporting  the  development  of  all  sectors  of  the  profession  around  the  world. 
The IAASB, IAESB and IESBA are three of IFAC´s independent standard setting boards.  

IFAC Reform: the introduction in 2003 of processes for oversight and monitoring designed 
to  strengthen  IFAC  international  standard  setting,  achieve  convergence  to  international 

78 

 
 
 
standards and ensure that the international accountancy profession is responsive to the public 
interest. 

International Forum of Independent Audit Regulators (IFIAR): a forum of national audit 
regulators  from  several  jurisdictions  that  conduct  inspections  of  auditors  and  audit  firms. 
Among  its  objectives  are  the  sharing  of  knowledge  and  practical  experience,  promotion  of 
collaboration and consistency in regulatory activity and engagement with other organizations 
with an interest in audit quality. 

International  Organization  of  Securities  Commissions  (IOSCO):  the  cooperative  forum 
for securities regulatory agencies and international standard setter for securities markets. 

Monitoring  Group  (MG):  the  regulatory  and  international  organizations  responsible  for 
monitoring  the  implementation  of  IFAC  Reform.  The  MG  nominates  PIOB  members  and 
engages  in  dialogue  with  the  international  accountancy  profession,  receives  operating  and 
financial  reports  from  the  PIOB,  and  updates  the  PIOB  regarding  significant  events  in  the 
regulatory  environment.  Members  of  the  MG  are  the  BCBS,  IAIS,  IOSCO,  the  FSB,  the 
IFIAR, the World Bank and the European Commission.  

79