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TECH 48/05: ICAEW Comment on CEBS Consultation Paper on Financial Reporting

Introduction

The Institute of Chartered Accountants in England & Wales (ICAEW), the largest accountancy body in Europe with over 126,000 members, submitted a memorandum of comment in July 2005 in response to the CEBS Consultation Paper on Financial Reporting (CP 06). The ICAEW operates under a Royal Charter and is committed to working in the public interest. The comment focuses on the alignment of CP 06 with IFRS and the appropriate role of CEBS in financial reporting.

General Comments

• Clarity of Guidance Status: The ICAEW is concerned about the unclear status of the proposed guidance in CP 06. It emphasizes that the guidance should be intended for central banks and supervisors, not for banks themselves, regarding the information they receive under IFRS.

• Relationship with CP 04: There is a need for clarification regarding the relationship between CP 06 (financial reporting) and CP 04 (solvency reporting). The ICAEW is worried that CP 06 may overstep CEBS's responsibilities by interpreting IFRS, which is not appropriate for the CEBS.

• Appropriateness of CP 06: The ICAEW believes that CP 06 is not IFRS compliant. It argues that the framework proposed is more prescriptive and detailed than IFRS, which may conflict with the principles-based approach of IFRS.

Responses to Questions

Q1: IFRS Consistency

• The ICAEW does not agree that the reporting framework in CP 06 is consistent with IFRS.
• They argue that while CP 06 provides a basis for meeting IFRS requirements, it introduces excessive detail and prescriptive elements that are not in line with the principles of IFRS.
• This could lead to confusion for users of financial statements and undermine the objective of providing a "true and fair view."

Q2: Appropriateness of Common Practice (CP)

• The ICAEW supports the development of a single set of high-quality global financial reporting standards.
• They are concerned that CEBS issuing interpretations of IFRS may undermine the authority of IFRIC and the IASB.
• Only interpretations issued by IFRIC have formal status, and the ICAEW believes that CEBS should not engage in such activity.
• They support a risk-based approach to regulation and warn that excessive convergence could lead to a loss of this approach.

Q3: Availability of Data

• The ICAEW notes that the data required by CP 06 may not be readily available in all reporting entities.
• The framework requires more detailed disclosures than the IASB's financial reporting framework, which could necessitate costly system changes or the use of secondary IT systems.
• This may compromise the accuracy and reliability of the data provided.

Q4: Steps for Convergence

• The ICAEW suggests that CEBS should focus on solvency reporting rather than financial reporting.
• If general purpose financial reporting lacks consistency or detail, supervisors should request additional information through solvency reporting mechanisms, not by requiring it in financial reporting.
• This approach would avoid unnecessary complexity and maintain the integrity of IFRS.

Q5: Appropriateness of Annex 2 Guidance

• The ICAEW finds that Annex 2 provides limited guidance on the extensive list of disclosures in Annex 1.
• They believe that Annex 1 should be viewed as an example of the types of disclosures that may be requested by supervisors for solvency reporting, not as a mandatory checklist for all banks across all jurisdictions.
• They have no further comments on the first chapter of the explanatory guidance.

Key Information

• ICAEW's Position: The ICAEW supports IFRS but is critical of CP 06 for being inconsistent with IFRS and overstepping CEBS's responsibilities.
• Concerns: The ICAEW is worried about the prescriptive nature of CP 06, the potential for confusion due to excessive detail, and the risk of undermining the authority of IFRIC and the IASB.
• Recommendations: CEBS should focus on solvency reporting and avoid issuing interpretations of IFRS. Financial reporting should remain principles-based to ensure a "true and fair view."

Conclusion

The ICAEW's comment highlights the need for clarity in the role of CEBS and the importance of maintaining the principles-based approach of IFRS. They advocate for a separation between regulatory reporting and general purpose financial reporting, emphasizing that regulatory requirements should not restrict the flexibility of IFRS for broader financial reporting purposes.