Annexes to COM(2014)396 - Progress achieved in the implementation of the reform of EFRAG (European Financial Reporting Advisory Group) following the recommendation provided in the Maystadt report

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dossier COM(2014)396 - Progress achieved in the implementation of the reform of EFRAG (European Financial Reporting Advisory Group) following the ...
document COM(2014)396 EN
date July  2, 2014
agreement that the NSS of the four largest Member States will always be represented).

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

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

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

Technical Expert Group (TEG)

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

Impact assessments

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

Consultative Forum of Standard Setters (CFSS)

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

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

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

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

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

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

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

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

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

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

4            Progress in implementing the reforms

4.1       Progress achieved to date

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

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

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

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

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

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

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

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

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

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

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

- Tasks of the General Assembly.

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

- Profile and criteria of the Board.

- Role of the President of the Board.

- Responsibilities of the Board.

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

- Responsibilities of EFRAG TEG.

- Profile and criteria for the membership of EFRAG TEG.

4.2       Departures from Mr Maystadt’s recommendations

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

Composition of the new Board

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

Decision-making in the Board

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

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

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

4.3       Prospective timetable

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

5            Conclusions

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

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

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

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

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

[2] OJ L 105/1, 8.04.2014

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

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

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

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

[7] European Financial Reporting Advisory Group

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

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

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

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

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