European investment funds failing to reap benefits of IFRS
London, 8 February 2010: Despite the G20’s call for the setting up of high-quality global accounting standards, there is little evidence that International Financial Reporting Standards (IFRS) are being embraced by the European investment fund industry and its supervisors, finds a new Ernst & Young survey.
The poll of leading fund managers, administrators and supervisors in 44 European countries found that just a fifth of the funds and administrators who currently have the option to apply IFRS do so. A further 22% of managers and administrators choose to use a combination of IFRS and other accounting standards, such as local Generally Agreed Accounting Principles (GAAP) or United States GAAP. And despite the low take-up of IFRS across Europe, the research found that 48% of managers and administrators believe that conversion had significantly improved the quality of financial reporting.
Joost Hendriks, Ernst & Young’s Assurance Asset Management Leader for Europe, Middle East, India and Africa believes that a reporting standard which combines US GAAP and IFRS seems the “most logical solution” for the industry. He explains: “Specific rules for investment funds within IFRS like those enjoyed under US GAAP would be the most desirable. However, even without such benefits, European investment funds are losing out by not adopting IFRS. Yes, there will be some pain for managers around implementation and costs during transition, but the rewards will result in standardized financial reporting and cost efficiencies, which will benefit the industry and its key stakeholders.”
Hurdles ahead
The survey found that almost three quarters of managers and administrators polled believe that IFRS will eventually become the European accounting standard for investment funds, but only 17% believe it will be mandated in the near future. Nearly four fifths of local supervisors polled anticipate that the use of alternative GAAP will continue for some time.
Hendriks believes that some major hurdles need to be addressed before the harmonization of financial reporting for funds in Europe will be achieved: “First, a European Directive is needed to change local reporting regulations to mandatory IFRS reporting. Secondly, a convergence between IFRS and US GAAP is desirable, specifically the incorporation of the investment fund accounting guidance which already exists in US GAAP. This basis of accounts preparation is favored by the managers and administrators as it provides specific investment fund disclosures and exempts funds from disclosing other information, which they do not believe is relevant to investment funds.”
Current state of play
Currently, the European Commission allows member states to decide whether to mandate IFRS for regulated funds and there appears to be no desire to force such funds to adopt IFRS.
Significant steps towards a harmonized regulatory regime were made with the introduction of the European Passport for funds that have signed up to the Undertaking for Collective Investment in Transferable Securities IV (UCITS IV) Directive. But similar advancements have not been achieved in financial reporting for investment funds in the European Union. Although the UCITS IV Directive highlights the importance of annual reports and explicitly states that UCITS funds must prepare annual reports, it does not specify any particular set of accounting standards or convention, such as IFRS.
According to Hendriks: “Industry trade organizations may be reticent to push for IFRS, but in the spirit of transparency it is clear that the industry should take advantage of the standards as the European Commission compels the industry towards greater harmonization and clearer reporting through Directives such as UCITS, the Markets in Financial Instruments Directive (MiFID) and the Alternative Investment Fund Manager Directive.
“Investment funds look for harmonization across products, regulations and internal structures, yet this does not currently extend to their financial reporting. This, and IFRS in particular, seems to be a logical next step on the road to harmonization.”
Hendriks hopes that the survey findings encourage trade bodies, the International Accounting Standards Board, supervisors and regulators to engage in a constructive dialogue to address accounting matters for investment funds. “It will lead to high-quality financial information that will meet the needs of the various users and higher efficiencies for managers. These are laudable goals,” he concludes.
About the survey
The survey polled 56 European fund managers and administrators with assets under management of €4 trillion, 26 local supervisors and 44 Ernst & Young asset management assurance partners for their views on the application of IFRS in the European investment fund community.
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