Progress towards the goal of a global set of international financial reporting standards has been steady. Since 2001, more than 100 countries have required or permitted the use of International Financial Reporting Standards (IFRS), while the remaining major economies have established timelines for convergence with, or adoption of IFRS.

In 2006, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) agreed a Memorandum of Understanding (MoU) that described a programme to achieve improvements in accounting standards and substantial convergence between IFRS and US Generally Accepted Accounting Principles (GAAP).

The MoU was updated in 2008 and in November 2009 the two boards issued a further statement outlining steps for completing their convergence work by 2011.

The advantages of IFRS are well documented by the standard setters and include:

  • IFRS is a “global financial reporting” standard that enables an entity to be understood in a global marketplace. This helps in accessing world capital markets and promoting new business. It allows an entity to be perceived as an international player and for disclosures to be easily understood by investors.
  • A consistent financial reporting basis would allow a multi-national company to apply common accounting standards to its subsidiaries worldwide, which would improve internal communications, the quality of reporting and group decision-making.
  • In increasingly competitive markets, IFRS allows an entity to benchmark itself against its peers throughout the world and allows investors and others to compare the company’s performance with competitors globally.

Europe All listed EU companies have been required to use IFRS since 2005. 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 harmonised regulatory regime were made with the introduction of the European Passport under the 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.

United Kingdom and Ireland The Accounting Standards Board (ASB) in the United Kingdom has been a key promoter of IFRS. In March 2005, the ASB proposed to bring UK standards into line with IFRS using a phased approach, bringing a number of standards on related topics into effect each year over a three to four year period. This has resulted in Financial Reporting Standards being issued that are aligned to IFRS such as FRS 25 and FRS26 (IAS 32 and IAS39). These standards also apply to Irish entities, including investment funds as Irish GAAP is fully aligned to the standards issued by the ASB.

  • In its latest consultation paper, the ASB seeks views on its intention to work under the IASB framework and to converge to the fullest extent possible with IFRS, in a way that is consistent with the needs of UK and Irish entities. A potential result would see current UK GAAP ceasing to exist, replaced by three tiers. Tier 1 includes entities that are “Publicly Accountable” and would be subject to full IFRS reporting, Tier 2 would be IFRS for SMEs, and Tier 3 would include a Financial Reporting Standard for Smaller Entities (FRSSE). Over 150 submissions have been made to the ASB from interested parties across the industry. In the current draft, an investment entity would be considered a publicly accountable body and would therefore require full IFRS reporting. The Irish Funds Industry Association (“IFIA”) have proposed a separate IFRS for Investment Companies which would be similar in nature to the current Statement of Recommended Practice (“SORP”) issued by the IMA and used in the United Kingdom. Alternatively, the IFIA have suggested that investment entities be included within Tier 2 supported by additional disclosure and presentation requirements. The ASB is planning on introducing final amendments for financial years beginning on or after 1 January 2012 so the next 18 months will no doubt see a huge amount of discussion and change.


  • In Luxembourg, most investment entities prepare their financial statements under Luxembourg GAAP. Luxembourg GAAP is light on disclosures compared to IFRS. The IFRS European Directive was written into commercial law in Luxembourg, that is separate to the law governing Investment Funds. Promoters can opt to prepare financial statements under IFRS but a formal submission must be made to the Commission de Surveillance du Secteur Financier (“CSSF”) for approval to do so.


  • In Germany, financial statements required by the Investment Act are prepared under fund-specific accounting principles. There are additional more specific rules for the annual report concerning content, scope and presentation but would not be IFRS compliant. If required by investors, some investment management company prepares financial statements under IFRS.


  • French regulated funds, whether listed or not, must apply French Generally Accepted Accounting Principles (“GAAP”).


  • The harmonisation proposals under the UCITS IV directive are a step in the right direction to making a more efficient market. It is, however, a missed opportunity for lawmakers to move towards harmonised financial reporting standards for Investment Funds across Europe.
  • The continued growth in Exchange Traded Funds (“ETF”) structures across Europe highlights a great opportunity and perhaps best shows the advantages of IFRS. Asset managers are continuing to launch ETFs, including those that employ leverage, shorting and other alternative strategies. An IFRS reporting platform allows investors to effectively compare performance when structuring an ETF portfolio.

Research Team, FundAssist Ltd.

September 25, 2013