European Commission must assess impact of 'deeply flawed' IFRS 9

The chairman of the European Parliament’s Committee on Economic and Monetary Affairs (ECON), Roberto Gualtieri, has warned that the European Commission must honour its responsibility to assess the impact of a new financial instruments accounting standard.

The warning comes as the Commission prepares to endorse International Financial Reporting Standard 9, Financial Instruments (IFRS 9) for use across the 28-nation bloc.

In a 19 June letter, Gualtieri wrote: “We understand that the European Commission is about to suggest to the European Parliament and the Council to endorse the international financial reporting standard on financial instruments IFRS 9.”

The new standard will then be subject to the European Parliament’s Economic and Monetary Affairs Committee own scrutiny processes.

“However, given the relatively short scrutiny period ahead,” Gualtieri said, “we would like to already express our concern on whether the adoption of IFRS 9 is fully in line with the Commission’s better regulation approach.”

The European Parliament recently passed a motion that was highly critical of both IFRS more generally and of the activities of the IFRS Foundation in particular.

In the 16 June letter seen by IPE, the ECON chair notes that “IFRS 9 has not been subject to an impact assessment on its macroeconomic consequences and its effects on long-term investment.

“Equally, there is no proper analysis of its consequences for crucial long-term investment.”

The comments echo the concerns of many long-term UK investors and pension funds.

Sven Giegold, a leading IFRS critic and Green Party MEP, told IPE: “The IFRS 9 standard is deeply flawed. It makes accounting of financial instruments even more complex and more pro-cyclical.

“The EU commission has now to prove that IFRS 9 will not harm macroeconomic stability and long-term investment. In particular, a proper economic impact assessment has to be provided.

“The Commission has to defend European interests in accounting rules rather than to follow a rubber-stamp approach.”

The letter also calls on the Commission to set out the basis for the Commission’s adoption of the new standard.

“In concrete terms,” it adds, ”we are wondering whether IFRS 9 will remedy the causes of the financial crisis, as mentioned in the De Larosiere report and fulfil the changes required by the G20 in 2009.

“As IFRS 9 is said to extend the volume of financial assets measured at fair value, the new standard might even increase pro-cyclicality.

“Additionally, in the course of fair value measurement, unrealised gains are also considered in the Profit and Loss Account, thus raising concern as to whether IFRS 9 is fully compliant with the Accounting Directive and the Capital Maintenance Directive.”

MEPs have repeatedly complained that the Commission’s failure to conduct a full impact assessment of IFRS 9 means the effects of its new impairment rules remain unclear.

The IASB launched its IFRS 9 project in 2009.

The move came in response to calls for the board to reduce complexity in financial reporting and also to fix impairment.

Critics of the board’s existing impairment rules in IAS 39 argue that, because they measure incurred losses rather than an expected lose, they lead to too-little-too-late recognition of losses on impaired assets.

Despite the criticisms of the new standard, academics from the University of Mannheim Business School hailed it as an improvement to financial reporting.

ECB chairman Mario Draghi subsequently admitted the European Systemic Risk Board had yet to conduct a financial stability assessment of IFRS 9 and would only do so during the course of 2017.

MEPs have now urged the Commission to conduct their own assessment by no later than June 2019.

The ECON committee questions, however, whether IFRS 9 does in fact add up to a simplification of accounting rules for financial assets.

ECON chairman Gualtieri wrote: “[W]e would like to know how the Commission wants to solve the problem of the new standard IFRS 9 being even more complex than its predecessor IAS 39.”

In particular, the lawmaker questioned the extent to which the new standard was compatible with the Commission’s Regulatory Fitness and Performance Programme and its commitment to reduce regulatory burdens and simplify existing laws.