The UK Local Authority Pension Fund Forum (LAPFF) has upped the stakes in its bid to persuade the European Union to block the introduction of International Financial Reporting Standard 9, Financial Instruments (IFRS 9) across the bloc.
From 1 January 2018, IFRS 9 will become the new accounting rule that EU banks will have to follow as the basis for their reporting.
In a strongly worded letter to the EU commissioner for Financial Stability, Financial Services, Jonathan Hill, LAPFF chairman councillor Keiran Quinn has now accused the EU’s advisory body on technical accounting matters of having misunderstood European law.
Cllr Quinn writes: “[W]e do not believe EFRAG should have progressed to final endorsement advice without a revised draft of its endorsement advice.”
He goes on to argue that IFRS 9 now has so many question marks hanging over it that it has become a lame duck standard – even before its introduction.
Cllr Quinn warned that defects in the IFRS 9 endorsement process leave both the European Commission and the UK regulator, the Financial Reporting Council, open to the threat of legal action from investors.
The IASB launched its bid to replace its existing financial instruments accounting standard, IAS 39, in 2009.
Critics of IAS 39, the standard it replaces, argue that its incurred-loss impairment model has caused banks to recognise losses too late.
Although the IFRS 9 project started out life as a joint effort with the US FASB, the US standard setter largely walked away from the effort.
That move on the part of the FASB has complicated the IASB’s bid to become the world’s single global accounting standard setter.
In a further twist, critics of the IFRS 9 have jumped on the fact the FASB has adopted a more forward-looking model that requires banks to recognise full upfront lifetime losses.
Meanwhile, the LAPFF, together with a growing investor coalition, has turned into a vocal critic of the IASB’s efforts.
The LAPFF is an umbrella body for some 65 UK public sector pension fund members, with approximately €235bn in total assets under management.
In June 2013, the LAPFF, Threadneedle Investment and USS Investment Management released a legal Opinion from George Bompas QC.
This move emboldened those investors who believe IFRS puts too little focus on protecting the interests of capital providers as required under UK company law.
That row was reignited earlier this month when the LAPFF sought a second Opinion from Mr Bompas, who again concluded that company accounts prepared using IFRS fail to provide a true and fair view of its financial position.
Nor, he added, do they allow companies to assess how much of their profit each year is available for distribution to shareholders.
The FRC, however, has long rejected these claims, dismissing them as “misconceived”.
Instead, it has urged investors to engage with the IASB’s conceptual framework project and the debate over the role of prudence in accounting.
Central to the LAPFF position set out in its 23 September letter is the claim by EFRAG in its endorsement advice to the Commission that IFRS 9 is “not contrary to the principle of [sic] ‘true and fair view’ set out in Article 4(3) of Council Directive 2013/34/EU”.
The LAPFF position is that the IAS Regulation, which is the legal basis for the adoption of accounting standards within the EU, in fact uses quite different words that carry another meaning entirely.
The LAPFF wrote: “[W]hat Article 4(3) of the said Council Directive actually says is ‘The annual financial statements shall give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss.’”
The Directive continues, the LAPFF noted: “Where the application of this Directive would not be sufficient to give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss, such additional information as is necessary to comply with that requirement shall be given in the notes to the financial statements’.”
The LAPFF concluded: “The Directive and Regulation is clear that the principle at stake is a true and fair view of the specified numbers and [that] disclosure backs up the correct numbers.
“This matters because there is a big difference between disclosure needed to back up correct numbers, and disclosure compensating for the wrong numbers.”
Alongside those requirements, the Directive and the IAS Regulation also set out the IFRS endorsement criteria.
The regulation requires that an IFRS be “not contrary to the principle set out in Article 4(3) of Council Directive 2013/34/EU and … conducive to the European public good”.
In addition, each IFRS must “meet the criteria of understandability, relevance, reliability and comparability required of the financial information needed for making economic decisions and assessing the stewardship of management”.
In the past, MEPs have highlighted the potential scope for a conflict of interest within Europe’s accounting institutions.
In a statement last year, former ECON Committee chairman Sharon Bowles warned that funding for the IFRS Foundation had strings attached.
“My parliamentary colleagues have done a great job in highlighting the much-needed reform of these accounting quangos, which will improve public confidence in how accounting standards are implemented in Europe,” she said.
“We have, for the first time, shone a light on how bodies such as the IFRS Foundation and EFRAG are constituted and governed, which has not made for pretty reading.
“Any potential conflicts of interest have to be weeded out, and, if they are not, then the Parliament has shown it has the power to withhold funding, which sends a powerful message.”