The European Insurance and Occupational Pensions Authority (EIOPA) has dismissed suggestions by the International Accounting Standards Board (IASB) that retaining the notion of prudence within revised reporting standards would lead to a biased assessment of assets.
Responding to the IASB review of the conceptual framework for financial reporting, the European pensions regulator sided with a number of institutional investors in calling for the retention of prudence within International Financial Reporting Standards (IFRS).
In its consultation response, EIOPA said it did not support removing the reference to the notion of prudence as it disagreed with the IASB’s reasons for doing so.
It said it disagreed that retaining the reference “would conflict with keeping neutrality, or that it would automatically lead to a biased appraisal of assets and liabilities”.
“EIOPA believes actors in financial markets are generally risk-averse,” it said. “This influences open market prices and should be taken into account in the valuation of assets and liabilities with uncertain outcomes.”
The regulator further pointed towards the retention of prudence within IAS 12 and IAS 37 as being considered “appropriate by the majority of stakeholders”.
The regulator joins a coalition of UK investors – comprising the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds – in urging that references to prudence be retained.
In a letter to the UK Financial Reporting Council, seen by IPE last year, the industry associations said: “We believe it materially correct to err on the side of caution – i.e. be prudent – in the face of uncertainty at an individual item level and view prudence as a predisposition.”
At the time, the FRC said it had “often” called on the IASB to include a reference to prudence in its conceptual framework.
In its own response to the consultation published this week, the FRC reiterated that references to prudence should be reinstated.
“We do not agree the notion of prudence, correctly understood, is incompatible with neutrality,” it said.
“The conceptual framework should state that the role of prudence is in the development of accounting policies,” the FRC added, “particularly in ensuring all losses and liabilities are reflected promptly and that gains are not recognised except where there is adequate evidence.”
The UK accounting standards body said the notion of prudence could not be omitted simply because they were generally agreed concepts, as apparent agreement could “mask significant underlying differences”.
The body concluded: “Explicitly addressing agreed concepts in the conceptual framework enables their interpretation to be clarified and reduces the possibility of undesirable interpretations gaining credence.”