Further details have emerged of the challenges the International Accounting Standards Board (IASB) faces in its battle to win credibility among politicians in Europe.
Two leading members of the European Parliament, Syed Kamall and Sven Giegold, have called on the European Commission to explain the procedures it has followed to the possible adoption of a new financial instruments accounting standard in the European Union (EU).
Separately, a source close to the issue has revealed that the expectation among even the most ardent opponents of the London-based IASB is that the EU will eventually endorse International Financial Reporting Standard 9, Financial Instruments.
The reluctance of the Parliament to exercise its veto, however, could come as part of a trade-off that could see MEPs approve a highly critical motion on the IASB and its parents body, the IFRS Foundation.
In a letter dated 16 July obtained by IPE, the MEPs detail seven demands for the Commission to meet to satisfy them they should support IFRS 9.
The parliamentarians want the Commission to explain why it has failed to produce clear guidelines on the meaning of ‘the public good’ and ‘the true and fair view principle’.
They are concerned the Commission has no apparent plan to carry out a thorough impact assessment on either the measurement or impairment requirements of IFRS 9.
They warn that a knock-on effect of banks squirrelling away more capital could be that small and medium-sized enterprises will find it harder to secure loan financing. In addition, the MEPs also advise that long-term investors might find “equity investments less attractive”.
The parliamentarians also want the European Systemic Risk Board to comment on whether the impairment and measurement requirements could have procyclical or other implications for financial stability.
They called on the Commission to explain how it would address the concerns raised by the EU’s technical advisers on accounting issues that fair-value measurement requirements under IFRS 9 are “problematic”, particularly in relation to dividends and transparency for investors.
They said they needed more information about how banks would implement the new proposals, and, lastly, they want the Commission to explain how IFRS 9 would interact with prudential requirements such as the International Regulatory Framework for Banks (Basel III).
The demands are linked to increasing agitation in the EU in many quarters over the bloc’s decision to outsource its standard-setting functions to the IFRS Foundation, a Delaware-based quango.
Reform of financial instruments accounting has been a hot-button topic since the financial crisis.
Critics of the IASB’s current financial-instruments accounting model claim it resulted in banks recognising losses on underwater loans too late.
The principles for recognising and measuring financial assets, liabilities and some contracts to buy or sell non-financial items are currently set out in IAS 39.
The IASB has been working on a replacement standard, IFRS 9, since 2009. This effort was originally a joint effort with the US FASB.
The US standard setter walked away from the effort largely because of irreconcilable differences with the IASB on the issue of impairment, the process by which losses or likely losses on amortised cost financial assets are written down.
Against this background, former EU internal market commission Michel Barnier instructed Philippe Maystadt to look at how the EU could enhance its influence on the IASB’s processes.
Maystadt also looked at the ways the EU could improve governance of the European bodies involved in developing these standards.
Maystadt delivered his findings to an ECOFIN Council meeting on 15 November 2013. His recommendations received wide support from EU member states.
IFRSs are currently mandated for use by all listed companies across the bloc. Under the current endorsement mechanism, the Commission receives advice on the suitability of individual IFRSs for endorsement from the European Financial Reporting Advisory Group (EFRAG).
EFRAG also works with European national standard setters on outreach activities designed to stimulate debate among interested parties in Europe on accounting matters.
In addition, the Commission receives advice from the SARG or Standards Advice Review Group. On the basis of this advice, the Commission presents a draft regulation to the Accounting Regulatory Committee for approval.
The Accounting Regulatory Committee is made up of representatives drawn from individual member states with the Commission as its chair.
Subsequently, both the European Council and the Parliament assess whether the Commission has complied with the EU’s accounting directive or not.
Effectively, this endorsement mechanism gives a veto to the Commission, the Parliament and the ARC. The Parliament has yet to exercise its veto over an IFRS.
Meanwhile, well-placed sources close to the issue have told IPE they do not expect the Parliament to block IFRS 9 – despite recent sabre rattling.
Speaking on condition of anonymity, the sources explained that, because IFRS 9 is a delegated act under EU procedure, this means the Parliament is unable to amend it. Instead, it must either accept it or reject it.
What is likely, however, is that the Parliament will vote on a non-binding own-initiative resolution of its ECON Committee that could be highly critical of both the IFRS Foundation and the IASB’s standards.
IPE has also learned that this report could possibly make reference to the recent opinion of George Bompas QC, in which he questioned the legality of IFRS accounts in the UK.
Alongside George Bompas, both the Basel Committee and the Bank of England have raised concerns about IFRS 9.
IASB chairman Hans Hoogervorst has previously attempted to sell IFRS 9 as an escape hatch for underwater Greek government debt.
Addressing the July 2011 IFRS annual conference, Hoogervorst said: “The endorsement of IFRS by Europe has been extremely important for IFRS.
“We still have a small problem now with IFRS 9. There are many people who now think they should adopt it quickly because it gives a little bit more leeway in terms of the Greek government bonds.
“Right now, most of them are held available for sale. If you impair them, you have to impair them at the going market rate – not very high, I believe, 30% – whereas, if they are at amortised cost, as IFRS 9 makes possible, then you still have the possibility of making at least some sort of judgement.”