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LAPFF moves against EC with IFRS 9 'maladministration' claim

The Local Authority Pension Fund Forum (LAPFF) has demanded that the European Commission demonstrate that it has followed a lawful procedure in endorsing International Financial Reporting Standard 9, Financial Instruments (IFRS 9).

The standard is the new financial instruments accounting rulebook that banks and other businesses must follow throughout the European Union from next January to account for their assets and liabilities.

In a strongly worded letter to the Commission, the LAPFF writes: “Unless the Commission can demonstrate transparently and objectively that the endorsement of IFRS 9 has properly taken account of member and creditor protection (including the relevant parts of the Capital Maintenance Directive), we believe there will be a very clear case of maladministration.”

The LAPFF has requested that the Commission present hard evidence to back its assertions within 30 days.

The LAPFF first contacted the EU’s so-called three presidents on 7 October last year, alleging that the EU had followed a “defective” endorsement process.

Former EU commissioner Jonathan Hill rehearsed the EU’s IFRS endorsement criteria in a response to a question tabled by Syed Kamall MEP last year.

In summary, the LAPFF claims that neither the European Financial Reporting Advisory Group nor the Accounting Regulatory Committee has applied those criteria.

It also believes that both the European Council and the Parliament have been given a defective position concerning IFRS 9 endorsement.

At the heart of the long-running spat over IFRS 9 is the view that IFRSs generally fail to deliver adequate cross-border member and creditor protection in the EU.

Long-term investors such as that LAPFF argue that defective IFRS standards, such as those used by major banks, overstate balance sheets and result in fantasy dividends being paid from what are ultimately shareholder funds.

Key to the LAPFF view is the notion that an investor is not necessarily interested in a dividend payment but also in protecting its long-term capital stake in an investment target.

In other words, such investors want an accounting model that reflects assets correctly, as they see it, rather than one they fear misrepresents a company’s solvency position.

This concern is particularly acute in the case of a rights issue.

In a response dated 9 December, the vice-president of the Commission, Valdis Dumbrovskis, strongly rejected the LAPFF claims that “the endorsement process for IFRS 9 has been defective”.

Dumbrovskis went on to defend the robustness of the IASB’s due process and backed the procedures followed by both the ARC and EFRAG.

An LAPFF spokesperson told IPE: “The LAPFF has kept its options open. Maladministration is the basis for an investigation by the Ombudsman. IFRS adoption is a delegated power for the Commission to get right and not the Council or Parliament.

“The problem the Commission has is that there is no evidence of the correct endorsement criteria – inclusive of capital maintenance – but lots of evidence of parties involved in endorsement denying capital maintenance.”

In September 2015, IPE reported that sources close to the IFRS 9 issue in Brussels had claimed the EU would eventually endorse IFRS 9 but that Parliament would pass a motion that was critical of IFRS and the IASB.

In June last year, the European Parliament subsequently censured IFRSs in an own-initiative motion.

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