Investor dissatisfaction with International Financial Reporting Standards and the UK Financial Reporting Council shows no sign of abating following the release of a report from the Local Authority Pension Fund Forum (LAPFF) into impairment accounting by major banks.
In an analysis document, entitled ’Banks Post Mortem – Follow Up’, the LAPFF claims that the UK’s accounting framework for listed companies has allowed major British banks to keep substantial losses out of net income.
Elsewhere in the document, the LAPFF renews its long-standing charge that the IFRS accounting framework runs counter to UK public law as well as investor interests.
Finally, it delivers a line-by-line rebuttal of the FRC’s legal response to LAPFF’s barrister, George Bompas QC, on the legal status of the IFRS accounting framework in the UK.
The release of the analysis comes in the wake of the publication in December 2011 by LAPFF of its report into banking losses in the UK and Ireland, ’UK and Irish Banks Capital Losses – Post Mortem’.
The 2011 inquiry by LAPFF into the accounting for financial instruments by major banks focused on the collapse of the capital adequacy regime of banks in the UK and the Republic of Ireland.
The latest LAPFF findings show that unbooked losses at the failing Co-operative Bank now total £1.5bn — 88% of the bank’s capital resources (Core Equity Tier 1).
And the LAPFF highlights unreported losses totalling £12.1bn (€14.5bn) for the Lloyds Banking Group, 43% of the bank’s capital resources.
In a foreword to the finding, LAPFF chairman, Keiran Quinn, writes: “LAPFF is still of the view that until there is an independent enquiry into the failures of the IFRS standard setting and adoption process, matters will not be settled within an appropriate timescale.
“The consequences of faulty accounts not discharging solvency duties under the Companies Act create too many conflicts for the various parties involved, particularly when the companies involved are as large as banks.”
Quinn concludes with the warning that LAPFF “continues to consult legal advice with regard to these matters.”
The roots of investor dissatisfaction with IFRS lie in part with the loan-loss impairment model found in International Accounting Standard 39, Financial Instruments: Recognition and Measurement.
Critics of the standard, which sets out an accounting framework for the reporting impairment losses, argue that its incurred-loss model allows banks to delay the recognition of losses on loans that have turned bad.
In response to these and other criticisms, the International Accounting Standards Board has been working since 2008 on an IAS 39 replacement.
Just like IAS 39, the new standard, International Financial Reporting Standard 9: Financial Instruments, deals with classification and measurement, impairment, and hedge accounting.
Crucially, although the board has finalised the hedge accounting module of IFRS 9, and has almost finalised work on classification and measurement under the new standard, it has struggled to round off work on a more forward-looking impairment model.
“IFRS 9 is practically finished and will soon be ready to be endorsed,” IASB chairman Hans Hoogervorst said recently.
Nonetheless, investor discontent with accounting standards has mounted in recent months.
The Universities Superannuation Scheme, Threadneedle Asset Management and the UK Shareholders Association recently joined LAPFF in seeking advice from George Bompas QC on the legality of the IFRS framework within the UK.
The FRC countered, however, with its own legal advice: “On the specific issue of its legality, the Department for Business has today confirmed that the concerns expressed by some are misconceived.”
But earlier this week, in response to questions from IPE.com, the FRC confirmed that it is “undertaking a review of our paper on the ‘true and fair view’”.
And in a letter leaked to IPE.com earlier this week, major UK institutional investors told the FRC that the inclusion of prudence in the IFRS conceptual framework, the true and fair view override, as well as capital maintenance, were areas of major concern for them.
Another group of investors, the CFA Institute, also questioned the quality of financial-instruments accounting by banks earlier this year.
In a 1 May 2013 blog post, the CFA Institute’s Vincent Papa hit out at the quality of the big banks’ accounting for reclassified financial assets.
The concern dates back to the IASB’s decision in 2008 to amend IAS 39 in order to permit banks to move distressed financial assets – excluding derivatives – out of the standard’s fair-value-through-profit-or-loss category to more benign amortised-cost treatments.
Papa wrote that for “some” systemically important UK, French and German banks, “there were significant amounts not recognised on income statements due to reclassification, when compared to overall net income or loss.”
On the topic of Greek debt holdings, the CFA Institute representative argued: “In 2011, the European Securities Market Authority (ESMA) voiced concerns regarding the inconsistency in how several banks holding Greek sovereign bonds were applying IFRS requirements including reclassification and impairment rules to avoid loss recognition.”