July 28, 2013 2:00 pm

EU lawmakers seek review of accounting standards compatibility

A group of lawmakers in Brussels has added its weight to concerns about widely used accounting standards in the wake of the financial crisis.

Five MEPs have called for a review of the compatibility of International Financial Reporting Standards – which are set by the International Accounting Standards Board and used in the European Union and many other countries – with European company law.

Some critics of IFRS claim the system has made accounting less prudent by undermining or even jettisoning the principle that financial statements need to be “true and fair”. This is denied by the IASB.

In a draft amendment to proposed regulation, the MEPs have demanded an explicit recognition of the primacy of a “true and fair” view in accounts. They have also called for “tougher liability standards for directors and auditors” to be considered.

Their position is backed by a legal opinion submitted to a recent parliamentary inquiry into banking in the UK.

The opinion, commissioned by investors, cast doubt on the compatibility of IFRS with UK company law. UK regulators have in the past argued that IFRS still presents a true and fair view.

The way in which banks set aside money against losses on soured loans has been one of the most controversial issues for IFRS.

The gap between loan losses reported under IFRS and those generated by a more conservative approach was highlighted last month when UK regulators said the nation’s biggest banks were undercapitalised to the tune of £27bn at the end of 2012.

Syed Kamall, a UK Conservative MEP who backed the amendment, said: “The fundamental question is, are we just pursuing standards for the sake of standards but losing some important concepts along the way, such as prudence and ‘true and fair’?”

Another amendment, put forward by four MEPs including Mr Kamall, would attach conditions to €32m the European Commission is set to give the IASB’s parent body for the 2014 to 2020 period.

The conditions relate to the IASB’s standards, governance and framework for standard-setting – the last of which is currently under revision. The move has prompted a response from Michael Prada, who chairs the IASB’s parent body.

In a letter, seen by the Financial Times, Mr Prada said it would be impossible to accept funding that constrained the independence of its standard-setting activities.

Such contributions might trigger “retaliatory actions” by other countries in which they sought special treatment for funding the IASB, he argued.

In 2012, funding from the European Commission represented 16 per cent of the contributions to the IASB’s parent body, while international accounting firms provided 29 per cent.

The amendments will be discussed in the autumn, with a view to finalising the regulation by the end of the year.

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