IFRS under fire at Parliamentary hearing

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International accounting standards came under sustained attack in a Parliamentary committee hearing into banking yesterday.

Accounting professors Stella Fearnley and Prem Sikka took centre stage during the committee hearings and laid into not just the complexity and ineffectuality of IFRS, but also the structures that lay behind them.

They were egged on at times by commission chairman Lord Lawson, who is leading the joint Lords-Commons committee examining professional standards within the banking industry and the lessons that can be learned from recent crises about the sector’s governance, regulation and transparency.

The former Chancellor was appointed to the role after participating in the 2011 Lords’ Economic Affairs committee enquiry last year...

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True and fair

I can see where both arguments are coming from but I don't necessarily agree with Stella Fearnley and Professor Sikka on the grounds of practicalities but tend to err on the side of David Cairns.

Ms Fearnley says that "UK GAAP had true and fair and other safeguards within it to prevent what happened.”

One could argue that IFRS has the same principle in that it believes that financial statements should present fairly the state of affairs of an entity (albeit that IFRS doesn't necessarily cite the phraseology "true and fair") - and let's face it, UK GAAP's been more or less aligned to IFRS over the years so I'm not sure I am in agreement with this argument.

Professor Sikka says that Government allow the IASB to act in the way it does.  Do we [as accountants] really want a government body to influence the way we work in terms of standard-setting?  Perhaps many accountants' view would be "God forbid!"

Whilst all arguments warrant merit, the harsh reality is that neither GAAP/Co Act/princples/ethics/opinion will ever stop any bank, company, service organisation or any Tom, Dick or Harry wanting to manipulate financial statements if they really want to and where auditors might choose to turn a "blind eye".  I can't see how IFRS - in itself - can be wholly to blame as no GAAP is perfectly designed to prevent an economic downturn like we are currently experiencing. Yes, it has its flaws, but I think we have to be realistic.

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Fair comment Steve - up to a point

I agree with you Steve that neither IFRS nor UK GAAP are that different from the true and fair perspective.If you look at RBS accounts over the period 2007/2011 the swings in values are all there in plain sight, and I don't believe that, following the introduction of FRS18 on accounting policies it would have been much different under UK GAAP.

The problem has been the downplaying of prudence (per FRS18) and the hugely complex disclosures in IFRS.

As accountants our job is to explain this often quite tricky stuff to the rest of humanity. IASB and ASB have confused disclosure with clarity - if you put it all out there it's the reader's problem if he doesn't understand it.

This is clearly wrong and doesn't do our profession any favours. The accounts of the banks should have explained the risks associated with having so much of the banks' capital tied up in risky investments, and they didn't.

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True and fair view
It seems like a stretch to refer to the true and fair view as a safeguard. The premise is that companies/banks always strive for transparency. Accordingly, when necessary to clearly explain transactions they can use the true and fair view option to lay it all out for stakeholders. As Steve mentioned, when companies want to manipulate financial statements, rules will not hold them back.

This is why I thought the malignment and defamation of US GAAP around the time of Enron was misplaced. I teach international accounting in the US. To this day authors and commentators cite the complexity and detail of US GAAP as the cause of business corruption over here. Pleeeeeze can we dispense with this argument?!

When IAS 39 was first introduced in the 90s it had to be put on the shelf for fear of sinking hopes of IFRS adoption in Europe. It doesn't look like the current version of IAS 39 is working.

In any case ~ Cheers!

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There are always opportunities for manipulation

Many thanks Mcgowanjr for this.

From this side of the pond the Enron thing was seen as abuse of the non consolidated controlled company rule - 97% owned SPVs with $21bn of debt attached but not consolidated - and the abuse of mark to market.

It was said that it couldn't have happened here, but of course it could. Those particular avenues of abuse were less likely here, but where there's a will there's a way and similar things had happened in the 1980s.

Surely the problem with fair value accounting is that as long as someone (however foolish) is prepared to pay such a price, that is the fair value. If a whole sector as crucial as the banks gets caught up in the nonsense, it's going to be extremely painful when the music stops.

I guess the real problem was not that such values were used and disclosed in the accounts, but the depth and interconnected nature of the exposure.

My beef with IAS is not so much this method of valuation or that, but the fact that the reader has to wade through so much of the guff that he loses the will to live before discovering what the results were, and there is still no greater certainty about the quality of the information.

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