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House of Lords: The FRSME revolt starts here

30th Mar 2011
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John Stokdyk discovers some unlikely members of the campaign for real financial reporting within the Lords Economic Affairs committee.

The Houses of Parliament is still an insprining - if anachronistic - building. The gothic architecture and Hogwarts-like passageways lure you into a fantasy world where it really does feel like individuals can change society.

The reality of airport-style security and the 19th century conventions of political discourse are a reminder that this is not really the case. These thoughts struck me as I sat in Committee Room 4 a few feet away from Lord Lawson as he castigated Big Four auditors for their “complacency” during the banking collapse of 2007-9.

How odd that it should take more than two years for someone to lift the lid on that costly scandal and examine what went wrong. Lords Lawson, McGregor, Lipsey and Hollick and their peers on the economic affairs committee have no real power. They decided on their own that it was a topic worth investigating and called in a number of eminent experts to compile their 72-page report. They had few resources to back them up, and as Lord McGregor, the committee chairman, frequently reminded the assembled journalists, the report was little more than a prod to the Office of Fair Trading, the Financial Reporting Council and Brussels that they should take a more active interest in the subject.

It’s an admirable piece of work, and well worth reading. But when they strayed into the technicalities of financial reporting, their Lordships opened up a new line of attack that could derail Sir David Tweedie’s 25-year crusade for international accounting standards.

After bemoaning the “inferior” quality of IFRS and its defects on valuing expected losses and the effect of limiting auditors’ ability to exercise prudent judgement, the key passage comes in paragraph 132 (Chapter 5: Impact of IFRS), which concludes: “We recommend that the Government and regulators should not extend application of IFRS beyond the larger, listed companies where it is already mandatory. Continued use of UK GAAP should be permitted elsewhere, so that the basis of a functioning, alternative system remains in place in case IFRS do not meet their aims.”

Lord McGregor confirmed that while they had asked the IASB and FRC about these issues during their hearings, the committee had not consulted the standards-setters about their conclusions, which were subject to parliamentary privilege. However, their effectively calls for a halt to the introduction of the Financial Reporting Standard for Mid-Size Entities (FRSME), planned for 2012-13. Behind that is an assumption that UK (and US) financial reporting standards for both large and small firms will eventually converge around the internationally agreed ideals.

I wouldn’t for a moment suggest that such august experts as the former Chancellor were nobbled by the likes of known anti-IFRS agitators such as Bournemouth professor Stella Fearnley, who is widely quoted in the report. But her views are echoed by many others who gave evidence to the committee, including former PwC partner and ICAEW president Peter Wyman. He told the committee: “The rules allowed banks to pay dividends and bonuses out of unrealised profits—from profits that were anything but certain. The system is still in place now — we can’t tell if similar problems are building up because there is no requirement to separate realised from unrealised profits… Significant further work is necessary before IFRS can be said to be totally fit for purpose.”

After the press conference Lord McGregor told me, “The basic problem of IFRS was brought to our attention by companies. So why not review this on an international level? Our view was to take a lot of evidence. We didn’t feel able to come to a conclusion, but I hope we’re prodding in the right direction.”

For years now, students have been trained on international standards and we are probably closer to the converged ideal than we are to the safe haven of UK GAAP that their Lordships imagine. Their report has set off a time bomb that could have explosive repercussions - or more likely, fizzle out into a damp squib.

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By smullan
01st Apr 2011 12:17

IFRS

I am delighted to hear that Lords Lawson, McGregor, Lipsey and Hollick have taken it upon themselves to carry out an independent review, (and it is commendable that they have done so with so little resource) and that their conclusions show common sense being applied in that UK GAAP should remain in the arena for the foreseeable future and at the very least sit alongside IFRS. I would imagine most accountancy practitioners with SME clients will continue to apply UK GAAP as this is the most cost effective for both client and accountant.

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