IFRS: EU set to put conditions on IASB funding

05 Nov 2013

The European Union Parliament (EUP) has suggested it might tighten conditions around its €60 million funding allocation to the IASB, in the latest sign of frustration from policymakers unhappy with the speed of reform taking place in Europe following the financial crisis.

Instead of agreeing to sign over the full amount pledged, the EUP has said it wants to review the funding on an annual basis and that it is considering withholding what would amount to a third, or €7.1 million, of the standard-setting body’s stipend.

The draft report from the influential Committee on Economic and Monetary Affairs (ECON) suggests that the funding be contingent on, among other requirements, the reinsertion of ‘prudence’ into the IASB’s Conceptual Framework for Financial Reporting. This was removed in the revisions to IFRS in 2010.

Prudence or bust?

The debate around ‘prudence’ has been heating up of late. Some legislators consider that its inclusion in the Board’s Conceptual Framework would somehow force financial institutions to disclose the “true” nature of their assets and leverage. Other national standard setters – including the DCRS (Germany), OIC (Italy) and ANC (France) – and Europe’s financial reporting advisory group (EFRAG) would like to re-visit the ‘prudence’ debate; the UK’s FRC recently recommended that ‘prudence’ be explicitly included in the Framework.

The IASB’s reaction to ECON heightened the tension. IASB chairman Hans Hoogervorst has called the attempt to tie the matter of prudence into a discussion of funding as “political”, "highly worrisome” and “something we cannot accept". He has outlined in a number of speeches, the IASB’s position that prudence is ingrained in everything it does, and that reintroducing the term might encourage excessive conservatism or lead to ‘cookie jar’ accounting – the practice of understating profits in good years to mitigate losses in tougher years.

European demands – "a threat to independence"

Broader recommendations in the draft ECON report include maintaining the principle of the ‘true and fair’ view’ as an override to IFRS where there is doubt; spending European public money in a manner that responds to European needs; and considering financial stability and the economy in all future standard-setting.

“The gains of IFRS in Europe must be protected…it must remain intact and undiluted.”

Michel Prada, Chairman, IFRS Foundation

The EUP has implied that the IASB has made insufficient effort to demonstrate its independence. The draft report recommends that the IASB describe any private sector interests and commitments in full, as well as publishing its expenses. In an indication of its intention to clamp down on expenses, the EUP has said that it should not reimburse the IASB for business class flights of under four hours. Hans Hoogervorst has described ECON’s demands as “a threat to our independence”.

IFRS Foundation chairman Michel Prada took a gentler approach in a speech at the DCRS. He referred to the Daimler-Benz listing of 1993, and the “incredible” differences in the income statement under IFRS versus US GAAP. He warned Europe that tweaking IFRS to benefit its ends could lead to lack of comparability between financial statements. As for the speed of reform, Mr Prada said detractors should ask themselves “what aspect of transparency they are willing to sacrifice”.

The draft report has now gone to official trialogue – meetings between EU Parliament representatives, the Council and the Commission – which aim to package a bundle of amendments that the Council and European Parliament can agree on.