Senior investors slam IFRS for lacking prudence

Two senior investors have slammed the IFRS for prioritising 'neutrality over prudence', and for casting accounts adrift 'from their legal and corporate governance moorings'.

Ben Levenstein, head of UK equities at USS Investment Management and Robert Talbut, chief investment officer at Royal London Asset Management, said that the 'imposition' of IFRS in Europe in 2005 - 'and in particular the prioritisation of "neutrality" over "prudence" has cast accounts adrift from their legal and corporate governance moorings,' the Financial Times reported.

The two senior figures said that they, along with other investors, believe that prudence needs to be restored to accounting in all companies, if they are to have confidence in the numbers and to support sustained economic growth.

Taking aim at the approach to standard-setting by the International Accounting Standards Board (IASB), they said: 'The move to "neutrality", or the "absence from bias", in accounting has been driven by the desire of international standard setters to converge with US standards. But the origins and aims of accounting in the US are very different from those in Europe.

'In Europe, accounts were rooted in a governance system that emphasised stewardship and ownership, and depended on prudence and realisable values to ensure the protection of capital.

'By contrast, in the US, accounts evolved to facilitate trading in securities markets, which meant that more weight was given to neutrality and market valuations. It is not possible to have accounts that are both consistently prudent (emphasising judgment to avoid overstating capital or income) and neutral (emphasising current market valuations to eliminate "bias"). The imposition of US-style "neutrality" in Europe has removed the glue that binds together accounting and corporate governance.'

The investors said that long-term shareholders depend on accounts to provide a reliable view of a company's capital, to evaluate performance and to give managements incentives to create lasting value.

'To achieve this, accounts must emphasise realisable values and incorporate likely losses. They should provide a "true and fair" view of a business, not exaggerated by short-lived market fluctuations,' said Levenstein and Talbut.

They also cited the Bank of England's call for banks to produce more prudent accounts, saying that it was concerned that banks' failure to recognise likely defaults associated with so-called zombie companies, might be holding back growth.

The comments come on the back of other criticisms by high profile figures - Pearson's CFO and deputy chairman of the Hundred Group, Robin Freestone who said: 'In the transition from UK GAAP to IFRS, a few things have been lost some areas have been obscured, particularly when it comes to assessing management's contribution.'

Pearson also slammed mark-to-market accounting, a model strongly proposed by the International Accounting Standards Board, saying: 'Movement in the accounts are not helpful. We shouldn't really be surprised when mark-to-market doesn't always do what we expect or serve us well,' said Freestone, adding that averaged fair values can be a lot 'fairer' than spot values.'

In September, Hans Hoogervorst, chairman of the IASB said that, despite its removal, the basic tenets of the concept of prudence remain intact and visible throughout IFRS.

He explained that prudence also plays an important role in the development of new Standards, outlining the challenges that the IASB faces in building sufficient levels of caution in developing rules for areas such as Financial Instruments, particularly with regard to impairment.

Penny Sukhraj |Content editor, Accountancy - (up to 2016)

Penny Sukhraj, former content editor and writer for Accountancy and Accountancy Live, responsible for commissioning and editing news...

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