We won’t achieve financial stability under IFRS

I spoke by Skype link to the Local Authority Pension Fund Forum this afternoon on a panel about the International Financial Reporting Standard and its faults. The LAPFF has just published a report which critiques the Standard as a key contributor to the financial crisis.

I first met IFRS in a technical capacity when working as a software consultant. It struck me then as suffering from being the product of a committee without years of evolution behind it. It seems I underestimated its side effects.

The key problem is this: IFRS is backward looking. It allows poor loan loss provisioning or even prevents it. It allows unrealised gains to be recorded as profits. Assets are not recorded at the lower of historic cost and net realisable value. IFRS accounts therefore do not represent the economic or commercial substance of firms’ positions. Loss-making businesses may appear profitable. Hence banks went, in a trice, from seeming solvent on paper to needing bailouts.

Now, the Bank of England Financial Stability report came out today. The Governor made some remarks about the state of banks’ capital and the need for more as a precaution. If my colleagues are right and one cannot tell from IFRS accounts whether or not a firm is a going concern, then the Bank’s report and the Governor’s remarks may be badly wrong: they may have been misled by IFRS accounting.

With this in mind, it seems likely that we won’t achieve financial stability under IFRS.

My Bill would require parallel prudent accounts compliant with the Companies Act from banks. That would reveal a true and fair view of their position and the UK could do it.

A problem is this: I am not convinced anyone wants to know.

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