APPENDIX 7: LETTER FROM THE LORD FLIGHT
Economic Affairs Committee Report
I have long been unhappy with IFRS accounting standards.
I was one of the signatories with Jeremy Hosking and Timothy Bush
to the Times letter of 23rd July 2010 and also wrote
the attached piece
for Conservative.Home which I believe Lord Lawson circulated to
I am particularly concerned that IFRS is about to
extend to the public sector as well as the insurance industry
where in my judgement not only do the standards make Accounts
difficult to understand but can also conflict with the fundamental
principles of "true and fair".
I also understand there has been some perceived inconsistency
of evidence provided to your Committee, on the one hand provided
by senior executives of major Life companies, together with Professor Stella
Fearnley and Timothy Bush and, on the other hand, members of the
Financial Reporting Council and the FSA. No doubt you and your
Committee have formed your own views here.
I would make the point that there are substantial
professional and individual vested interests and reputations going
back some time, involved here.
I am concerned in particular as regards the legal
advice provided to the FRC, on the basis of which I understand
it is standard practice for the FRC to respond to letters to Ministers
at the BIS.
I observe that both the Bank of England and members
of the auditing profession such as Peter Wyman (although himself
closely involved with the implementation of IFRS) provide a more
independent assessment of the damaging impact of IFRS.
My belief is that, particularly with regard to banks,
a major purpose of Accounts is to discharge the solvency obligations
of directors and auditors to report the true capital position.
When Runs on banks occur, it is largely because markets have spotted
that particular banks are potentially insolvent. In the recent
banking crisis, I believe there is little doubt that markets spotted
that for certain banks IFRS "marked to market" standards
had served to overstate capital resources in buoyant times; as
subsequently they served to understate capital in difficult times.
My objections to IFRS are, however, wider than that
I believe they were a contributor to the banking crisis; as referred
to in my attached article, I have always felt that requiring the
accounting treatment relating to the granting of options to be
booked through the Profit & Loss Account both obscures the
real trading position of the particular business and also fails
to advise shareholders of the impact of actual or potential dilution.
I also consider the requirement to discount pension fund liabilities
at a rate of interest measured by prime bond yields overstates
effective liabilities and has been a major contributor to the
demise of final salary schemes. Liabilities should surely be discounted
at the anticipated "blended" rate of return on the pension
fund investment portfolio.
Finally, I make the comment from my career background
in the investment management industry, that invariably, analysts
go through the exercise of adjusting the IFRS statutory accounts
to screen out the distortions resulting from "marked to market",
the treatment of options and IFRS 17 in order to arrive at an
understanding of the performance of particular businesses.
Going back nearly 10 years I felt that IFRS was introduced
"by command" and without adequate political and commercial
debate. The impact has been demonstrably damaging, particularly
in its contribution to the banking crisis.
22 February 2011
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