A trio of lawmakers in the upper house of the United Kingdom parliament have lined up to launch an unprecedented attack on accounting policy issues. In the firing line was the new body charged with endorsing International Financial Reporting Standards for use in the UK, the International Accounting Standards Board's planned new insurance liabilities accounting standard, IFRS 17, and the mark-to-market pensions model. Long-standing IFRS critic Lord Prem Sikka said: "In common with the Financial Reporting Council, the newly created Accounting Standards Endorsement Board will primarily rubber-stamp the international accounting standards, better known as the international financial reporting standards, or IFRS."
He added that in contrast to the US, which sets its own accounting standards through a dedicated rulemaker, the Financial Accounting Standards Board, the UK had yet to address the accounting issues such as the 2008 financial crisis and the collapse of firms like Carillion. Lord Sikka also warned that the government's efforts to tackle distributable profits were doomed to fail because IFRS has "no clear concept of capital maintenance". But some of the strongest criticism of the session was reserved for the IASB's new insurance accounting standard IFRS 17.
Baroness Sharon Bowles, the former chair of the European Parliament's Economic Affairs Committees, said IFRS 17 would allow insurers to "reduce liabilities not merely for unrealised gains but for anticipated future income, giving the appearance of capital." She said: "This cannot be proper accounting. These unrealised gains and this anticipated income cannot be used to service debt, pay down debt or invest in other assets, and nor do they have any value as collateral.
No way is this true and fair, and anyone endorsing it would surely have to be nobbled." Documents obtained by IPE show that senior figures within both the FRC and the UKEB have received a claim that IFRS 17 flatters the IFRS capital position of a number of insurers "by manipulating the discount rate applied to liabilities". The interventions came as the Upper House debated regulations intended to hand authority for the adoption of new international standards from the business secretary to an expert endorsement body.
Legislation dating back to 2019 introduced a mechanism to transfer all EU-endorsed IFRSs to a new status of "UK-adopted international accounting standards". Since the UK's departure from European Union structures on 31 December 2020, the business secretary has taken responsibility for adopting new IFRSs through means of a temporary endorsement mechanism. In a statement, the FRC told IPE: "The UKEB is committed to carrying out its technical work in line with its guiding principles of accountability, independence, transparency and thought leadership.
On the question of IFRS 17 endorsement, the FRC added that the UKEB was committed to following a transparent, public due process. However, Lord Davies of Brixton, a former actuary, said he doubted whether parliamentary scrutiny of the UKEB's endorsement work will be effective. "Unfortunately, experience makes us doubtful that what is proposed will be sufficient. Too much of the involvement occurs after the event and is reactive rather than proactive.
"In my brief time in the House, I have already referred on several occasions to the phenomenon of regulatory capture; I see nothing here to allay my fears." The lawmaker reserved special criticism for the IAS 19 accounting model. He said: "[W]hat we have ended up with is a discounted cash-flow valuation using a market-determined discount rate to estimate pension liabilities and market prices to value pension assets."
This approach, he explained, "disregards the true nature of a pension scheme" and is "detrimental to the sustainability of defined benefit schemes" because it fails to account appropriately for the long-term nature of a DB pension benefit obligation.