IPE analyses the fact that the IASB has dashed the hopes of long-term UK institutional investors by rejecting calls to reintroduce ‘prudence’ defined as a bias toward conservatism back into IFRS.
Instead, the IASB appears set to reintroduce a more restrictive notion of prudence – so-called cautious prudence.
In an ED on the project released last year, the IASB defined cautious prudence as the exercise of caution in conditions of uncertainty.
Some major UK investor interests have demanded the return of prudence because they believe it offers long-term investor interests a degree of protection.
This group has broadly supported what the IASB has labelled asymmetric prudence.
They believe this cautious approach to accounting will mean distributions and management pay are made on a prudent basis.
Speaking during a 17 May board meeting, however, the IASB’s staff recommended against adopting asymmetric prudence.
They warned it could lead to greater subjectivity in financial reporting.
The call also noted that dividend distributions and executive remuneration were issues for local law and corporate governance, respectively.
IASB project manager Jelena Voilo said: “While [the accounts] can be used as inputs for this process, it is not the [purpose] of financial reporting to determine the amounts that can be used without further analysis.”
The Local Authority Pension Fund Forum, as well as Iain Richards of Threadneedle Investments and Roger Collinge of the UK Shareholders Organisation, have all demanded a return to prudent accounting.
On the other hand, IASB member Stephen Cooper, a former sell-side analyst, has argued that prudence would reintroduce a conservative bias that could mean investors receive less relevant information.
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