05 July 2013

EuroFinUse: Recommendations to Mr Philippe Maystadt on the reform of the IFRS

The European Federation of Financial Services Users has provided Mr Philippe Maystadt with the views of retail investors on accounting standards, the principles they should contain, and the need to count with international account standards that protect the interests of investors.

EuroFinUse welcomes the appointment of last March 2013 by Commissioner Michel Barnier of Philippe Maystadt as Special Adviser to enhance EU’s role in promoting high quality accounting standards. EuroFinUse believes there are important questions to be dealt with at this very precise moment as regards accounting standards setting. Indeed, EuroFinUse´s organization has been intensively working on corporate governance issues representing the interests of individual shareholders, retail investors and other financial services users. We believe that one of the most important elements for the protection of investors’ interests is appropriate accounting standards.

Plus, internationally valid standards are more than desirable as cross-border investment relies on the availability of understandable information at the disposal of investors: if accounting is based on different principles there is no use of it for foreign investors.

Therefore, EuroFinUse would like to focus on certain key points that should in its opinion be addressed in this assessment:

I. Accounts should reflect a prudent, true and fair view;

II. Accounting standards should include the notion of stewardship;

III. There should be a convergence of EU accounting standards (4th Company Law Directive) and international standards (IFRS) in place. However, this process of convergence should in no case mean abandoning the European “prudent” accounting approach, which should be imperative over the “neutrality” principle;

IV. The structure of EFRAG should be reviewed and rebalanced to address the lack of representation of not only “users”, but especially of “end users”, which is a title that ultimately corresponds to investors, be they individual or institutional.

In view of the points of discrepancy with current IFRS standards and processes, the EuroFinUse would like to propose the following lines of action to address the situation:

a) A reconsideration of the present approval process of IFRS standards

b) A reconsideration of present EU approved standards to ensure that they are in compliance with EU law

c) A better structure under which EU’s wide views can be obtained and effectively presented in a timely manner to the IASB. Concretely, the governance structure of the EFRAG should be reformed to guarantee adequate representation from the enduser side, e.g. from the investors with their own money at risk. This may involve EFRAG being prepared to accept that end-users will in most cases not be well funded and may need financial assistance to ensure that adequate representation.

EuroFinUse believes in the appropriateness of the concept of prudence as risk cannot be appropriately measured, according to numerous evidences. Indeed, banks are allowed to have “risk adjusted capital”; but virtually no-one foresaw the extent of the crisis and interbank market coming to a halt.

Accounts did not give any warning of the financial crisis. One example was raised by the UK banking commission. The accounts of a bank called HBOS showed provisions of about €300 million for the year to 31 Dec 2007. Around €28 billion were in fact written off in the next four years. EuroFinUse believes there were some clues as to what was coming; but the accounts did not reflect those clues. This was, at least in part, because accounting standards have progressively reduced the importance of the concept of prudence and eventually in the 2010 Conceptual Framework the IASB removed it completely. They said the concept of “conservatism” (as defined in United States) was biased; an affirmation which in this case is unproven.

Several personalities such as Lord Stevenson, chair of HBOS, said the financial crisis was unforeseeable. But it happened and demonstrates that nobody knows what the future will bring.

Position paper

© EuroFinuse