IFRS 8 – TJN submission to the European Parliament

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I sent the following mail earlier today on behalf of TJN to members of the EU Parliament committee considering IFRS 8 this week:

To:

Pervenche Beres
Lars Sorensen
Alexander Radwan
Peter Skinner

I am writing as I have now had opportunity to read the report of the Accounting Unit of the European Commission on IFRS 8. To put this matter in context, I wrote the technical submissions made to them on this issue from the Tax Justice Network and the Publish What You Pay coalition.

I am disappointed that the Accounting Unit recommended unreserved endorsement of IFRS 8. Most of all I am concerned because having read that report it provides endorsement but without answering any of the questions that were raised which gave rise to the referral by you to them. In particular:

1) It stresses the need for endorsement to ensure convergence with US GAAP but ignores the fact that FASB is now planning to review the identical standard SFAS 131 precisely because it has reservations about it in use. Convergence will not be achieved as a result;

2) Although 40% of the investors in the London Stock Exchange (through their various representative organisations) and the biggest pension fund in the world (Calpers, through the ICGN) expressed reservations about IFRS 8 and corporate governance issues the EC review can find no such concern. Are these users all wrong by implication?

3) Despite the clear academic evidence submitted showing that following adoption of SFAS 131 by US corporations geographic reporting was reduced and outcomes for shareholders worsened unambiguously in consequence, with no other factor being able to explain that outcome, the EC report says that the geographic reporting required by IFRS 8 meets the need of users. That appears untrue of shareholders, and the evidence to this effect has been ignored.

4) The report suggests the needs of organisations I work with can be met through improved CSR, but that is voluntary disclosure and we have shown that this cannot provide the information we need precisely for that reason. Compulsory disclosure of financial data on a country-by-country basis is required to meet the needs of civil society. As users we believe the EC report is contemptuous of our expressed opinion when it says it thinks IFRS 8 meets our needs: we know it does not. We also know IAS14 does so better.

We could offer more comment, but it is apparent that this report could have followed one of two paths. The dividing lines in accountancy are now quite clear. The producers of accounts and their agents (the auditors and the accounting standards agencies they control) wish for limited disclosure of data in a form that suits management. This is called the fair value approach to accounting and is designed to encourage speculation in shares. This means long term engagement with a company and its management is discouraged, so allowing them to pursue action in their own interests. This group, based around management, does not need published financial reports to pursue their chosen courses of action, they have internal company data for that purpose.

The other camp is made up of those for whom it has (until recently) been assumed accounts were produced. These are the shareholders and all other users, collectively called the stakeholders. These groups rely on company reports for information and expect them to be true and fair and a record of stewardship and accountability. This is what the European accounting model has been all about to date.

IFRS 8 is a product of the first camp, presenting the management view in a way that is of little use to other users. IAS 14 and the development in it we have proposed were of benefit to the latter group, whether the user be a shareholder or stakeholder.

What is at stake is therefore the future direction of accountancy and for whose benefit accounts and accounting standards are to be produced. Are they to provide selected information chosen by management for its benefit, as IFRS 8 requires, or are they about accountability for action, as we would wish?

The EC has chosen to support management. It is our hope that you will chose to support the users of financial statements and will reject this inadequate report as a result.

I shall, of course, be pleased to provide you with further information to support the comments I have made.

Regards

Richard Murphy

Director
Tax Justice Network IFRS Project Director

This committee still has it in its power to reject the EC report, or to order its own enquiry. I rather hope it does both.