June 19 (Bloomberg) -- Britain should review how it sets accounting rules after research found they may clash with U.K. law, the Local Authority Pension Fund Forum said.
International Financial Reporting Standards follow an incurred-loss model, which allow banks to wait until financial assets are close to default before realizing a loss. This contradicts the demand under U.K. law for “a true and fair” view of profit, the London-based LAPFF said in a statement today.
“These are extremely significant issues, given that they directly affect the accounting practices of systemically important financial institutions, and in turn affect the decisions made by those institutions,” LAPFF Chairman Kieran Quinn said in the statement.
IFRS has been the mandatory method of accounting for publicly traded companies in the European Union since 2005 and is drafted by the London-based International Accounting Standards Board. The Group of 20 industrial nations created a body to examine alternatives to the incurred-loss model following the 2008 financial crisis.
George Bompas, a trial lawyer in London, provided the legal opinion on the rules for the LAPFF, the U.K.-based Universities Superannuation Scheme, Threadneedle Asset Management Ltd. and the U.K. Shareholders’ Association. The LAPFF supplied the view as evidence to the Parliamentary Commission on Banking Standards, which published its findings today.
The House of Lords Economic Affairs Committee or the Treasury Committee should consider how IFRS became part of EU law, the commission’s report said.
“There is clearly widespread concern about IFRS and the method by which it is introduced into EU law,” the commission’s report said.
Banks should recognize losses on loans before the assets go into default, the International Accounting Standards Board said in March.
“IFRS may sound dull and unimportant, but lack of compliance with the EU accounting law, as well as the standards themselves, played a central role in the crisis,” Syed Kamall, a U.K. Conservative lawmaker representing London in the EU Parliament, said in an e-mailed statement.
“We cannot allow the situation to continue where bankers’ bonuses might be paid out of profits that do not actually exist.”
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