Brexit – bad news for Britain, and also for IFRS?

Of all the reasons to worry about the UK’s staggeringly reckless “Brexit” decision, the potential impact on IFRS probably wouldn’t rank too highly…

At the very least though, it’s not good news for the IFRS Foundation and its activities. On the symbolic level alone, such a major statement against the free flow of capital and commerce and people is seriously misaligned with the philosophy and vision that drives the IFRS project – if barriers are back in fashion, then why wouldn’t “taking back our country” extend to taking back our capacity to decide what profit is? And it’s not merely an abstract threat – there are forces that could feasibly lead to a British move to dump IFRS. This is from a recent article in Investment & Pensions Europe:

  • “A plenary session of the European Parliament has passed a potentially damaging report on the activities of the IFRS Foundation and the International Accounting Standards Board (IASB).
  • The own-initiative report of the Parliament’s Committee on Economic and Monetary Affairs (ECON) lends weight to criticisms made by leading investors of the International Financial Reporting Standards (IFRS).
  • Although the report is non-binding and lacks legislative force, it comes at a difficult time for the IASB as leading UK investors challenge the legality and financial-stability impact of its new financial-instruments accounting rules.
  • Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants in London, welcomed the report’s findings, which in the UK could pile further political pressure on the IASB and its supporters….
  • The ECON report also lends weight to the argument advanced by the Local Authority Pension Fund Forum (LAPFF) in the UK that the so-called true and fair view requirement for accounts under EU law applies to specific components of the accounts and not just to the accounts as a whole.
  • Specifically, in accord with the LAPFF’s view, the ECON report states: “The annual financial statements shall give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss.”
  • The report further notes that “this purpose relates to the capital adequacy function of accounts … that both creditors and shareholders use … as the basis for determining whether a company is ‘net asset’ solvent and for determining dividend payments.”
  • More damagingly for the IASB, the ECON report finds that the IASB’s understanding of the principles of prudence and stewardship is at odds with the legal position under European case law and the Accounting Directive.
  • Major long-term investors have argued that the concept of prudence, or caution, plays an important role in ensuring that a distribution to shareholders is lawful and backed by real profits….”

These issues have been around for years, but if the pressure is piling up even while the UK is within the European Union, it’s not hard to see how it could go haywire once liberated from it. Even absent any specific reservations about IFRS, the dizziness of asserting and defining the new British sovereignty might conceivably create a positive desire to craft and implement its own variant version of the standards.

A New York Times article set out something else that could contribute to this:

  • “With a recession in Britain now a distinct possibility, some experts worry that a government desperate to create and maintain jobs could seek to save the financial sector by making the City more attractive as an offshore haven.
  • ‘This could lead to London becoming even more like the Cayman Islands and other British territories, skirting around regulations, in a race to the bottom for the financial sector,’ said Adam S. Posen, a former member of the rate-setting committee at the Bank of England and now president of the Peterson Institute for International Economics in Washington. ‘This potentially could leave pretty big holes in the financial safety net.’”

Could a relaxation of financial reporting standards be a part of such a race to the bottom? Who knows. Anyway, all this will take years to crystallize, if ever. In the meantime, Canadian and other entities will no doubt be considering what impact this should have on their present financial reporting, and it wouldn’t be a surprise to see regulatory bulletins on this in due course. It’s easy enough to envisage some generic cautionary disclosure to warn readers that, basically, everything even vaguely connected with Britain is up in the air. But the greater challenge will be to more specifically identify and articulate (or even quantify) the impact on specific aspects of financial position and performance. Among the areas that might be affected are estimates and assumptions relevant to such matters as impairment testing and fair value measurement; assessments of provisions, onerous contracts and collectibility; and disclosures relating to financial instruments and the accompanying risks.

Of course, Britain might adjust to its new reality fairly quickly, with less overall impact than anyone expects, and little or none on IFRS-related matters. But given the story so far, how confident could anyone be about that…?

The opinions expressed are solely those of the author

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