IASB accounting body rejects EU parliament's funding conditions

Reuters

* IASB says worried about future independence

* Says it is decision time on banks' souring loans rule

* EU lawmaker says there is no threat to IASB

By Huw Jones

LONDON, Oct 14 (Reuters) - The group which writes globalaccounting rules said the European Parliament was threateningits independence by calling for a fundamental change to the wayit sets standards, and linking it to future funding.

The parliament wants the International Accounting StandardsBoard (IASB) to include a specific reference to "prudence" inits basic tenets, to put pressure on accountants to err on theside of caution when scrutinising losses at banks.

In a draft law, it wants to make future contributions fromthe European Union - which provides about a third of funding forthe IASB - effectively conditional on this reform.

Lawmakers believe the prudence reference could help avoid arepeat of the 2007-09 financial crisis in which EU taxpayers hadto put billions of euros into struggling banks.

IASB Chairman Hans Hoogervorst described the parliament'sstance as "highly worrisome".

"This is something we cannot accept," he told a meeting ofhis body's advisory council on Monday.

"If Europe is going to do this, other parts of the worldmight be encouraged to do so. It's a threat to ourindependence," he said.

The European Parliament's work is being led by lawmakerTheodor Dumitru Stolojan, who said there were concerns about howthe IASB is run and about some of its standards.

"The MEPs have to respond to these concerns. There is nothreat," Stolojan said.

The IASB writes book-keeping rules used in over 100countries, including the European Union, but not the UnitedStates.

In 2012, the EU provided 7.1 million pounds or roughly athird of the 20 million pounds the IASB received that year.

In an amendment to a draft law on future contributions tothe IASB, the European Parliament wants to make fundingconditional upon the body giving serious consideration toamending its basic tenets, known as the conceptual framework,and wants it to insert a reference to "prudence".

"COOKIE JAR"

"Cofinancing should be given to the bodies in question onlyif it is clear that... accounting concepts, in particular withregard to 'prudence' ... are appropriately considered in therevision of the conceptual framework," says the amendment, seenby Reuters.

A specific reference to prudence was dropped by the IASB in2010 to help align IASB and U.S. accounting rules.

U.S. critics say prudence introduces a bias into financialreporting when it is meant to be a neutral snapshot. There isalso a risk of creating "cookie jar" accounting, meaningcompanies downplay profits in good years to smooth out a rockierperformance in tougher years, the critics say.

Hoogervorst said many of the EU member states, who havejoint say with parliament over funding, oppose the linkage.Britain, however, has just thrown its weight behind there-introduction of prudence.

The spat over funding is a further sign of policymakerfrustration at the speed of reform in accounting rules for banksafter the financial crisis.

In 2008, during the financial crisis, world leaders calledon the IASB and its U.S. counterpart, the Financial AccountingStandards Board, to force banks to recognise souring loans muchearlier so they can take speedy action and avoid calling ontaxpayers.

So far the two boards have failed to find a common solutiondespite several drafting changes.

"We have to think about the credibility of standard setting.We have had five years and six models. It's decision time,"Hoogervorst said. "We have certainly not thrown in the towel. Weare determined to get this done."

He was "quite confident" the reform being proposed by theIASB would lead to a significant increase in provisioning bybanks to quell U.S. criticism it was being too light touch.

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