The IASB sent prudence out of the window

The IASB sent prudence out of the window

Richard Murphy

May 21st, 2009

Fascinating stuff from the Telegraph:

Senior fund managers are becoming increasingly frustrated with the International Accounting Standards Board (IASB).

The most ardent critics of IFRS have written a document, now circulating in the City among major investors, that lays out a detailed analysis of the shortcomings of the system in relation to banks. The group believes the IFRS approach allowed certain banks such as HBOS, Bradford & Bingley and Northern Rock to trade while they were insolvent last year.

One of the biggest criticism the way banks provision for losses under IFRS. The old system allowed lenders to smooth their results from one year to the next by guessing at bad debts to come and using forward provisioning, IFRS prevents banks from making a provision unless a loan has actually gone bad. Critics believe the change fundamentally weakened banks.

A fund manager who is a member of the Financial Reporting Council, which oversees accounting and corporate governance, said: "Taking out expected loss bad debt provisioning from IFRS has meant that the process of banks making a risk assessment on all loans at the outset fell out of the scope of the annual accounts. As a result of the numbers being wrong, profits and assets were overstated, the banks looked healthier than they were."

Staggering, but true.

IFRS sent prudence out of the window.

And so they failed.

And nothing has been done to change the rules.

So, no doubt they will fail again.