THE ARCHITECT behind the creation of IFRS has dismissed claims that accounting rules are at fault for failings in the way banks provision for loan losses.
Writing in ICAS’ member publication, institute chairman and former head of the IASB Sir David Tweedie said he “totally disagreed” with the view that “global accounting rules prevent banks adequately provisioning for future loan losses”.
Tweedie’s comments contradict Andrew Haldane, the executive director for financial stability at the Bank of England, who wrote in the Financial Times last month that global accounting rules “contributed to an overvaluation of legacy assets, as they prevent banks adequately provisioning. International efforts to rectify this are at risk of stalling.”
Similarly, Dow Jones reported that Bank of England governor Sir Mervyn King told the House of Lords the accounting convention of not recognising a loss until the lack of payment has occurred “doesn’t seem to me a very sensible or prudent basis to make business decisions”.
According to Tweedie, having estimates of overall losses made up front would be “a weird way to get lending restarted, taking a hit to the profit and loss account instantly”.
“During the crisis, regulators proposed that the IASB should require counter-cyclical provisions to be made in good times, and released in bad times (to show profits instead of losses),” Tweedie said.
“Phony provisions have no place in accounting, and if the regulators wish to curtail dividends and compensation, they should require an element of profit to be taken to an undistributable reserve. That is their job, not ours. “
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