IASB responds to the European Commission’s Green Paper on long-term financing

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05 Jul, 2013

The IASB has submitted a response to the European Commission (EC) concerning the Green Paper, ‘Long-term financing of the European economy’. Focus of the letter is the EC's question regarding a possible relationship between the use of fair value accounting principles and short-termism in investor behavior.

The Memorandum the IASB has made available on its website opens commenting on the EC's question Q20 – To what extent do you consider that the use of fair value accounting principles has led to short-termism in investor behaviour? What alternatives or other ways to compensate for such effects could be suggested? with the statement:

The IASB does not believe that fair value accounting principles have of themselves led to short-termism in investment behaviour.

The IASB points at the wide range of factors that contribute to short-termism (which are also acknowledged in the Green Paper). Fair value accounting may be one of these, however, the comment letter points to the fact that in some cases, there is no alternative as only the fair value can capture meaningful information about financial instruments with complex cashflows. This does not mean that the IASB is seeking a full fair value model for financial instruments, as the comment letter explains, contradicting claims that were not raised expressis verbis in the Green Paper.

As in the IASB's Chairman's April 2013 speech entitled Accounting and long term investment – 'Buy and hold' should not mean 'buy and hope', which is added to the comment letter as an appendix, the IASB notes that even long-term investors require shorter-term, reliable and unbiased performance measures to keep track of their investments and to hold management to account.

The IASB also points at IFRS 13 Fair Value Measurement, which was published in 2011 to explain how to measure fair value for financial reporting and to increase transparency when entities use models to measure fair value, especially when markets become less active.

After explaining that IFRSs seek to report economic performance as it happens which also includes not to hide or to reduce volatility in an artificial way when volatility reflects the actual economic conditions, the letter mandates that accounting should not be seen as or even tried to be used as an instrument to smooth out short-term volatility. It concludes:

Finally, it is important for all users to recognise the limitations of financial reporting.

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