Britain says global accounting rule is crimping its economy

LONDON: A central plank of global accounting rules has become a “performance penalty” which holds back investment in Britain, its financial services minister Andrew Griffith said on Tuesday.

So-called mark-to-market, or valuing investments on a regular basis to reflect changes in prices, is part of the International Financial Reporting Standards (IFRS), which Britain makes mandatory for listed companies.

“The combination of overly prudent regulation and mark to market accounting standards mean far too much UK capital is trapped in short term, low yielding investments,” Griffith told an Association of British Insurers (ABI) conference.

“The resulting ‘performance penalty’ is not serving the needs of British investors and pensioners,” Griffith said.

Alongside Britain’s finance minister Jeremy Hunt, Griffith said he will focus on this issue to “help Britain be a start-up and scale-up superpower”.

Critics say mark-to-market or “fair value” accounting creates balance sheet volatility in assets which are held for the longer term. Proponents say it gives investors a more accurate picture of current values of assets.

Britain is already easing insurers’ capital or prudential rules to unlock what Griffith said would be “one hundred billion of additional investment in productive capital over the next ten years”.

Griffith’s comments follows calls from a House of Lords committee earlier this month which recommended that accounting rules should take a longer-term view of pension investments.

The lawmakers were drawing lessons from the meltdown last September of liability-driven investment funds (LDI), widely used by pension schemes.

“The Government and the UK Endorsement Board should review whether the current system of accounting for pension scheme finances in company accounts is appropriate and whether to introduce a system that does not drive short-termism in pensions investment,” the House of Lords committee said.

The Endorsement Board determines whether Britain should adopt an IFRS accounting rule.

“If a change is deemed appropriate, the UK should adopt different accounting standards and promote their adoption internationally,” the committee said.