Skip to main content

International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021

Volume 811: debated on Tuesday 27 April 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the International Accounting Standards (Delegation of Functions) (EU Exit) Regulations 2021.

Relevant document: 46th Report from the Secondary Legislation Scrutiny Committee

My Lords, these regulations, which were laid before the House on 1 February, aim to address matters relating to company reporting arising from the UK’s exit from the EU. I shall refer to these regulations as the delegation SI.

International financial reporting standards—IFRS—are a set of international accounting standards used in over 125 countries around the world, including Australia, Canada and across the EU. In a world with growing economic interconnectivity, accounts prepared in accordance with high-quality international accounting standards provide the consistency and reassurance that investors require to confidently invest in capital markets. The Government are committed to IFRS as standards that drive improvements in the quality and comparability of financial reporting, facilitate investment across borders and build links for investors and regulators between capital markets. The UK is the largest single user of IFRS, with over 15,000 economically significant UK companies now using the standards. This includes all publicly traded companies, which are required to use them to prepare their consolidated accounts.

Legislation made in 2019 provided post-transition period continuity for IFRS by transferring all existing EU-adopted IFRS into UK law to form “UK-adopted international accounting standards”. I shall refer to these regulations as the principal regulations. The principal regulations also provided a mechanism for IFRS to be adopted for use in the UK after the end of the transition period. This action meant that the Secretary of State has been able to adopt crucial amendments to IFRS for use in the UK, including amendments relating to the ongoing interest rate benchmark reform. This was, however, intended only as an interim measure. The principal regulations also provided for the delegation of the adoption functions to an expert body.

The purpose of the delegation SI is straightforward. In line with the intent of the principal regulations, it will delegate decision-making powers on the adoption of IFRS to the recently established UK Endorsement Board. The board will have two primary responsibilities: it will be responsible for the analysis and adoption of IFRS for use in the UK, and for influencing the development of IFRS by the International Accounting Standards Board.

To adopt a standard, the endorsement board will need to be satisfied, first, that its application is likely to be conducive to the UK’s long-term public good; secondly, that the standard meets the criteria of understandability, relevance and comparability; and thirdly, that its application would not be contrary to the principle that accounts provide a “true and fair” view. In addition, decisions on the adoption of IFRS can be taken only following consultation with stakeholders with an interest in the quality and availability of accounts.

I turn to the endorsement board’s influencing work. While it is beneficial for the UK to maintain alignment with international standards, it is also important that those standards work for the United Kingdom. That is why influencing the development of IFRS by the International Accounting Standards Board is one of the board’s key responsibilities. Effectively performed, this will mean that UK interests are addressed during the development process and final standards reflect the needs of UK stakeholders.

These are substantial responsibilities, but the endorsement board has been equipped to meet those needs. Clearly, the calibre and expertise of those involved in the decision-making process is vital. The appointed board, led by Pauline Wallace, is talented, experienced and diverse. Its membership includes preparers of accounts, members of accounting firms and academics and investors; an economist will also be recruited over the coming months.

Further, we recognise that the board’s decision-making, although independent, cannot overlook the regulatory context. As such, those in attendance at endorsement board meetings will also include representatives from the relevant government departments, the FCA and the Bank of England. These observers will be involved in discussions but not the final decision-making stage, in order to maintain the board’s independence.

The endorsement board’s terms of reference were adopted at its first meeting in March and are available on the board’s website. The terms of reference are structured around guiding principles of accountability, independence, transparency and thought leadership. They provide for an active and transparent adoption process that is receptive to the views of stakeholders and reflects the long-term public interest. In drafting the terms of reference and the establishment of the endorsement board, we involved a broad range of stakeholders with an interest in IFRS, including regulators, at each stage of development. We are grateful for their insight and commitment.

I now move to the oversight of the endorsement board. The board is an independent unincorporated association supported by a subsidiary of the FRC via a service-level agreement. This agreement will include support in the areas of HR, finance and IT equipment to enable the board to carry out its work.

I have already stressed that the endorsement board’s decision-making will be independent. However, this does not mean that it should be beyond the reach of those with wider responsibilities for the integrity of company reporting. As such, a key principle of the adoption process will be transparency, with both the discussions and the outcome of adoption decisions being made publicly available.

The endorsement board will be accountable to the Secretary of State for how it performs its delegated functions, and the Secretary of State will, in turn, lay the endorsement board’s annual report before Parliament. The board will also report, in a publicly available document, on its governance and due processes to the FRC. I should add that the Secretary of State will also retain the ability to make regulations to amend or withdraw the delegation if it appears to the Secretary of State that the delegation is no longer in the public interest.

With the appointment of an interim chair, board members, the recruitment of a secretariat and adoption of the terms of reference, we have completed important steps to establish the endorsement board. The cost of this has been approximately £2 million over the past two years and we expect future ongoing costs of £2.9 million per year. These ongoing costs will be funded using the FRC’s levy on preparers of accounts. This will put the cost of the endorsement board to those who benefit most from IFRS.

In conclusion, I hope noble Lords will agree that delegating statutory powers to the UK Endorsement Board will support the UK’s long-term public interest and maintain high standards of UK company reporting. I commend the regulations to the Committee and ask it to support and accept them. I beg to move.

My Lords, I must declare an interest as a practising actuary, as the remit of the UKEB extends to actuarial matters. Accounting standards are important, but it needs to be understood that they are not a neutral revelation of some absolute underlying truth. They inevitably incorporate views that, overtly or covertly, represent a particular view of how the economy should be run. In effect, they play a role in determining how economic power gets allocated and who gains and who loses. Hence the need for strong democratic oversight, including a role for Parliament. In other words, accounting standards are too important to be left to accountants.

This point was acknowledged by the Government, with the claim that parliamentary accountability has been built into the constitution of the UKEB, as the Minister just explained. Unfortunately, experience makes us doubtful that what is proposed will be sufficient. Too much of the involvement occurs after the event and is reactive rather than proactive. In my brief time in the House, I have already referred on several occasions to the phenomenon of regulatory capture; I see nothing here to allay my fears.

A couple of points arise directly from these regulations. First, once again, we see the delusions of the Brexiteers laid bare. The claim that the UK can exercise greater autonomy in accounting standards because it is outside the EU is nonsense. In practice, we have become rule takers rather than rule-makers when we worked with our European partners. International accounting standards are set far from our shores where, in reality, there is Hobson’s choice.

Secondly—this is my main point—the record to date of international financial standards does not inspire confidence. I am sure that my noble friend Lord Sikka will provide chapter and verse, but I want to say something about the standard with which I am most familiar: International Accounting Standard 19, on employee benefits. This comes of course under the aegis of the UKEB.

There are many reasons for the regrettable decline of defined benefit pension arrangements in the private sector over the past 20 years. We have ended up with the vast majority of private sector defined benefit schemes closed completely, closed to new members or closed to future accrual. Increases in life expectancy and low interest rates have certainly had a role in bringing about the increased cost for corporate sponsors.

Nevertheless, one of the key drivers in this decline has been how pensions are accounted for, as laid down by the international standard. The International Accounting Standards Board says that it sets accounting standards within

“a conceptual framework of understandability, relevance, reliability, comparability and timeliness.”

That is fair enough, but this has been interpreted as meaning an emphasis on the use of market prices, whether actual market prices or derived market prices where the thing being valued is not traded in a market. In valuing pension costs, what we have ended up with is a discounted cash-flow valuation using a market-determined discount rate to estimate pension liabilities and market prices to value pension assets.

The problem is that this disregards the true nature of a pension scheme, as it plays out over many years into the future. Such an approach has been detrimental to the sustainability of defined benefit schemes because it removes any respect for the interaction between pension assets/liabilities and asset liability cash flows when both are valued at a single point in time using discounted cash flows. Corporate accounts should recognise amounts that better reflect the long-term nature of a defined pension obligation.

The result of this approach is volatility in assets and liabilities, hence the need to recognise substantial and often volatile pension deficits in the statement of the sponsor’s financial position. These deficits are an artefact of the valuation method, but it leaves corporate managers to wish to divest the company of such liabilities. Therefore, applying fair-value accounting to defined benefit pension obligations has hastened the decline of such schemes as corporate managers increase the rate at which these schemes are closed to new members and to future accrual.

From this one example, I hope that noble Lords will forgive my lack of confidence in the international financial standards. Perhaps the Minister could give us in his reply a bit more detail on what real advantages we will gain from proceeding along the lines set by these regulations.

My Lords, it is a pleasure to follow the noble Lord, Lord Davies of Brixton. I agree that the decline of defined benefit schemes, which he outlined, is something to be regretted; they were extremely valuable to millions of employees but, sadly, action by both parties over many decades has led to their virtual demise. However, today’s debate is about the broader issue of international accounting standards, and I thank my noble friend the Minister for his explanation. I refer to my interests in the register as a director of Secure Trust Bank and Capita, and a shareholder in some international companies, including Tesco, where I served for many years, hence my knowledge of pensions, and lived through the introduction of international accounting standards.

As a supporter of free trade and the benefits of comparative advantage, I favour global standards, for the reasons the Minister highlighted. I also favour using UK strength in financial services to participate in the international standard-setting process for accounting conventions; we have done so for many years, and that has been beneficial. Now that we are out of the EU, it is essential that we play our part directly. There is, however, a major problem: an enduring fight between the proponents of prescription, often favoured by Brussels, and principles-based rules which are essentially meant to reflect common sense. I have always been in favour of the latter because I worry about burdens and costs, which always end up being passed on to the consumer.

I am also keen on learning from history, and I have two lessons for today and then a couple of questions on the regulations before us. The first lesson reflects the introduction of Sarbanes-Oxley in 2002 in the United States—a typical example of overreaction to a financial crisis. There had been a failure to enforce accounting rules properly in the case of Enron, WorldCom and others, but the correct response to that was to enforce the rules properly, not to make them excessively complicated. I know from direct experience that Sarbanes-Oxley stopped some companies listing in New York at the time and encouraged others to delist, admittedly with the welcome effect of boosting growth in London. The extraordinary prescriptions it introduced were costly and bureaucratic and yet it did not prevent the 2008 financial crisis. Remember: accounting standards affect most businesses of any size, not just financial services; some 15,000 are subject to them in the UK, according to the Minister’s helpful introduction.

The second lesson of history is the emerging evidence that economic growth, which is how we can make everyone better off, can be explained in part by the stripping away of impediments. There is a fabulous book on this subject, free from modern fashion, which I borrowed from the Lords Library: Barriers to Growth by Eric L Jones, published in 2020. It explores the slow dissolution of such barriers in English history. In brief, the book suggests that the increase in the rate of economic growth in recent centuries reflects the removal of institutional and environmental barriers that held it back before the Industrial Revolution and which were then progressively relaxed over the following centuries. This is not the occasion to set out the many fascinating strands of the thesis developed in the book, although I would commend the section on how tithes retarded increased productivity in agriculture. The essential point is that all ages have their concerns and obsessions which have as a major—perhaps the major—effect the retarding of economic growth. My concern is that, in our age, what I call bureaucratisation is such a failing, and that today’s SI is an example of it.

I am not really convinced that we need a quango to endorse international standards—this new UK Endorsement Board. I understand that it will enable us to make sure that international standards are not missing a vital dimension and to reflect UK stakeholders’ needs, as the Minister explained. However, when you create such a body it will find work to do; people will want to write strategies and have a work programme. It will have a comprehensive diversity programme, although I note that it will be served, on HR, IT and finance, by the FRC. I would have left the work with BEIS and its civil servants, some of whom are extremely talented and will no doubt be conducting the international negotiations on accounting standards. We have too many regulators.

We are, however, where we are today. I ask my noble friend, who I know takes a welcome interest in corporate governance, from a practical perspective to enlarge on the criteria he will set. Page 3 of the Explanatory Memorandum says:

“the Secretary of State retains the function to amend the criteria for determining whether the use of an IFRS is conducive to the long term public good of the UK.”

What sort of things are we talking about? My main concerns would be: first, relative UK competitiveness; secondly, simplicity and clarity, to the extent that that is possible; and, thirdly, sensible timing in the introduction of new IFR standards, with more flexibility where that is justified. In my experience, IFR standards, while welcome conceptually, have often come in at difficult times, been expensive in accountants’ fees and diverted management damagingly.

Will Ministers be able to control any of these things, or will they just be in the hands of the new body, the new chair—Pauline Wallace—and anyone she appoints? If so, how will we ensure that a common-sense business voice, including the voice of smaller business, is heard?

While I am on my feet, I take this opportunity to remind the Government of interest in this House about the nature of the audit and governance package which is now out for consultation. It would be extremely helpful to have an oral briefing from BEIS on this subject while there is still some time to influence the content.

My Lords, it is a great pleasure to join this debate.

The Government claim to be “taking back control”—that slogan has been used quite a few times—but there is no sign of that in this statutory instrument. In common with the Financial Reporting Council, the newly created Accounting Standards Endorsement Board will primarily rubber-stamp the international accounting standards, better known as the international financial reporting standards, or IFRS. These standards are produced by the International Accounting Standards Board—the IASB.

The IASB is a subsidiary of the International Financial Reporting Standards Foundation, and it is registered in the US state of Delaware. The sole reason for that was actually to avoid tax on its income. That fact alone disqualifies the IASB from acting as a standard setter, but the Government permit it to effectively set standards for the UK. The IASB is subsidised by the big four accounting firms and major corporations, among others. This enables the funders to pull levers and exercise undue influence—in other words, the IASB is already captured.

One of the UK’s biggest failures has been to build durable accounting institutions. We had the Accounting Standards Steering Committee, which morphed into the Accounting Standards Committee, the Accounting Standards Board, the Accounting Council, and now the Accounting Standards Endorsement Board. The names have changed but the entity remains colonised by scandal-ridden big accounting firms and corporations. There is no independence from corporate interests. The legislation does not require the endorsement board to hold open board meetings and it does not owe a “duty of care” to any individual stakeholder. The statutory instrument exempts it from liability, which means that there are weak pressure points upon it to advance the welfare of various stakeholders or even consider the negative impact of accounting standards.

The US has robust accounting standards which are set by the Financial Accounting Standards Board. This enables the authorities to respond to scandals. By contrast, the UK has abandoned its capacity to set accounting standards and the Government look to the IASB to respond to UK scandals. The Parliamentary Commission on Banking Standards highlighted the failures of IFRS, including fair value accounting and the demotion of prudence. We are still awaiting meaningful reforms. The collapse of Carillion also highlighted failures of fair value accounting, good will and reverse factoring; we are still awaiting reforms some two years later. The Government can say only that they are waiting for the IASB to act; meanwhile, accounting scandals continue.

Regulators such as the Prudential Regulation Authority have already learned to ignore some aspects of corporate financial statements of banks and regulated entities, especially items such as good will and capitalised software costs. Just think of the costs of looking through these documents and working out entirely different numbers. The end result is that we have two sets of financial statements: one published by companies in accordance with international accounting standards and another modified by the PRA. I hope the Minister will tell us which one is more credible.

The Government’s recent consultation paper Restoring Trust in Audit and Corporate Governance mentions possible reform of distributable profits, which requires consideration of capital maintenance. However, IFRS have no clear concept of capital maintenance. Company financial statements add up random numbers based on historical costs, amortised costs, net realisable values, present values, fair values and just plain guesses. The end result is that companies are not maintaining any financial or real capital. It is impossible to address issues around illegal dividend payments within the Government’s policies. The international accounting standards are the residue of their political games rather than what stakeholders or any set of investors might need. Contrary to what the Minister, the noble Lord, Lord Callanan, said earlier, they do not improve the quality of financial reporting.

I will illustrate that with an example relating to accounting for related party transactions. These are the material transactions that occur between a company and the parties who are in a position to exercise significant control over it. There was a time when such transactions were disclosed, but they are not disclosed now. As the US refused to accept IFRS, the IASB sought to enrol China in its project. Many Chinese companies are controlled by the Chinese Government. They did not like the related party accounting standard because they were not keen to disclose transactions between them and the companies they controlled. Did the IASB make a stand? No. It exempted Government-related companies from disclosing related party transactions. It is hard to understand the UK Government’s enthusiasm for adopting accounting standards shaped by the Chinese Government.

We all know that accounting rules affect the calculation of profits, leverage, liquidity, solvency, risks, wages, dividends, pensions and taxes. These have a direct impact on the distribution of income and wealth. Only Parliament has a democratic mandate to adjudicate on such matters. However, the Government have transferred such authority to unaccountable corporate elites and weakened Parliament. This legislation is against our national interest.

My Lords, it is a pleasure to follow the noble Lord, Lord Sikka, and to agree with everything he has said.

Under what the Minister referenced as the principal regulation, Regulation 7 states that an international accounting standard may be adopted only if it is not contrary to the principle that accounts must give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss. The same provision applies for consolidated accounts, taken as a whole, as far as concerns members of the undertaking. The Secretary of State is now delegating adoption power to the endorsement board; the board and its members are being exempted from liability for getting it wrong, unless it is in bad faith.

Some might find it strange that, while there is a consultation going on about the liability of auditors and company directors for getting it wrong, those endorsing the standards that can well be part of it going wrong are absolved, unless it is in bad faith—and I think that there is some of that about, or at least conflict of interest.

The Brydon review categorically said that accounting standards are forward-looking accounting estimates and judgments, and therefore cannot be true in the literal sense. This is quoted in the restoring trust in audit consultation, which also says that

“consideration of ‘true and fair’ needs to go beyond … compliance with the financial reporting framework”.

It goes on to say that the Government are

“not aware of any systemic issues”—

so let me give a few.

Accounts that are prepared on a going-concern basis require an audited assessment of whether a company is capable of being a going concern or not. If accounts contain unrealised gains, as allowed by IFRS, those gains are not cash and cannot be used to service debt, pay down debt, invest in other assets or make distributions to shareholders. How, then, can auditors sign off the accounts of a company as a going concern if the facts required to assess that position are totally masked by the standards? The incurred loan loss provisioning problem had that effect in banks that collapsed: losses were hidden and banks were not going concerns. Even now, the PRA makes adjustments to get to the true loss-absorbing values.

With the proposed new insurance standard IFRS 17, the issues go further than unrealised profits and credit is given to reduce liabilities not merely for unrealised gains but for anticipated future income, giving the appearance of capital. This cannot be proper accounting. These unrealised gains and this anticipated income cannot be used to service debt, pay down debt or invest in other assets, and nor do they have any value as collateral. No way is this true and fair, and anyone endorsing it would surely have to be nobbled.

This seems to aptly describe the UK Endorsement Board. Three were members of the former Accounting Standards Board, which has approved defective accounting standards in the past. Several were partners in accounting firms at the time that banks were collapsing. Mr Ashley, a former ASB member, was also a career KPMG partner, which the UK Endorsement Board website fails to note. Of course, KPMG was the auditor of Carillion and HBOS. In the case of former ASB member Ms Wallace, at least the website references her connection to PwC, the auditors of Northern Rock, but it is silent about her time at Arthur Andersen. The board includes another recent PwC partner, and a partner from Grant Thornton, which is currently defending itself in connection with the auditing problems of the collapsed Patisserie Valerie. There is no mention that board member Kathryn Cearns worked for the ASB and then for the law firm Herbert Smith Freehills which, as well as providing defence advice to PwC and KPMG, also instructed the ICAEW’s counsel to give the dubious true and fair legal opinions for the FRC, from which the Government eventually distanced themselves, as I discovered in FoIs. Liz Murrall, an employee of the Investment Association, and Paul Lee, a consultant to the Investor Forum, are also on the Endorsement Board, and both those organisations are dominated by insurance companies, the accounts of which will benefit from using IFRS 17.

Who is there to represent the public interest and act on the known lie that Brydon and the Government’s consultation acknowledge—that accounting standards alone cannot be true and fair? Who is there to represent the policyholders of insurance companies who, barring more government bailouts, will be the victims if accounting standards cause them loss? One could hardly wish for a more biased view, and no wonder they need protection from liability. This is a bad SI and we do not need this UK Endorsement Board.

This instrument delegates current functions of the Secretary of State in relation to international accounting standards to a new UK accounting standards Endorsement Board, making the UKEB responsible for the adoption of international accounting standards for use within the UK.

We see the need to ensure that the international standards, which have now been put in place across the world, are properly placed in the UK context, particularly given the UK’s withdrawal from the EU. There is also a context in terms of being an independent body that can bring those standards forward and into the mainstream of UK accounting life in good order. With confidence behind it, the UK can be seen to be playing its part in international structures that are now the norm for those accounting standards.

While not looking to oppose the change, I have some questions for the Minister. The Explanatory Memorandum states:

“The Secretary of State sets the terms of reference for the UKEB.”

I have seen that the draft terms of reference for the board have been published, so when will the final terms of reference be published? The draft terms of reference say that the Secretary of State will appoint a chair. What advice did the Secretary of State get, and from whom, concerning the appointment of its inaugural chair, Pauline Wallace? The only activity of the UK Endorsement Board so far has been to bring itself into being, and that has been done via a rather curious route. First, the chair was appointed by the Secretary of State, and the chair then essentially constructed her own board. That is not absolutely normal practice. The board normally elects the chair rather than the chair electing the board.

The noble Baroness, Lady Bowles, produced a lot of research about the members of the board. How can the board’s independence and accountability be guaranteed? Most members appointed to the board are accountants, so there is the potential danger for the board to reflect its own view of the profession on the profession itself. How will the Government ensure that this will not happen?

The Explanatory Memorandum states that

“the UKEB will be funded by increasing the FRC’s levy on preparers of accounts using IFRS.”

How much will the levy be increased by and how much will it be raised by annually? It has been reported that the FRC expects the overall cost for the financial year to increase by £6.1 million—not the £2 million that has been stated by the Minister—of which half will cover the cost of setting up the UK Endorsement Board. I wonder whether the Minister recognises this cost.

The Secondary Legislation Scrutiny Committee drew the SI to the attention of the House. It said that the UKEB

“will operate as an unincorporated association with support of the Financial Reporting Council … We note that these changes will mean additional responsibilities for the FRC at a time when the FRC itself will be undergoing transformation into the new Audit, Reporting and Governance Authority.”

Can the Minister explain what will happen when the new audit, reporting and governance authority is set up? Will it continue to fulfil the support functions?

The UKEB’s terms of reference will be set by the Secretary of State and will require the UKEB to report at least annually to the Secretary of State on its technical decision-making and to the FRC on adherence with its governance and due process. How regular does the Minister expect these reports to be? Would once a year be enough? I hope that the Minister will be able to provide some clarity to these questions.

My Lords, I thank noble Lords for their insightful contributions to this debate. The many points raised have demonstrated the need for the measures contained in the delegation SI and the support that they will give to users and preparers of accounts. Businesses up and down the UK continue to face uncertain trading conditions, particularly in light of the Covid-19 pandemic. The delegation SI provides reassurance for UK-registered companies using IFRS, on a mandatory or voluntary basis, that the Government remain committed to these global standards and their role in the UK’s company reporting framework. Further, we will use the strengths of the UK’s accounting and finance sectors to contribute to the future development of IFRS and to ensure that UK company interests are taken into account. I believe that the board will develop a reputation as a major voice on the global accounting stage.

I will now deal with some of the points raised in debate. The noble Lord, Lord Davies of Brixton, asked a question on parliamentary accountability. As I set out in my opening speech, Parliament will have oversight of the Endorsement Board’s activities and the board will be required to report on its technical decision-making to the Secretary of State on at least an annual basis. The Secretary of State will, in turn, be required to lay that report before Parliament. The Secretary of State must also, separately, lay a report each year on the carrying out of responsibilities related to the adoption of international accounting standards.

The statutory criteria for the Endorsement Board means that it must consider the long-term public good when deciding to adopt a standard, together with the costs and benefits, and any effects on the economy. The whole point of the UKEB is for the UK to decide on its adoption for use in the United Kingdom. While the UK was a member of the EU, the European Commission decided on adoption; now, the UK can make its own decisions on what standards are used.

The key advantages of IFRS are the high-quality, transparency and comparability that the standards bring to financial statements. They are now in use in over 125 countries, including the majority of the G20 states, all EEA member states and 93 major securities exchanges around the world. If the UK is to continue attracting international investment, it is in our interests to maintain alignment with these international standards. This was recognised by Parliament when continued use of IFRS in the UK was approved in 2019. A dedicated and independent Endorsement Board is more easily able to recruit the expertise needed for decision-making and influencing the future direction of IFRS. It is also better placed to conduct the outreach required to assess the impacts of adoption in the UK. A separate board is also consistent with the approach taken by many other countries that use IFRS, including Australia and Canada.

My noble friend Lady Neville-Rolfe referred to the Sarbanes-Oxley regime on internal controls in the US. I understand that this has had some benefit in terms of fewer US companies having to restate their accounts, but I respect my noble friend’s knowledge of potential negative impacts. The Government’s current audit reform and corporate governance White Paper includes proportionate proposals on internal controls. I would be very happy for my officials to brief my noble friend on the White Paper as a whole; I know that she has already had some meetings on it.

The regulations set out what is meant by long-term public good. They particularly require regard to be paid to the following matters: whether the use of the standard is likely to improve the quality of financial reporting; the costs and benefits likely to result from the use of the standard; and whether the use of the standard is likely to have an adverse effect on the economy of the United Kingdom, including on economic growth. The board will be required to consult with those representatives of users and preparers of accounts before adopting a standard, including smaller business where that is relevant.

Regarding the points made by the noble Lord, Lord Sikka, the Endorsement Board will be bound by the same assessment criteria that Parliament approved for the Secretary of State. These are based on established principles for financial reporting, including that the standards are not contrary to the principle to provide a true and fair view of an undertaking’s financial position, and that they are conducive to the long-term public good. There is also an obligation to consult persons representative of those with an interest in the quality and availability of accounts.

It is true that the IFRS Foundation is registered as an overseas company incorporated in Delaware, where it is classified as a not-for-profit, tax-exempt organisation. In the UK, the foundation’s tax is calculated on the basis of notional trade, where publications revenue is offset by the costs of developing the published materials. This was agreed with the UK authorities in 2006 and is set out in the foundation’s latest annual report. The terms of reference require meetings and decisions to be held in public. Its initial meetings have been held in public and are available to view on its website. The key advantages of IFRS are the high quality, transparency and comparability they bring to financial statements; they are prepared following extensive consultation and consideration.

Regulated entities are required to prepare separate accounts for investors and the market at large. These are separate from those produced for the regulator, which is considering the entity’s solvency and liquidity position to understand the impact on the system as a whole, and the two have two separate purposes. Accounts prepared under IFRS are general purpose accounts designed to meet the needs of a wide range of investors, finance providers and stakeholders. The proposals in this SI do not change the existing capital maintenance and distributable profits regime in the Companies Act. As I said earlier, the international standards are used in more than 125 countries, including Australia and Canada and across the EU.

Moving on to the points made by the noble Baroness, Lady Bowles, the conditions of the EU withdrawal Act do not provide the powers to create a new statutory body to endorse IFRS. The Endorsement Board is therefore an unincorporated association, comprising the chairman and the board members. Resources and funding are provided by the existing body, the Financial Reporting Council. The Endorsement Board has been designed to be accountable and open to scrutiny by government and stakeholders, and there are statutory requirements for reporting to the Secretary of State, to the FRC and to Parliament.

IFRS are not incompatible with the requirement to show a true and fair view in UK company law. Section 393 of the Companies Act 2006 sets out the overriding requirement that directors must not approve accounts unless satisfied that they give a true and fair view of a company’s financial position, notwithstanding the accounting standards used in their preparation. Additionally, the legal criteria for adopting a new or amended IFRS for use in the UK already includes a provision that a standard cannot be adopted if it would be contrary to the requirement for accounts to provide a true and fair view of the undertaking’s financial performance and position. Accounts prepared under IFRS are general purpose accounts, designed to meet the needs of a wide range of investors, finance providers and stakeholders and, as I said earlier, the proposals in this SI do not change the existing capital maintenance and distributable profits regime in the Companies Act.

The Endorsement Board secretariat has commenced some of the foundational work that will be needed to inform the assessment of IFRS 17. This includes conducting a survey of insurance companies and establishing an insurance technical advisory group. The work is expected to escalate in the coming months and will include outreach with representatives from stakeholder groups across the UK’s insurance sector, including preparers of financial statements and investors. As the recent announcement of the board members demonstrated, membership is representative of areas with an interest in the quality and availability of accounts. This naturally includes representatives with experience in the biggest accounting firms, as their expertise and insight will be invaluable. However, as the board composition demonstrates, those with experience in smaller firms are also valued as board members, and no one on the board has an existing role at any of the big four accounting firms.

Pauline has over 30 years’ experience in the development of accounting standards and I am delighted that she is the inaugural chair of the Endorsement Board. Her experience and technical knowledge of the standards has been invaluable during the work so far and there is no question in my mind that she is the right person to lead the board. She retired from PwC in 2013 and in my view this provides a sufficient gap between the end of Pauline’s employment by a big four firm and appointment as chair of the UK’s Endorsement Board, without any danger of being unduly influenced by the policies of a former employer. In addition, the terms of appointment for members of the board require it to comply with the terms of reference. The Secretary of State could take action if the terms of reference were being disregarded, including the ultimate ability to revoke the delegation.

Moving on to the comments of the noble Lord, Lord Lennie, the terms of reference are already published on the UKEB website, and these are intended to be finalised after the completion of the parliamentary debates. All board members are, of course, required to act independently and in the UK’s long-term public good, including not showing preference to special interests. The Endorsement Board has been developed with Sir John Kingman’s review of the FRC in mind, and we envisage ARGA’s role in relation to the board to be similar to the FRC’s role.

To close, I reiterate that the action taken by these regulations represents the best way forward for adoption of IFRS in the UK’s long-term public interest. The endorsement board is ready, now is the time for it to take on its functions, and I commend this statutory instrument to the Committee.

Motion agreed.

Sitting suspended.