Thursday, October 23, 2008

EU: Hands off Fair Value Accounting

Brussels defuses threat of 'fair value' demands
Changes to controversial fair value accounting rules will be left to the accounting rulemakers, European officials said yesterday after a meeting that defused the threat of political intervention. Mounting pressure to ease fair value, which requires companies to mark most of their financial holdings at their current market value, had led to suggestions the European Commission could "carve out" sections of the current rules or even form its own rulemaker.

European Union accounting is set by the International Accounting Standards Board, whose rules are followed, or are being adopted, by more than 100 countries. Yesterday the Brussels meeting, comprised of Commission officials, regulators, banking and insurance representatives, investors and accountants, drew up a modest list of issues that it would like the IASB to consider but stopped well short of the high pressure for immediate action that some had expected.

"Everyone stressed the importance of a solution at a global level," said one par-ticipant afterwards.
Others agreed the meeting had in effect buried any suggestion of a European "carve-out" of the IASB's rules or the creation of a new regional standard-setter - fears that had surfaced publicly beforehand. "There was a very positive outcome, with unanimous support for working within the IASB framework and in line with proper due process," said a spokesman for Charlie McCreevy, EU internal market commissioner.

Last week the IASB eased its fair value rules to align them with US generally accepted accounting principles (GAAP) following pressure from Brussels and a number of banks and insurers. The market seizures of the past year have forced financial institutions to write down billions in the value of their assets, hitting profits and undermining their capital reserves.

The commission will still pursue with the IASB further changes to the rules. Areas likely to be considered include allowing financial institutions to reclassify assets containing embedded derivatives from being marked at fair value to "amortised cost", which would ignore further violent market swings and smooth out their impact on reported profits and capital reserves.

However, this will be done through the IASB's regular processes and not be sought on an emergency basis as were last week's changes, which come into effect for third-quarter accounts that close at the end of this month. Any new changes could instead be brought in for year-end, but not sooner. Earlier this week the IASB and its US counterpart, the Financial Accounting Standards Board, agreed to set up a joint global advisory group to examine accounting issues thrown up by the credit crunch and was expected soon to announce high-profile appointees.
By Jennifer Hughes Nikki Tait of the Financial Times

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