Tuesday, October 21, 2008

European Accountants: Don’t Change Fair Value Rules

Hasty revisions to controversial accounting rules on how to value assets threaten to undermine investor confidence in company accounts, a group of senior investors and analysts has warned. Members of the Corporate Reporting Users Forum, a pan-European group of investors and analysts, urge the European Commission not to make more amendments to accounting rules.

The Commission is hosting a meeting on Tuesday involving regulators, banking and insurance representatives, investors and accountants to discuss changes to the rules. The resulting “wishlist” will then be presented to the International Accounting Standards Board, which sets accounting rules for more than 100 countries, including the European Union.

The so-called fair value accounting rules require companies to mark most financial instruments at their market value. In the present illiquid markets, values have plunged, forcing banks and insurers into enormous writedowns that have savaged their capital reserves.

The IASB has eased its rules to align them with US practice but many banks and insurers believe the standards misrepresent their true financial health and have called for immediate changes.

In a letter to the Financial Times, the CRUF pledges to oppose any steps by the Commission that could lead to a European “carve out” of the IASB’s rules or potentially lead to the creation of a new regional standard setter. “Now especially, investors need comparability and transparency, not further uncertainty and inconsistency,” the group said.

Although the final “wishlist” is not yet known, today’s discussions will cover calls for easing of fair value rules in illiquid markets and for more instruments to be accounted for not at fair value but at “amortised cost” – a practice that would smooth their effect on institutions’ balance sheets.

The list could, however, pose a threat to the IASB, which is likely to have previously dismissed many of the requests and could struggle to revisit them without damaging its credibility. Other countries that have adopted, or are adopting, the IASB’s rules include China, Hong Kong, South Africa, Australia and Canada.

By Jennifer Hughes in London and Nikki Tait in Brussels for The Financial Times

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