Tuesday, October 7, 2008

Gun to the Head of the International Accounting Standards Board?

European Union says to relax mark-to-market accounting rules

Banks in the European Union will be allowed to skirt an accounting rule blamed by critics for exacerbating the impact of the credit crunch and triggering fire sales of assets, EU president France said on Tuesday.

EU finance ministers agreed to change how the mark-to-market rule is applied in the third quarter so that European banks are treated in the same way as their U.S. competitors in the face of the worst financial crisis in 80 years.

Under U.S. accounting rules, banks in rare circumstances can move an asset from their trading book, where assets are valued on a mark-to-market basis, to their bank book, where assets are held to maturity and valued at cost.

The U.S. authorities formally encouraged this last week to ease the pain on banks facing an uphill task to recapitalise.

"In accounting, the American groups are authorised to transfer assets from their trading book, where they evaluate assets at mark-to-market," said Christine Lagarde, finance minister for France, which currently holds the rotating EU presidency. "We feel this method should also be allowed to apply to establishments in Europe," Lagarde said.

The move puts a gun to the head of the International Accounting Standards Board, an independent body that sets mandatory accounting rules used in over 100 countries, including the 27-nation EU. The IASB meets in London on Oct. 13-17 to consider aligning its mark-to-market rule with changes made in the United States.

EU diplomats said if the IASB did not make the change, the European Commission would make a formal proposal "within days" for EU ministers to adopt. "We can't leave European industry at a competitive disadvantage to their American counterparts," an EU official said.

The European Banking Federation called for the change last week, but some big investors have their doubts. "The Association of British Insurers believes that accounts should portray the situation facing companies as it is in reality, and the fair-value approach is important to this," the ABI said in a statement. "If we are to have faith in accounting standards, fair value should be applied when the going is hard as well as when it is fair," the ABI said.

The effective ultimatum from the EU to the IASB marks a further hardening of the bloc's attitude to a body that is seen by some EU policymakers as having influential law-making powers but too little public accountability.

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