Monday, November 16, 2009

Politics and Accounting: EU Delays Adoption of Fair Value Accounting Rule Changes

Politicians in the European Union have held up a radical overhaul of accounting rules for banks and insurers which came into force yesterday across most of the non-U.S. accounting world.

Politics comes to the fore in this as the rules have been postponed at a time when the commission itself is a lame duck because the commissioner’s job will come open with the new Commission beginning next year. Diplomats in Brussels say France is interested in the internal market commissioner's job in the next Commission.

The move highlights a major split among European financial institutions over the fair value new rules.

Analysts say some French, German and Italian banks with large investment banking activities would be hit disproportionately by the changes, forcing them to book losses on large holdings of derivatives.

The decision by the European Commission to delay the changes within Europe has angered other banks in the region who fear they will be put at a disadvantage compared to international peers.

The International Accounting Standards Board recently published major changes to the rules on fair value accounting, where assets are marked to market prices. Supporters of the new rules say this makes reporting more transparent. Critics believe fair value rules made the financial crisis worse by forcing banks to take losses on assets when markets fell.

The IASB fast-tracked the changes in response to calls by the G20 to make the changes by the end of the year. The European Commission said it would not adopt the changes until it had carried out an in-depth analysis, and would consider adoption in the new year.

The decision means that European banks and insurers will not use the new rules for their 2009 accounts while companies in more than 80 countries outside the EU will be required to do so.

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