Corporates and banks in Europe have been left in limbo yet again over the adoption of International Accounting Standard 39, after the European Commission's Accounting Regulatory Committee proposed two amendments to the rule. This could create two accounting systems in Europe, one which doesn't require institutions to mark financial instruments--including derivatives--to market and another that does. An official at the IASB declined comment, but one market official said the board is due to meet in November and could make wholesale changes to the standard, adding even more confusion.
The ARC proposed carving out the option to mark liabilities to market, although it said it will review any changes the IASB makes as a result of its discussion on the option to fair value, with a view to adopting it in amended form next year. The ARC also proposed that IAS 39 provisions, which prevent portfolio hedging of deposits on a fair value basis should not be adopted, driven by concern that IAS 39 does not take into account the way in which many European banks manage their assets and liabilities in a fixed interest rate culture. "The legal framework around the ARC's proposals needs clarity," according to an accountant. The ARC's proposals will be reviewed by the European Commission, but it is not clear when this will be.
A prime concern raised by the ARC's amendments is the knock-on effect it may have on the rest of the International Financial Reporting Standards, noted Hitchins. For example, in IFRS 1 there are provisions, which only apply if the rest of IFRS is fully adopted. It is not clear whether this will still be the case for an entity operating under IAS 39 as proposed by the ARC. Corporates listed with the Securities and Exchange Commission will also need clarification as to whether the amended European IAS 39 will be accepted by the SEC, added Hitchins. Under the proposed changes to mark-to-market accounting, entities such as insurance companies, which are required to match assets and liabilities, will lose out because they will have to mark assets to market, but not liabilities.
The European Commission's move is a coup for the French banks, which have been campaigning for a change in the rule to allow hedge accounting. This climaxed last year when Jacques Chirac, president of France, wrote a letter to European Commission president, Romano Prodi, highlighting the short-comings of IAS 39 and 32.
