By Anna McLauchlin - 31st March 2004
Banks have expressed disappointment at the final controversial accounting standard IAS 39 adopted on Wednesday by the International Accounting Standards Board.
All IAS rules are due to be adopted by EU public companies by 2005 but IAS 39 may still be rejected by the European Commission on fears it will make equity stockmarkets more volatile.
An advisor at the European Banking Federation Wilfried Wilms told EUPolitix.com he is "disappointed with the outcome".
"It is useful but not as useful as we planned and most importantly it is a complex burdensome standard to put into practice."
And he supported banks' fears that markets will be affected.
"It will result in huge swings in equity", he admitted.
"Look at German banks, who have been using a similar standard for a few years now. They announce profits but warn analysts they are based on an accounting issue rather than economic performance.
"Two years later when these profits become losses analysts have forgotten the explanation or refuse to believe it, and they are now even more suspicious after Enron etc."
A commission spokesman said talks are ongoing between Brussels and the IASB to try to reach a compromise "instead of the rules laid down today that we could not accept."
"We welcome the fact that they have left the door open for further contact with banks and insurance companies," he said.
"But we do expect the board to concentrate on finding solutions to EU concerns asap."
He said the commission would expect a decision "in weeks".
Standard IAS 39 sticks to the principle of fair value accounting which means certain financial instruments known as derivatives will have to be accounted for at their current market value on company balance sheets rather than their historical value.
Banks and governments have argued this will make lead to dramatic swings in company accounts as these instruments are alternately accounted for as profits and losses depending on their maturity.
But the IASB has defended its standard as it claims fair value correctly values the risks banks are carrying.
In the draft adopted on Wednesday the board has made various concessions after consulting with the banking sector and has said it will continue to revise the standard to make it easier to implement over the next couple of years.
But the issue of fair value will not change.
IASB chairman Sir David Tweedie said on Wednesday: "The IASB has made it clear that any amendments must be within the basic principles of hedge accounting contained in IAS 39, but that we will work within those principles to simplify the application of the standard."
Wilms called the IASB "unprofessional" for imposing a standard before it has been properly thought out.
"If you impose a change on a bank and then say you might review it, in other words you could unwind the whole thing and in my view this is not professional."
But despite the fact that the standard has not yet been endorsed in Brussels, several major banks across Europe could implement it to tie in with the US, which uses similar fair value accounting.
The UK's biggest bank HSBC told the FT on Wednesday it would use the standard, but France's Credit Agricole and Société Générale said they would reject the current draft but consider amendments.
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