The European Commission decided to delay the introduction of controversial accounting rules just as they were made available for use in most of the rest of the world outside the US.

EU shocked the accountancy community last month when it decided not to proceed with the fast track procedure to endorse the International Accounting Standards Board’s simplification of measurement of financial assets, IFRS 9. The delay came just as the new rules were introduced in most of the rest of the world outside the US. Brussels’ decision, which followed calls by the Group of 20 nations for clearer rules in response to the financial crisis, revealed a deep split among European financial institutions.

It was pressure from the European Commission earlier this year that prompted the IASB to bring out IFRS 9 as demands from within the EU has stalled the endorsement process. Companies all over Europe are perturbed by the increased politicisation of the accounting standard-setting process

The EU decision means that European companies cannot apply the new rules for 2009 year end financial statements while companies in more than 80 countries outside the US can. This has angered many multinationals, particularly in the UK, which believe they will be put at a competitive disadvantage. For some companies IFRS 9 produces “more meaningful numbers” than the current IAS 39.

An accounting crisis

The UK insurance industry is also concerned at the failure of the European Union to endorse IFRS 9 (“Companies set to defy accounting rule delay”, FT November 26).

FT stated in a report on 26/11/2009 that some of Europe’s biggest multinational companies are preparing to defy moves by Brussels to delay the introduction of new global accounting rules within the European Union.

Several UK banks and other European companies are among those in favour of early adoption of IFRS 9 for use this year end, according to minutes from a committee meeting. However, French and Italian banks, German insurers and European regulators such as the European Central Bank were in favour of postponing a decision until next year.

The other alternative is to prepare accounts as if the new rules were in place in parallel with official financial statements.

Fair value or mark-to-market accounting

Under the overhaul, loans, or securities similar to loans, will be held at the price banks paid for them, provided the part of the firm that owns them is not engaged in trading. Everything else will be held at fair value. Bank analysts believe that this will cut the proportion of assets held at market prices, which is about 50 per cent for big European firms.

Some policymakers and banks blamed “fair value” for exacerbating the crisis by providing a snapshot of the value of banks as the markets fell. Accountants said the reforms would provide greater clarity in determining which bank assets must be marked to market.

A single set of independent accounting standards is the holy grail for accountants, but fair value accounting, which requires assets to be marked to market in order to give the clearest snapshot of their worth, is one of the controversies at the heart of the financial crisis. The International Accounting Standards Board, always risked facing political opposition to its overhaul of fair value rules.

Some banks and policymakers say that valuing assets at market prices as the global economy sank served to exacerbate the crisis. Confidence in “efficient” markets has also taken a hit. Some observers, especially in France, argue accounting is too important an economic tool to be left to bean-counters.

Under the overhaul, there are two ways to value assets. Under IAS 39 there are only 2 measurement methods, however, there are 4 categories. Loans, or securities similar to loans, will be held at the price banks paid for them, provided the part of the firm that owns them is not engaged in trading. The rest will be held at fair value.

Analysts believe this will cut the proportion of assets held at market prices, which is about 50 per cent for big European firms. All trading assets are measured at fair value under current IFRS, which could lead to them being required to report bigger losses.

Overview of all aspects

The 11th hour decision by European officials to defer endorsement of the standard, or mark to market, accounting just as they became available for early adoption in rest of world, excluding the US, has shown how close technocrats have come to losing their grip on their craft.

European Commission officials say they want more time to look into whether the rethink would cause European companies to report more of their assets at current market prices. Critics of this system say this can lead greater volatility of accounts.

EUs’ decision puts European companies at a disadvantage. Companies in favour of IFRS 9 also see it as a vital step to a single set of global accounting standards, including convergence of the rules of the Federal Accounting Standards Board in the US with the IASB.

EU has warned that it will be months before it decides whether to support a radical overhaul of accounting rules on measurement of financial assets.

Charlie McCreevy, the outgoing internal markets commissioner, stepped into the debate in a letter to Gerrit Zalm, head of the independent foundation which oversees the International Accounting Standards Board. The Commission’s decision not to deploy the rules this year “reflects the changed financial outlook and market improvements”

In the letter, Mr McCreevy said endorsement of 9 would be considered when the IASB had published the full standard, including rules on hedge accounting and liabilities, which is due in late 2010.

What happens next?

EU believes that it has chosen the less controversial option by delaying approval until the final two parts of the IFRS 9 standard are published late next year. The delay in introducing the rules is due to “the changed financial outlook and market improvements”.

The Group of 20 nations had called for independent global standards that “reaffirm ... the framework of fair value” irrespective of whether the global economy is up or down. Hedge funds say the ability to compare accounts across borders drives capital markets in bad times and good. More transparency typically equals more investment.

Multinational corporations and the more than 80 countries outside the EU that are signing up to IASB rules – including Japan, Australia, India and China – have at least as much to lose as their European counterparts if consensus collapses.

Groups with global operations face even greater misery with a patchwork of rules across the world. Emerging economies have seen the adoption of global IFRS accounting as their ticket to the capital markets.

Source: The Financial Times, The Economic Times, IASB. FEI.