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13 Nov 2009
European banks will have to wait to adopt a new contentious accounting rule released yesterday in the wake of the crisis, which banks fear will make them uncompetitive.
European finance ministers have spent the past twelve months piling pressure on the International Accounting Standards Board to hasten the release of a new accounting rule to value and measure assets.
Yesterday’s release of the new standard was met with delays from Brussels which will study the new standard before it considers adoption, The Financial Times reports.
The move has angered banks which fear they will be put at a “competitive disadvantage” if they are not able to start using the new rule.
The rule, based on the “fair value” principle, forces listed companies around the world to measure their assets at market prices.
The principle was criticised during the crisis as banks valued their financial instruments at depressed prices in stagnant markets.
Read the full story: EU delays adoption of accounting rule changes
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Visitor comments Add your comment
IASB phobia of derivatives
When talking about accounting financial rules, everyone speaks about banks. Don't forget insurers! this industry is impacted by these rules on both sides of balance sheet. The main objective for them is consistency on both sides : either amortised cost, either mark to market but consistency.
On the asset side, their portfolio is diversified, shares, bonds, real estate..Every thing can be accounted either at cost, either at mark to market (or mark to model when not listed).
On the liability side, very often ,and specially in life business, with participating features, the future cash flow payed to policyholders will depend on the assets. So the present value of these cash flows has to be consistent with the accounting evaluation of assets.
The real business model is to use assets performance to pay insurance risk, to take a part of this performance and to give the residuals as bonuses to policyholders.
Consistency could be achieved with the two mains models of assets ( at cost or mark to market). And the
But he IASB's phobia of derivatives prevents this consistency: all derivative must be classified as mark to market by profit and losses..In iasb"s thinking, a derivative is some thing very dangerous: small but nasty!
You must apply this rule
even if the derivative is embedded in a bond. An equity may be classified Available for Sale, a bond issued by the same company also, but a convertible is too much dangerous!! you have to separate the derivative, or put the entire instrument in mark to market by profit and loss! One can easily consider that the convertible is less risky than the equity..but not the IASB.
So there will be always a part of assets in mark to market by profit and losses ( because of their business, specially redemption risk,insurers need to have on the asset side some optionnality, reducing their risk).
Today insurers obtain some consistency in P/L using massively Available for Sale classification on assets and shadow accounting on liability side. IASB wants to eliminate AFS classification..And works on some mark to market norm for insurers...New proposition IFRS9 should again break this arrangement...
Posted by: nook, 14 Nov 2009 | 00:00
why does the article refer to bureaucracy
European regulators are state supported and not financed by its users
Why does the article not refer to elementary weaknesses in the fasten upgraded international rules, for which, correct me if am wrong there no scientifical support and still underlying controversial comments
Regulating is a serious matter important prevails, not urgency
Besides the profession as a whole accepted the international regulating edicts with a total absence of critical viewpoints whatsoever
A last remark, which company uses fair value as an economic measure for its internal decisions, I hear no comments on this aspect of valuation, whereas it was always (now an atavism, that valuation rules where congruent in respect of internal or external economic decisions
Regards, an excuse me my aborigal English
Posted by: HUBERT DE NEEF, 19 Nov 2009 | 00:00