Europe’s IAS39 battle sounds alarm bells in Oz

Uncertainty about the status of international accounting standard IAS39 has added to the growing alarm in Down Under’s A$760bn (£285bn) financial services industry, the fourth largest in the world.

The ‘no’ vote by France, Italy, Spain and Belgium to new rules on disclosure of the market value of investments in derivative securities has intensified opposition to the changes and led to calls for postponement.

Australian and New Zealand companies have been told they will be the first to introduce the new accounting rules despite their complaints about cost, widespread confusion and major rule changes so close to the deadline.

Les Owen, group chief executive of international insurance giant AXA Asia Pacific – which has to report according to Australian, US and French rules, said the latest set back involving IAS39 strengthened the case for postponement.

‘This was the kind of situation we foresaw happening. If Europe, or some major European countries, do not adopt IAS39 then the advantage (of the rule changes) will be seriously damaged, if not reduced altogether,’ Owen explained

Owen also complained of uncertainty caused when rules were still being finalised with less than six months to the accounting deadline, and of the possibility that the system might have to be replaced again in three years time.

Sir John Anderson, chief executive officer of National Bank of New Zealand, recently acquired by Australia and New Zealand Banking Group (ANZ), said the European move improved the case for having the January 1 deadline put back.

But Warren McGregor, who is on the 14-member London-based International Accounting Standards Board overseeing the transition, said one of the most compelling reasons for meeting the deadline was that any prevarication could mean the loss of a unique opportunity for global consensus.

Advocates of the changes say they will improve transparency, strengthen disclosure and provide a common basis for comparing companies, benefiting investors and lenders.

They would also improve disclosure of the use of derivatives by banks and insurance companies.

According to best estimates, the current value of derivatives is between A$6 trillion and A$8 trillion, with a high concentration of that exposure among banks and insurance companies.

The accounting treatment of derivatives by many companies is presently driven by domestic taxation and regulatory standards that provide little insight into the exposure for investors.

Some companies have been accused of fighting a rearguard action against the new reporting system because it will require them to mark to market, that is, make an accounting adjustment to reflect unrealised gains and losses on book values.

McGregor believes more forensic reporting of their use will encourage higher standards.

US regulators were closely watching the move to international standards, which 90 countries are expected to accept by 2005, and could quickly seek convergence if it was successful, he added.

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