RegulationAccounting StandardsBank defended over derivatives mess

Bank defended over derivatives mess

IAS39 is still proving to be a significant hurdle despite positive noises by standard setters

After Accountancy Age

highlighted the Bank of England’s decision not to take up the hedge
accounting option of IAS39, the head of the ASB Ian Mackintosh spoke out in
defence of the central bank and the standard.

‘Given that hedge accounting is permitted rather than required by IAS39, it
is clear that the Bank’s decision is not a departure from the standard. It
therefore provides no ground for criticism either of the Bank or of the
standard,’ Mackintosh said.

The move left the Bank’s gains and losses arising on some financial
instruments (especially those that relate to arrangements that will affect the
results of future periods) off the P&L, but these gains and losses were as
real as many others that are reported, said Mackintosh.

Despite his staunch backing of the standard, the ASB chairman conceded that
the accounting regulation was far from the finished article in its present form.
‘In my opinion, a better standard, providing more transparent information, would
not contain an option for hedge accounting,’ he added.

The mixed attribute standard leaves room for loans to be recorded on a cost
basis and derivative contracts on a fair value basis, but this creates a
‘mish-mash’, according to one source, which has been criticised by clients and

There are still major sticking points on the treatment of financial and
non-financial host contracts. Detractors have highlighted the grey area that
sees standard financial contracts eligible for fair value treatment, but some
‘non-financial’ agreements such as lease contracts and insurance contracts
valued at cost.

Changes in fair value for financial host contracts are reported through the
profit and loss accounts, but embedding a derivative in a contract that is not a
financial instrument ‘should not allow circumventing the requirement to account
for all derivatives under IAS39’, said one critic.

Another concerned party was the International Swaps and Derivatives
Associates, representing 797 member institutions in 54 countries.

The ISDA thought that the standard was so shaky in terms of cash flow hedging
requirements that it was being interpreted differently by the major audit firms.


Red tape ‘won’t be cut’

Businesses are not convinced by government plans to cut red tape. The
majority believe that the programme to cut bureaucracy will not tackle the
regulation business finds most irritating. In a report by the NAO, called
‘Reducing the Cost of Complying with Regulations: The Delivery of the
Administrative Burdens Reduction Programme 2007’, the watchdog said that the
administrative reduction programme, launched in December, was failing to win
over companies. The NAO found that 85% of businesses polled did not believe
Whitehall would succeed in its plans to reduce the £20bn regulatory burden by
20% by 2010.

US listing loses BG Group

BG Group has announced that it will be delisting from the US stock market.
The FTSE 100 giant became the latest high-profile company to turn its back on
the US, following United Utilities, ICI and International Power. In a statement
to the London Stock Exchange, CFO Ashley Almanza said: ‘This move will reduce
costs and complexity without detracting from our standards of governance and

UK tax rate suffers

The UK had the fourth lowest corporate tax rate of the 15 member countries in
the EU in 1997, but is in 21st place (out of 27 EU countries) in 2007, a KPMG
survey of global tax rates showed. In a separate survey of tax competitiveness,
it added that tax rates were not everything in terms of attractiveness: ‘It’s
not just about tax rates. Clarity and consistency are still the most important
factors for business in making a tax regime attractive, the firm said. The news
comes as the government is moving to make the UK more attractive for
multi-nationals by dropping the taxation of inbound dividends.

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