I’ve been thinking about the International Accounting Standards Board’s decision to allow for the reclassification of securities to ‘held for investment’ and avoiding the application of fair value.
You will remember that the IASB’s reasoning for ths relaxation of fair value was that it could only happen in rare circumstances. The lead from the board was that these times we’re living in are rare enough to constitute justification for allowing the reclassification.
Only the thing is this, I understand these are rare circumstances, we can all agree that. But so that there’s is no misunderstanding, shouldn’t we be supplied with some form of definition? I say this so that, in the future, the banks cannot keep coming back to say: ‘these times are rare, give us the reclassification.’
This is important, I think, because Sir David Tweedie, and his board members, will not be around forever and their definition of a crisis may differ from that of their successors.
Lastly, who will call time on the ‘rare’ circumstances and how will that be judged? Or to put it another way, who will tell the banks that they are no longer in crisis and they have to return to the old way of doing things. If the reclassification gets widely used this moment might prove very tricky indeed.
I suspect this won’t happen and the current review of accounting for financial instruments will overtake the short term ‘rare’ circumstances solutions. It will be fascinating to see how it all works out.