IAS39 prompts fears over account volatility

Link: IAS special report

European banks want to continue using favourable accounting treatments for derivatives, which hedge deposits repayable on demand. But the IASB has sought to make accounts correlate more with actual current year values.

Critics claim the approach can lead to more volatility in accounts with companies less able to smooth returns to reflect long-term averages. Derivatives are used to cover risk linked to movements in interest rates. Tony Clifford, partner at Ernst & Young, said: ‘The problem behind IASB is that it takes a highly technical purist approach. The banks worry that the results don’t make accountancy sense.’

The insurance sector is also lobbying for changes to IAS39, because they fear it will cause more volatility from year to year.

IASB said the need for IAS39 is driven by the increasingly prevalent use of financial instruments. It claimed that without a standard such as IAS39, the use of derivative contracts for an individual company’s accounts would be unknown to investors.

The US accounting regulator has warned that if Europe does not adopt the derivative rules, transatlantic convergence could be threatened. But a source close to the European Commission said the IASB’s latest concessions on the issue were still ‘unworkable’.

Clifford added that financial institutions’ key concerns remained. ‘The changes are modest and unlikely to meet their aim of developing an approach that is both workable in practice and requires financial institutions to make no major system changes.’

Related reading