Banks wage war on new rule

So hated is the standard, that even the head of the UK Accounting Standards Board said her organisation would not have published the rule if it had not been compelled to do so.

The British Bankers Association, representing high street names such as Abbey National, Barclays and HSBC, said the standard, IAS 39, contained in a paper known as FRED 30, would cause consternation among banks if their concerns were not recognised.

Crucially the draft is proposing that all financial instruments, such as derivatives and shares, be valued at fair value and not historical cost as is the existing practice.

The change would radically transform the balance sheets of investment and retail banks with large loan portfolios in particular. Overall it introduces a great deal more volatility to a company’s profit and loss account and balance sheet.

Of particular concern to the BBA are the ‘arbitrary restrictions on enterprise-wide risk management’ the draft is proposing.

Paul Chisnall, director of the BBA, said: ‘UK banks are very anti this. It’s an awful standard and there’s a case for dropping IAS 39 completely. The outcry will be if the exposure draft does not recognise the concerns that have been repeatedly raised.’

The shift made by IAS 39 is so fundamental that the UK ASB has placed itself at odds with the International Accounting Standards Board by voicing its concerns.

Mary Keegan, chairman of the ASB, said: ‘There will be howls of anguish. It is so different in so many ways from UK standards. If the UK board had a free choice, we would not be offering IAS 39 for adoption in the UK today.’

The stage is now set for a desperate struggle over the standard which has to be fully adopted by companies which have to use international standards by 2005.The issue has re-emerged following the early adoption of IAS 39 by German banks, such as Dresdner and Hypovereinsbank. The banks have expressed concern about the standard’s arbitrary accounting treatment and restrictions on enterprise-wide risk management.

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