Europe battles over fair value carve out

Efforts are underway in Brussels to create a carve out to international
accounting standards that would allow sweeping changes to the classification of
financial assets that would allow institutions to sidestep a fair value
calculation for all financial instruments including controversial derivatives.

Experts immediately said it could have huge ramifications for the
comparability of accounts from company to company, and country to country, and
could severely damage efforts at converging international with US standards.

A Council of Ministers meeting is due to decide today whether to carve out
the key paragraphs, nine and 50, of IAS39.

Supporters of the carve out believe it could provide significant help to
banks struggling in the credit crisis and help strengthen balance sheets.

Observers said there was furious lobbying under way of finance ministry
representatives sitting on the Accounting Regulatory Committee that advises EU
leaders. However, experienced commission watchers cast doubt on whether the
committee could influence politicians at this stage.

Defenders of fair value criticsed the carve out saying it would allow all
financial instruments to be transferred from ‘held for sale’ to ‘held for
investment’, including all derivatives, thus avoiding a fair value calculation.

They said the proposals would also remove the need to recognise losses on
assets on a timely basis, the need to report a transfer from sale to investment
and would allow the reversal of statements reporting losses.

Controversial credit default swaps would be among the derivatives that could
be reclassified under a carve out, though not under IASB plans announced on
Monday.

Those would allow securities, in rare circumstances, such as the current
crisis, to be reclassified in the same way US companies are permitted to.

In allowing reclassification the IASB believed it was satisfying demands from
EU leaders to create a level playing field between IFRS users and US companies.
But the arguments for a further carve out have continued.

Critics say the carve out proposals would create a global accounting
imbalance and lead investors to lose confidence in financial reports using the
relevant standards.

Insiders believe the outcome is too close to call though others believe the
balance will be tipped in favour of rejecting the carve out.

It is understood that the carve out is being driven by French officials but
there is opposition to the move from other European states.

Gordon Brown has made statements in the press viewed as supporting fair value
but it remains unclear how far his opposition to a carve out will be pushed.

One insider close to debate said: ‘This is politics, not accounting.’

A fresh statement this week from the IASB re-emphasised that in a crisis fair
value measurement does not mean valuing assets as if for a distressed sale or in
a bankruptcy. It also accepted that companies could use their own assumptions
about future cash flows in calculating fair value for securities in an illiquid
market.

The board has now made significant movements to address concerns without
actually suspending fair value in the way many politicians and senior executives
have demanded over recent weeks.