The European Commission's decision to endorse almost all existing International Financial Reporting Standards is undoubtedly a milestone on the route to 2005. But it is a real concern that IAS32 and 39, such pivotal standards, still remain a potential stumbling block for the IASB and business alike.
The fact that the Commission’s Accounting Regulatory Committee did not endorse these standards may not seem a huge surprise. They are under revision following a series of consultations with European banks earlier in 2003. The IASB is about to issue an exposure draft that may deal with the main concern of the banks that, to the extent possible within agreed core principles, they should be allowed to account for hedges in a way that reflects the way they manage the risk.
On the other hand, it’s clear that time is tight. The standards must be completed by March 2004 if they are to be endorsed by in time for 2005. With the exception of net position hedging for interest rate risk – the mainissue for the banks – the IASB intends to complete the standards, withoutexposing them for further public comment, by the end of 2003.
The exposure draft on net position hedging is likely to be issued in September. Everything running according to plan, the standard should befinalised in March. But there seem to be unresolved issues in the discussions with the banks that could delay the process of completing the final standard. If these cannot be resolved, the endorsement process may also take longer than expected, which would be unfortunate.
The requirement to use IFRS in Europe must mean all IFRS. It seems unthinkable that the much-heralded European move to IFRS could take place without standards on financial instruments, since the use of such instruments in both the financial and corporate sectors is hugely significant.
The next few months will be critical for all concerned – the IASB, the EU and European industry – in their common aim of achieving a high quality package of IFRS for use in 2005.