November 25, 2011 / 11:15 AM / 7 years ago

"Fair value" accounting rule tweak raises concerns

LONDON (Reuters) - A global accounting rule that was rehashed under pressure from policymakers in the financial crisis has to be revised, sparking industry fears it could make standard setters vulnerable again to political influence.

In late 2009 the International Accounting Standards Board (IASB) revamped the first part of its “fair value” or mark-to-market rule which governs when and how banks in over 100 countries must price assets on their books at the going rate.

Policymakers in the EU and elsewhere said at the time the existing rule forced banks to price assets at depressed values causing more volatility when markets were already fragile.

IASB Chairman Hans Hoogervorst said on Friday the revamped IFRS 9 rule, which is likely to take effect in 2015, will be reworked even though countries like Australia already use it.

In a speech in Melbourne, Australia, Hoogervorst said further changes would make IFRS 9 fit better with a separate reform of insurance accounting and help bridge a gap with a U.S. fair value accounting rule reform.

World leaders want the IASB and its U.S. counterpart to “converge” their rules.

“We gradually came to the conclusion that we could make a lot of progress on both these issues — insurance and convergence — by adapting IFRS 9 in a limited way,” Hoogervorst said.

“It was not an easy decision to make. Most importantly because we knew that our constituents that have already adopted might not be very happy,” Hoogervorst added.

The former Dutch finance minister, who took up the reins earlier this year, hoped for only limited tweaks but “in practice pressure for wider changes will undoubtedly be there”.

He promised to “proceed with caution and limit any changes to those that are absolutely necessary.”

Ed Nusbaum, chief executive of auditor Grant Thornton, said the IASB should stick to market value assessments of bank assets.

“We want to make sure the IASB stays independent and the standards being set are not overly influenced by political influence to try to make banks and other institutions look better than they really are,” Nusbaum told Reuters.

REAL GREEK VALUE

IFRS 9 will replace the IASB’s current “fair value” rule known as IAS 39.

Hoogervorst complained in August to the European Securities and Markets Authority (ESMA) that some banks in the EU were failing to apply the rule properly to avoid large writdowns on holdings of sovereign debt in Greece, which is receiving a second bail out from the EU.

At the end of June markets were showing a 50 percent discount on Greek sovereign debt but French banks wrote down their holdings by much less than this while in Britain and Germany regulators insisted on full market value writedowns.

“It has been observed that there are differences regarding recognition or non-recognition of impairment losses,” ESMA said on Friday in a study on Greek debt writedowns which named no banks or EU member states.

Two financial institutions showed no impairment at all even though ESMA concluded “there was objective evidence of impairment of Greek sovereign bonds as of 30 June 2011).

“Issuers should have provided indications on the facts and circumstances and the conditions that existed at that date in their reports,” ESMA added.

ESMA noted its study will be “relevant” for banks and auditors preparing full annual statements for 2011, due early next year.

“While one can always debate the percentage of the impairment, the first question was it impaired and the accountants clearly said in an almost united way that it was indeed impaired,” Grant Thornton’s Nusbaum said.

“That is important going forward in looking at Greek debt but it’s too early to make an assessment about Italy and others,” Nusbaum said.

Reporting by Huw Jones

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