Bankers Hope for Fair Value Reprieve

Financial News, May 4, 2003 | Go to article overview

Bankers Hope for Fair Value Reprieve


Byline: Natasha de Teran

Bankers are hoping that the European accountancy watchdog will be swayed from its intent to introduce the controversial new audit rule affecting the treatment of derivatives in its present form.But industry specialists remain doubtful any significant changes will be forthcoming.

The new rule, International Accounting Standard 39 (IAS39), forms part of the new standards under which all European-listed corporates have to report in 2005. It is similar to the US Financial Accounting Standard Board's standard, FAS133, which says that companies preparing US Generally Accepted Accounting Principles-based financial statements (GAAP) must mark their derivative holdings to market.

IAS39 stipulates that all derivatives will have to be recognised on the balance sheet at fair value, unless they meet stringent criteria for hedge accounting.

Furthermore macro, or portfolio, hedges that are commonly employed by banks and other financial institutions to offset their risks will not qualify under the hedge accounting rule.

Many have objected to this rule including the Basel Committee, which has voiced its concerns about how the treatment of macro hedging could be detrimental to banks managing their risks.

The International Accounting Standard Board (IASB) held meetings in London with eight of the world's leading national standard setters last month in an effort to finalise the rule. There, the majority of participants expressed their support for IAS39, although there was some dissent.

A further summit was held last week when the IASB met several European banks, which strongly oppose the rule in its current form. Although neither the IASB nor the participating banks would discuss the meeting's outcome, the watchdog has confirmed the outcome was "constructive" and that it would continue to work with the group to reach a final conclusion. However, while some have concluded that a compromise on IAS39 will now be forthcoming, others are less convinced.

Karlo Fuchs, German banking analyst at Standard & Poor's in Frankfurt, says: "Changes may yet be made to the proposed version of IAS39 as there are still a lot of pressure groups lobbying against the existing proposals. …

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