EU Decision on New Accounting Standards Set to Affect Market

Financial News, June 16, 2002 | Go to article overview

EU Decision on New Accounting Standards Set to Affect Market


Byline: Natasha de Teran

A European Union decision made earlier this month to adopt new international accounting standards stands to significantly affect the derivatives market.The new regulation requires all European listed companies to implement the International Accounting Standard Board's international accounting standards (IAS) for their consolidated accounts by 2005, a move that will relate to 7,000 companies. Although there will be a temporary exemption for companies listed in the United States and using US generally accepted accounting principles (GAAP) and for companies that have issued debt but not equity instruments, even these companies will be required to comply with international standards by January 1, 2007.One of the more controversial parts of the new accounting standards is IAS 39, Financial Instruments: Recognition and Measurement. IAS 39 is almost identical to the US Financial Accounting Standard Board's standard FAS 133 introduced in June 2000. It demands that all companies preparing GAAP-based financial statements mark their derivative holdings to market.Under IAS 39 all derivatives will have to be recognised on balance sheet at fair value. All hedging relationships will have to meet stringent criteria in order for 'hedge accounting' to be applied. Many traditional strategies, such as the macro hedging (where a range of exposures are pooled and the overall risk is subsequently hedged) or netting (where subsidiaries exposures are offset against each other) may be severely restricted and may not qualify for hedge accounting. Option-based and currency hedges will also be affected by IAS implementation, as these are particularly difficult to classify under IAS 39's definition of hedge accounting. Ian Wright, a partner at PricewaterhouseCoopers, says: 'While application of IAS39 hedge accounting rules can significantly reduce earnings volatility, compliance with the hedge criteria will require significant systems enhancements for most companies. …

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