“Spineless?” UK Pressure Targets Fair Value Weakening

IASB's independence is questioned at a Parliamentary hearing today, as politicians look to soften mark-to-market accounting.

Members of the Treasury Committee of Britain’s House of Commons asked razor-sharp questions about the independence of the International Accounting Standards Board today — and especially IASB’s relaxation of fair-value accounting rules to help banks weather the credit crisis.

“Spineless? Caved-in?” said Labor Party MP John McFall, the committee chair, as he crisply opened the hearing on “accountancy and the banking crisis.” He then made a one-word demand of the man being questioned, IASB Chairman David Tweedie: “Answer.”

Since early October, IASB has been under fire for reportedly submitting to political pressure in softening the accounting rules in the face of financial pressure on Britain’s banks. One complaint against IASB has been that it sidestepped due process to rush out a rule allowing financial institutions to reclassify some loans as a way of avoiding marking those assets to market. By eschewing fair value accounting, the banks also avoid losses generated by a drop in asset value.

Critics of the fair value accounting — which includes banks — blame the methodology for exacerbating the current credit by forcing companies to take unnecessary writedowns on illiquid financial assets.

Tweedie said that the board had little choice but to rush through the rule changes to IAS 39 and IFRS 7 because the European Commission was bearing down on the organization and threatening to pass legislation that would allow reclassification of loans without also requiring proper controls or disclosures. Tweedie asserted that IASB faced a standard-setting dilemma that he hoped he would never encounter again — “a blunt threat to blow the organization away … and that came very, very rapidly.”

Tweedie explained that IASB first heard about the draft legislation in a speech by the EC commissioner, in which he proposed mandating a “carve out” or exception to the existing rules. The legislation, if passed, would have allowed banks to reclassify “held for sale” or “held for trading” loans to “held to maturity,” effectively permitting banks to avoid losses associated with fair value accounting. The EC had a competitive reason for promoting the rule change. According to an Oct. 7 statement, the EC wanted to avoid “any distortion of treatment between U.S. and European banks due to a difference in accounting rules.”

Quickly, IASB decided to speed through the rule change by adopting its American counterpart: FAS 115, which places restrictions around the reclassification process and includes disclosure requirements. “I think accounting in Europe would have been totally out of control if they had taken the option to go with the [EC] carve out,” Tweedie told the HOC committee, which has oversight responsibilities for the UK Treasury, Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Services Authority.

Originally, IASB expected to have at least a week to work through the EC draft to make sure it was aligned with U.S. generally accepted accounting principles and the ongoing convergence project between IASB and the U.S. Financial Accounting Standards Board. “But we didn’t have a week, only a matter of days,” noted Tweedie, who said it was important to investors to push through a rule change that included restrictions and disclosure requirements.


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