European Ministers Put Pressure on Accounting Standards Board

Threat to summon IASB representative to meeting following concerns that US banks will have an advantage.

The EU’s finance ministers and the European Commission are ratcheting up pressure on the setters of accounting standards in Europe to soften their rules on valuing assets.

Finance ministers threatened to summon a representative of the International Accounting Standards Board (IASB) to their next meeting in June to explain its stance. Christine Lagarde, France’s finance minister, said this week that the IASB’s response so far had not been sufficient.

At issue is the fair value accounting standard, which obliges firms to value assets in accordance with their current market price, and the standard on recognising and measuring financial instruments. Banks and other financial institutions complain that during the financial crisis they have been forced by the standard to value their assets at below their true levels, because of the illiquid state of the markets.

Charlie McCreevy, the European commissioner for the internal market, said on Tuesday that “there is a real concern among ministers that there is insufficient appreciation in the IASB of the huge impact on financial stability that fair value accounting has caused”.

The US standard-setter, the Financial Accounting Standards Board, changed its standards last month, in response to a lobbying campaign by the banks. McCreevy said that ministers were concerned about “the risk of a divergence between how banks are treated in the EU and in the United States”.

Ministers are concerned that the new rules, which were adopted following intense pressure in the US Congress, will give banks greater flexibility as to how they value their assets and thus allow them to make their balance-sheets appear healthier than those of European rivals. Finance ministers issued a statement in April saying that the rules could lead to a “significant divergence of international accounting practice” and called on the IASB to address these issues immediately “with the aim of achieving equivalent treatment”.

The IASB board announced on April 24th that it would accelerate a planned review of its standard on recognising and measuring financial instruments, and would present a proposal in six months. A separate draft proposal, on the principle of fair value, would be published at the end of May or beginning of June, although this initiative was already planned prior to the US changes. The board also agreed that the new US guidance on fair value was similar to its own.

According to diplomats who attended Tuesday’s meeting of finance ministers, Lagarde said that the IASB’s response so far had not been sufficient, and that it should be made to go further.

She was backed by the finance ministers of Germany and the Netherlands, Peer Steinbrück and Wouter Bos, who called for a representative of the IASB to be asked to attend the next meeting of finance ministers, on 9 June.

McCreevy said that ministers had agreed to return to the issue next month on the basis of further analysis by the Commission and the economic and financial committee, the national officials who prepare the meetings of EU finance ministers.

Nigel Sleigh-Johnson, head of financial reporting at the Institute of Chartered Accountants in England and Wales, said that rushing in new IASB standards without due process risked confusing investors and damaging the capital markets. He added that the IASB had responded to the US changes in a “fairly appropriate way”.

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