Last chance looms for IAS

By Anna McLauchlin

Date: 29/07/04

THE European Commission will next week launch a last-ditch attempt to get a controversial new accounting rule for banks endorsed in time for adoption in 2005.

The Commission will, according to insiders, ask member states on 6 August to adopt the standard - known as IAS39 - with the most contentious issues made optional.

The proposal needs the backing of a committee meeting planned for 8 September so as to be approved formally at the end of October and used throughout the EU from January.

The aim is to persuade sceptical member states, including France and Italy, to support the terms of IAS39. These countries have consistently opposed the standard, which obliges banks to value the risk involved in financial derivatives, such as options and futures, on their balance sheets. The pair, plus Spain and Belgium, argue that this will lead to unacceptable volatility in bank share prices as a derivative accounted for at market value could become a profit or a loss in different statements.

Some member states have already said that they will not back the new compromise proposal, because they want the standard to be approved in its entirety.

"The UK will oppose it and I think others will too," said one insider. "Think of the precedent it would set, if every time there is a difficult decision, you just leave out the difficult parts.

"If you do that in accounting terms you create enormous confusion in the market place. And it's also a very bad signal for such a new project."

The lack of support has frustrated the Commission. "Even if the standard is endorsed with the carve-out, that wouldn't prevent the UK from requiring IAS39 to be used under national law," a spokesman said.

But there is another issue at stake. The ultimate aim of standard-setters is to approve a global set of accounting standards, commonly accepted around the world. The EU's problem with IAS39 gives the impression that it is falling at the first hurdle.

"The US argument is constantly in the background," says another source close to the issue. "The point is to work towards a fully harmonized set of global standards and this will not help."

All European banks must use the 40 International Accounting Standards (IAS), drafted by an independent board and approved by the Commission, from next year.

IAS39 was excluded from the endorsement procedure after industry bosses and even heads of state argued it would damage European markets.