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August 29, 2011

IASB concerned over sovereign debt accounting

The International Accounting Standards Board has expressed concern over the inconsistent way that banks and insurers have been applying IAS 39 Financial Instruments: Recognition and Measurement when reporting the value of their Greek sovereign debt.

In a letter to the European Securities and Markets Authority (ESMA) the IASB chairman Hans Hoogervorst said that the recently published financial reports indicate that “some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of IAS 39”.

“It appears that some companies are not following IAS 39 when determining whether the Greek government bonds that they classify as AFS [available for sale] are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required in IAS 39,” Hoogervorst writes in the letter to the regulator.

Hoogervorst also said some companies holding Greek government bonds classified as AFS have stated that they are relying on internal valuation methodologies, “rather than on market prices, to measure the fair value of the assets as at 30 June 2011”.

The IASB does not normally comment on the application of IFRS, however Hoogervorst said that due to the visibly inconsistent application, the standard setter believes that it is appropriate to bring this matter to ESMA’s attention.

The IASB’s letter did not single out any banks or countries.

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