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June 29, 2009

Tweedie tells European minsters the IASB will stick to IAS 39 plans

Fears for the International Accounting Standards Board’s (IASB) credibility and future were alleviated this month when the board’s chair, David Tweedie, emerged from a meeting with European finance ministers with the IAS 39 improvements agenda intact and no further carve-outs imminent.

Tweedie was called before a European Union Council of Economic and Financial Affairs (Ecofin) meeting in Luxembourg to explain how the IASB is addressing what Ecofin called “potential competitive distortions generated by recent changes in US accounting regulation”.

The US Financial Accounting Standards Board (FASB) rushed through changes to US GAAP relating to fair value accounting and recognition of impairment losses on financial assets in April. Calls had been growing within Europe for the IASB to make similar changes.

Ecofin said the changes raised concerns about possible distortions to the level playing field for European entities.

Concerns for the IASB’s future

Fears had been growing within the accounting profession worldwide about what the fall out would be. If the IASB caved to EU demands, it would destroy the board’s credibility as an independent, international standard setter. If the IASB stood by its plans for a proper due process, it was feared Europe would make its own changes, undermining the IASB’s authority and possibly spelling the end to international standards.

Several weeks before the Ecofin meeting, the IASB decided to fast track its comprehensive review of IAS 39 Financial Instruments: Recognition and Measurement.

The review addresses the issues Ecofin was concerned about. It will be completed in a staggered fashion and the section that addresses classification, measurement and related impairment issues will be addressed first. An exposure draft on this section will be released next month and a final standard will be ready for use for 2009 financial statements.

Tweedie told the Ecofin meeting the IASB will stick to these plans. Reports indicate the ministers have accepted this.

Tweedie stressed the current approach is superior to the option of adopting the FASB staff position on impairment because the IASB’s work on impairment directly addresses the specific nature of EU concerns.

Adopting the FASB amendments would not create a level playing field as impairment rules in IFRS and US GAAP are very different, he added.

“It is for this reason that even today, after the FASB change, the US banking association is already arguing that EU banks have a competitive advantage,” Tweedie said. “Given the urgency of the fundamental issues surrounding IAS 39, we cannot afford the potential protracted back-and-forth between the IASB and the United States which could undermine the comprehensive and desperately needed revision of this standard.”

Reports suggest the French and German finance ministers, who have been among the IASB’s fiercest critics, accepted this assurance.

German Finance Minister Peer Steinbrueck told reporters after the meeting that “IAS 39 will be reworked in the coming months in such a way that it will be reliable and will be in place for use by European banks for the 2009 results”.

French Finance Minister Christine Lagarde reportedly made similar comments after the event.

The IASB reached two other milestones linked to fair value accounting in the past month.

In late May, it published a draft standard that would replace fair value measurement guidance contained in individual IFRS with a single source of guidance. The draft includes guidance on fair value measurement issued by the IASB’s expert advisory panel in October last year and the recent guidance issued by the FASB.

The board is also seeking comments on accounting for the role of credit risk in liability measurement. The IASB said that some see the outcome achieved when applying fair value measurement to both assets and liabilities as counter-intuitive.

The discussion paper has relevance to other IASB projects, including accounting for financial instruments.

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