Brussels, 16/10/2008 (Agence Europe) - The European Council and the European Commission believe that a root and branch review of “fair value” (aka “market value”) in the application of international accountancy rules is necessary (see EUROPE 9761) to see how best to mitigate the “pro-cyclical” impact of fair value. When there are sharp falls in the stock market, “fair value” accounting of assets tends to make things worse for financial institutions, forcing them to resort to emergency recapitalisation. In addition to the changes made earlier this week, EU heads of state will instruct the Council to issue recommended amendments to accounting standards. “Fair value” rules should no longer be applied “blindly” and “stupidly”' commented acting chair of the European Union, Nicolas Sarkozy, on Wednesday. The Commission believes that the right forum for this review is the new specialist “pro-cyclical” issues group of the Economic and Finance Committee, which an ECOFIN Council in Nice, France, decided should be set up.
The adoption on Wednesday 15 October 2008 of a change to EU accounting rules to allow financial institutions quoted on the stock exchange to make a more balanced interpretation of the real value of their assets in their financial reports for the third quarter of 2008 appears to be the first step in a wider review, decided as a matter of urgency in the current financial turmoil. Technically, quoted financial institutions are now authorities in certain circumstances to reclassify financial assets which will not be sold in the near future without using the “fair value” rule (in “held-for-maturity” rather than “held-for-trading” on their balance sheets).
In so doing, the Commission has taken on board changes made earlier in the week by the International Accounting Standards Board (IASB), which draws up the International Financial Reporting Standards (IFRS). On Wednesday 14 October 2008, the EU Standards Advisory Group of member state experts issued favourable technical endorsement advice on the amendments, and the European Parliament, which only has the right to be consulted on the issue under the comitology rules governing such matters, gave a favourable opinion on 14 October. Adopted at record speed, the changes in the EU accounting rules were published in the EU Official Journal L 275 on Thursday 16 October 2008. The Commission's decision to endorse the IASB changes was described by an EU accounting expert as a “good thing” because it means that different rules will not apply in the EU.
The Commission is already planning a new stage in the review of “fair value”, announcing in a press release that it will publish new changes to the IAS 39 and IFRS7 rules for financial instruments before the end of the month. The new changes will also apply to structured financial products like derivatives and insurance. (M.B./trans.fl)