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Proposal to limit IAS39 compliance
January 28, 2005

The European Commission has proposed that companies in the European Union should only make partial use of a contentious accounting IAS39 standard on derivatives from January. The Commission hopes  a majority of EU member states will support the proposal, although some, including the UK, want companies to make full use of the standard.

Some accountants, companies and regulators fear that the commission’s stance will damage the quality of Financial Reporting in the EU.

They also claim it will damage efforts to create a set of global accounting standards through convergence between US and International Accounting Standards.

More than 7000 listed companies are due to use the standards written by the International Accounting Standards Board, but they must first be endorsed by the Commission.

The Commission approved most of the IASB’s Reporting Rules last year, but the derivatives standard, known as IAS 39, has been dogged by the controversy. Several Banks, notably in France, complained that IAS 39 would provoke unjustified volatility in their accounts, and they demanded changes.

The IASB did not make enough consessions for the European Banking Federation, which has concerns about the strict provisions on hedge accounting in IAS 39 as they relate to deposits. As a result, the Commission will propose that it should not require companies to use the provisions on hedge accounting and core deposits. It will also propose that companies should not be able to use the option in IAS 39 to measure all their financial instruments by reference to fair or market value.

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