Proposed fair value rule changes in Europe would have threatened the credibility of European accounting. The reputation of the International Accounting Standards Board will also be tested during the debate.
Government proposals submitted to the European Commission in September would have in effect suspended fair value rules. The proposals carved out sections of international accounting standards in Europe and would have allowed broad reclassifications of financial assets by European firms, allowing the assets to escape fair value accounting measurements. The carve-out proposals were more far reaching than recent amendments issued by the IASB.
In October, the IASB issued amendments to IAS 39 and IFRS 7, allowing reclassifications of certain non-derivative financial assets to investment categories that are held at cost or amortized cost as opposed to fair value. The amendments more closely align the international standards with U.S. rules and are more restrictive than the carve-out proposals. With release of the amendments, the IASB noted concerns of EU leaders and finance ministers that European financial institutions not be disadvantaged to their international competitors in terms of accounting rules.
Because of the urgency of the crisis, the IASB was allowed to suspend normal due process and submit the amendments to the EU Commission for approval. The EU Commission approved the IASB changes and pulled the carve-out proposals off the table.
Investor and accounting groups aligned in their disapproval of politicians making changes to the accounting rules in Europe. If the EU carve-out proposals had been passed, the transparency and comparability of European firms would have been adversely affected.
Some have been critical of the IASB saying their IFRS amendments were not necessary and the IASB was influenced by political pressure. More importantly, the suspension of due process set a bad precedence. On the other side, the IASB amendments were seen as justified because the changes narrowed the differences with U.S. GAAP and are consistent with the movement towards convergence. In addition, proponents of the change believe the credit crisis required quick action making suspension of normal due process acceptable given the circumstances.
In coming weeks, the IASB and FASB will be working together to find long term solutions for accounting and reporting issues associated with financial instruments.
What is your opinion of recent actions taken by the IASB in response to concerns about fair value measurements?