Capital Markets

Accounting Boards Face Derivatives Dilemma

Convergence of accounting standards by 2005 is anything but a sure thing, thanks to opposition by Europe's banking sector.
Ed ZwirnFebruary 20, 2004

Will opposition from Europe’s banking sector leave the world’s two biggest markets operating by different rules?

The International Accounting Standards Board (IASB) is apparently digging in its heels on marking derivatives to market. But the European Union may refuse to go along. Companies needing to access capital markets in both the United States and Europe, as a result, might have to continue to account for their business by using both U.S. GAAP and International Financial Reporting Standards beyond the Jan. 1, 2005 deadline for convergence.

On Wednesday, the IASB rejected calls from bankers that IAS39 either be scrapped or substantially revised. IAS39 is Europe’s answer to FAS133, the U.S. accounting standard, which requires derivatives be marked to market. EU officials have cast doubt on whether they will make the standard mandatory when it makes IFRS mandatory on Jan. 1.

IASB has issued a standard on another controversial issue, ruling that EU companies must expense stock options. Another apparent sticking point for convergence is how to best record tax benefits for employee stock-based compensation.

Earlier this month, Fritz Bolkestein, internal market commissioner of the EU, warned that the EU might have to shelve mandatory compliance of IAS39 when IFRS becomes mandatory at the beginning of 2005 if the IASB does not reach some kind of agreement with the EU.

Donald Nicolaisen, the SEC chief accountant, said the IASB proposals already on the table were of “high standard” and that he would withdraw his support for accepting the IASB filings of companies listing in the United States if they were not adopted. “Derivatives are widely used today and you need a way to account for them,” he said after Bolkestein’s comments. “Without that, the [accounting] standards are not complete and I wouldn’t be in support of accepting filings where they don’t have it.”

Despite heavy lobbying from European banks and the EU’s European Commission on derivatives, the board refuses to change its position. As a result, sources cited by say, banks will still manage their risk portfolios as they always have. But they will be forced to make figures fit IASB requirements — a development that will be more costly and will reduce the reliability of accounting figures.