Will the 2005 project go off the rails?

The European Commission has put an end to hopes that it would quickly endorse a full set of International Accounting Standards in the run-up to 2005, by announcing plans to shelve the two new standards on financial instruments. European Commissioner Frits Bolkestein said that the Commission will not approve IAS 32 and 39 unless agreement can be reached between the European banking and insurance industry, and the IASB. The announcement follows an increasingly acrimonious argument between the two parties, with European bankers and insurers criticising the two standards for being impractical for business and introducing greater volatility into financial reports. The IASB counters that any further changes to the standards would jeopardise the principle of fair value accounting, which requires listed companies potentially to take a hit to earnings by reporting their financial instruments at current market values.

ACCA has reacted with dismay to the possible delay in the take-up of IAS 32 and 39, warning that any refusal to adopt a full set of IAS would threaten the 'holy grail' of one set of global standards. 'In view of the urgent need to have all European listed companies reporting on IAS by 2005 this is not a good message to send either to accounts preparers or to the investment community. We certainly do not believe that you can have one or two standards which vary from IAS,' said ACCA chief executive, Allen Blewitt. He also had strong views on the banking and insurance industry's resistance to disputed sections of IAS 32 and 39, adding: 'The goal of achieving a truly global set of financial reporting standards is vital for the credibility of the world's capital markets. All parties must accept that the process of global convergence will necessarily involve some pain and some gain - they must keep their eye on the bigger picture.'

Karel van Hulle, the head of the Unit for Financial Reporting and Company Law at the European Commission, denied that that 2005 project was unravelling in the wake of the Commission's decision. 'Whatever the outcome of the discussions between the banking and insurance industry and the IASB on the treatment of financial instruments, the 2005 project will still go ahead,' he told accounting & business. 'We are only talking about two standards that have not been endorsed by the Commission and, even then, only parts of those standards are being disputed, not all of them.'

Noting that warring parties - the banking and insurance industry on one side and the IASB on the other - should 'get out of the trenches and start talking to each other', van Hulle said that the Commission would play its part in bringing into the open the debate on IAS 32 and 39. Already, the IASB has acquiesced in the Commission's suggestion of creating a consultative group to advise on issues related to the application of accounting standards to financial institutions. Last month, the IASB Foundation Trustees invited senior officials from European banking, securities and insurance regulators, and from the accounting, banking and insurance industries, to join the group. The European Commission will participate in the discussions as an observer.

The first task will be to consider the disputed sections of the Board's standards on financial instruments, although Paul A Volcker, chairman of the IASC Foundation Trustees, said the IASB would also seek advice on longer-term issues, particularly the application and extent of fair value accounting for regulated financial institutions. Time, however, is running out for deliberations on IAS 32 and 39. The IASB is due to issue its final version of both standards later this month, including its conclusions on hedge accounting.

Karel van Hulle conceded that if a satisfactory agreement were not reached by then, in which case IAS 32 and 39 almost certainly will be left out of the endorsed set of International Accounting Standards in use by 2005, a common ground could still be found. Eventually. 'Where there are issues that are not ripe just yet for a solution, let's bag those issues and move ahead. We can always come back to them some time in the future. It should be possible to go forward without full agreement on IAS 32 and 39,' he argued.

What this potentially means for 7,000 European listed companies is that, from 1 January 2005, they will prepare financial statements using most of the new International Accounting Standards but report their financial instruments under local GAAP. That, says Allen Blewitt, is not only unacceptable but would also have wider repercussions, particularly in the US. The SEC has already voiced its concerns about the Commission's decision to shelve IAS 32 and 39. According to press reports, SEC chief accountant, Donald Nicolaisen, has warned the EU against diluting the standards on financial instruments, stressing that a solution was vital for the success of the convergence project. Anything less than adoption of a full set of IAS is likely to put paid to the SEC's intention to drop the requirement from 2005 that European companies with US share listings prepare accounts under US rules.

There are also fears that the continued debate over IAS 32 and 39 will endanger the convergence project in the US where the FASB is working together with the IASB in bringing US GAAP and IAS into line. Allen Blewitt argued that Europe's hesitation has potentially disastrous consequences for the move towards global convergence. 'How will the US take seriously Europe's professed aim of wanting better standards if Europe will not back the IASB?'