LONDON, Jan 24 (Reuters) - The European Union should endorse a rule that stops banks from misleading investors by booking profits even when the value of their debt falls, Britain’s accounting watchdog said.
Roger Marshall, chairman of the Financial Reporting Council, said he was frustrated that “eminently sensible” reforms making banks more transparent were being delayed by the EU’s executive European Commission and a global push to converge standards.
“There are things that could be done now but aren‘t,” Marshall said on Thursday to a British parliamentary commission considering legislative changes to improve standards in banking.
The International Accounting Standards Board (IASB) writes book-keeping rules used in over 100 countries. The European Commission must endorse rule changes for them to apply in the 27-country bloc.
The new rule replaces an existing standard which allows banks to book profits when the value of their debt falls on the grounds that it has become cheaper to buy the bonds back.
The 2007-09 financial crisis prompted leaders of the world’s top 20 economies (G20) to call for accounting standards to be converged for the benefit of investors.
The new rule was written under pressure from G20 countries in 2009 to give a truer picture of bank balance sheet health.
But the European Commission, which was not immediately available for comment, wants to wait for other elements of the new rule to be completed before endorsing the whole package.
The IASB has delayed mandatory use of the rule until 2015.
Former UK finance minister Nigel Lawson told the commission that he had doubts about the IASB’s decision in 2010 to drop the principle of prudence, under which a company could not overstate the value of assets or understate liabilities.
Marshall said he recently told the IASB that prudence should be reinstated.
FRC Chief Executive Stephen Haddrill said it would not be possible for Britain to unilaterally use different accounting rules but local regulators could require more disclosures.
IASB Chairman Hans Hoogervorst told Lawson, who chairs the accounting panel of the banking commission, at a hearing last week that bringing back prudence would not lead to magical results and that caution was ingrained in IASB rules.
“The reason why it was removed was that we felt it was being abused or misunderstood to artificially underestimate the value of assets,” Hoogervorst said.
This created “cookie jar accounting” to amass hidden reserves for use to mask losses in bad times, Hoogervorst said.
Lawson suggested on Thursday the G20 could take a “run and jump” as it made no sense to delay accounting reforms in a country like Britain which has a big banking sector.
The G20 goal of a single set of global accounting rules has been hit by disagreements over some standards and U.S. reluctance to switch to using IASB rules. (Reporting by Huw Jones; Editing by Sophie Walker)