UPDATE 2-Canada accounting change seen helping banks

(Adds analyst's comment on CIBC, share price)

By Lynne Olver

TORONTO, Oct 17 (Reuters) - The board that sets Canadian accounting rules is going along with U.S. and international changes that will allow companies to reclassify some financial instruments to allow them to avoid fair-value accounting treatment.

The Accounting Standards Board said on Friday it wants to ensure consistency with other jurisdictions.

"The amendments allow entities to move financial assets out of categories that require fair value changes to be recognized immediately in net income," Paul Cherry, chairman of the board, said in a statement.

"However, it must be stressed that assets will remain subject to impairment testing and the amendments involve extensive disclosure requirements," he said.

The move should help all Canadian banks, but "the real beneficiary" is Canadian Imperial Bank of Commerce (CM.TO), an analyst said.

CIBC, Canada's fifth-largest bank by assets, has taken billions of dollars of writedowns for subprime mortgage-related securities and other complex debt holdings in the past year.

The bank may still take a charge in its upcoming fourth-quarter results, but in future CIBC should not experience nearly the level of earnings and capital volatility, Mario Mendonca of Genuity Capital Markets said in a research note.

On the Toronto Stock Exchange on Friday afternoon, CIBC shares were almost 7 percent higher, at C$58.09 a share, ahead of the 4 percent gain in the S&P/TSX financials index.

A second analyst said the accounting changes could ease concerns about writedowns at Canadian banks, whose financial fourth quarters end Oct. 31. The banks will report quarterly and yearend results in late November and early December.

"While accounting treatment has zero impact on economic reality, the move should ease concerns around prospects for further writedowns and potentially meaningfully impairments to capital structures, which is not a particularly acute concern for the Canadian banks in our view," TD Securities banking analyst Jason Bilodeau said in a research note.

The Accounting Standards Board said on its website that the Canadian amendments are based "closely" on those made by the International Accounting Standards Board earlier this week. They reflect an "urgent need" to ensure consistency of Canadian generally accepted accounting principles with international and U.S. norms, the Canadian board said.

The amendments are effective July 1, 2008, but only for periods for which financial statements have not already been issued, the Canadian board said.

The IASB's Oct. 13 changes let companies reclassify securities as loans or debt securities, rather than in the trading category, if they are going to be held for the foreseeable future or until maturity.

Strict mark-to-market or fair value accounting has caused some banks to carry securities at significant discounts to reflect reduced liquidity, TD Securities' Bilodeau wrote.

"These developments add some credence to what industry executives have been saying for some time - that the assets values are being unfairly penalized by MTM (mark-to-market) and carrying values in many instances are understating the true underlying values," Bilodeau said.

The chief executives of Canada's largest financial institutions, Royal Bank of Canada (RY.TO) and insurer Manulife Financial Corp (MFC.TO), have criticized fair value accounting, saying that a snapshot of securities' value in illiquid markets and volatile times does not accurately reflect their long-term value.

Genuity analyst Mendonca said the accounting amendments are less meaningful for insurers. The new standards have nothing to do with segregated fund or variable annuity assets, so they do not reduce the recent stress on insurance companies caused by declining equity markets, Mendonca said.

Canada's Accounting Standards Board also said it is considering additional commentary to guide companies on how to report a wider range of investments, after previously issuing guidance on how to account for illiquid asset-backed commercial paper. (Reporting by Lynne Olver; Editing by Peter Galloway)