October 20, 2009 / 10:53 AM / 10 years ago

Fair value accounting reform wider than planned: IASB

* IASB draft tightens scope of mark-to-market standard

* IASB chairman says asset classification reform on track

By Huw Jones

LONDON, Oct 20 (Reuters) - Reform of an accounting rule criticised for amplifying the credit crunch will be more extensive than originally proposed with many banks benefiting, a global accounting standard setter said on Tuesday.

The International Accounting Standards Board (IASB) published a draft change to narrow the scope of its fair value or mark-to-market standard in July. It seeks to classify assets for valuation either at cost or at the going rate.

The measure was in response to calls from the Group of 20 group of leading economies to simplify fair value accounting rules in time for 2009 annual statements.

Policymakers blamed the rule for unnecessarily forcing banks to value some assets at depressed going rates amid extreme market turmoil, triggering huge writedowns and the need to recapitalise in a frozen credit market.

IASB Chairman, David Tweedie, told a meeting of European Union finance ministers in Luxembourg on Tuesday that reform of asset classification will be adopted on time in November.

He also outlined several changes to the original proposal following extensive public consultation so that fewer assets will likely be marked-to-market.

“The IASB is making changes to its original proposals to address the issues that have been raised,” Tweedie said.

More types of instruments will be eligible for valuing at cost than was originally proposed, he said.

“As a result, the final standard will likely result in financial institutions that undertake traditional banking activities of raising deposits and making basic loans applying less fair value accounting rather than more,” Tweedie said.

A key change will be much greater emphasis on the bank’s business model so that many big banks in Europe with portfolios of low risk corporate or government bonds can value them at cost, rather than at fair value as they must do at present.

A ban on reclassifying of financial instruments has also been removed from the draft so that when business models change and become more focused on the longer term or are less risky, some assets can be valued at cost rather than fair value.

The wider fair value reform, due to be completed some time in 2010, will also include changes related to hedging and to how impairment of assets is handled.

The changes will be mandatory from January 2012 and apply to publicly listed companies in over 100 countries that use IASB rules, including the EU.

“Insurance companies would not be required to adopt the new standard until 2013 or 2014 at the earliest,” Tweedie said.

The G20 has set a mid-2011 deadline for convergence of global accounting rules such as those set by the IASB and the U.S. Financial Accounting Standards Board (FASB).

The FASB has proposed widening the scope of fair value accounting, a step which may make convergence harder, as the IASB is effectively narrowing its application in many cases.

The two boards meet next week to iron out their differing approaches to fair value. “I remain optimistic that we can overcome our current differences,” Tweedie said.

Reporting by Huw Jones; Editing by Ruth Pitchford

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