EU adopts fair value derivatives accounting

The Commission accepted most of the proposals presented by the International Accounting Standards Board in 2004, but opted out of its recommendations on fair value accounting and on hedge accounting. It then drew up a restricted fair value option, which was approved in July and comes into force today, retroactive to 1 January 2005. Under the new rules, companies will have to account for derivatives at market value, rather than using a historical average.

The Commission has still to approve a replacement set of provisions for hedge accounting. Some European banks warned the IAS 39 rules would produce too much volatility in balance sheets and would mean costly changes to asset and liability management.

The original fair value accounting rules in IAS 39 raised protests from the European Central Bank and the Basel Committee on Banking Supervision. The rules also conflicted with a European law banning companies from using fair value methods on their own debt.

Although the rules are retroactive, most companies have already factored them in to their quarterly accounts, so major restatements are unlikely, the Commission said.