In a move that leaves the reform of accounting standards for financial instruments under a Brussels-shaped cloud, a key European Commission (EC) advisory panel on November 11 delayed endorsement of the first phase of the project, relating to the classification and measurement of assets - despite European politicians having lent heavily on the International Accounting Standards Board (IASB) to rush the new rules through.
Without the endorsement, European companies will be unable to benefit from early adoption of the standard, which was published by the IASB on November 12 and is due for implementation in 2013, although other countries that use International Financial Reporting Standards (IFRS) will be able to adopt them for 2009 accounts.
The panel - the European Financial Reporting Advisory Group (EFRAG) - has promised to revisit endorsement in January, but opinions are split on whether that will happen, with some observers believing the EC would prefer to wait until the second and third phases of the reform have been published. The latter course of action would massively delay a process that European politicians had previously trumpeted as one of extreme urgency. The second phase of the reform, dealing with loan-loss accounting, was published on November 5 with a comment period open until June 2010.
The IASB refused to comment on the EFRAG's decision, but a former IASB staffer says the standard-setter will be feeling aggrieved: "They were constantly told they had to get the new standard out in time for endorsement this year. They did a huge amount of work to gather stakeholder opinion, and kept Europe up to date throughout the process." A partner at one of the big accounting firms, who was present at the key November 11 meeting in Brussels, says: "I assume the IASB will be very unhappy."
The meeting was split into two halves. In the morning, representatives of around 50 key stakeholders - banks, industry associations and accounting firms - had their say on the new standard in front of EFRAG staff. These opinions were then meant to inform the EFRAG's decision on whether to endorse the standard for use by European companies. But the accounting firm's partner says it appeared as though the panel had already made up its mind not to endorse. "Nothing they heard at the meeting would have been a surprise, and the flavour we were getting throughout the morning session was that endorsement was not going to happen," he says.
“If Europe tells the IASB it wants further changes and the standard setter makes those changes then they could be seen as caving in to political pressure."
Behind the scenes, the standard appears to have run into opposition from a number of European countries, which feel too many assets would be accounted for at fair value under the new rules. One speaker at the November 11 meeting claimed 10% of Italian mortgages contain features that would result in the
loans being marked-to-market rather than being carried on the more stable basis of amortised cost, says the accounting partner. But the standard has plenty of support too - the partner says around half the stakeholders at the meeting spoke in favour of the change, and the comment period on the standard saw a number of heavyweights applauding it, such as HSBC, KPMG, Deloitte and the Federation of European Accountants.
The worst potential outcome of the November 11 meeting was avoided, says the accounting partner - there could have been a move to allow Europe to pick and choose which elements of the standard to adopt, undermining the bigger goal of unified, harmonised global standards. But the decision not to endorse still leaves the IASB - and the whole financial instruments project - facing a serious problem.
"If Europe tells the IASB it wants further changes and the standard-setter makes those changes, then they could be seen as caving in to political pressure. If that happens, the Securities and Exchange Commission might say, ‘well, this is a good reason for not moving to IFRS'. If, on the other hand, they don't adopt those changes, then presumably the chances are they will not be endorsed and we end up with standards that are a response to the crisis, but which European companies can't use," says the accounting partner.