Email News Service March 2005
Insurers see workable solution to fair value option issue
LONDON, March 2 - Europe's insurers are softening their opposition to limitations on the use of the fair value option in new international accounting rules in the light of the latest attempt to resolve the wrangle over the option.
It confirms early impressions last month that a breakthrough in the long-running saga might at last be at hand, ahead of a crucial round-table meeting on the issue in London in two weeks' time.
The argument has pitched regulators, particularly banking supervisors who've feared the potential for abuse of the option by weak banks, against financial and non-financial firms who want unfettered freedom to use the option to prevent accounting distortions.
However, regulators, bankers, insurers and accountants meeting informally in Brussels last week told representatives of the International Accounting Standards Board (IASB) that in general the latest "principles-based" proposals represent a workable solution, according to sources attending the meeting.
"Things are moving in the right direction," says a spokesperson for the Comité Européen des Assurances (CEA), the Paris-based umbrella organisation for Europe's national insurance-industry trade bodies. The CEA hopes to issue very soon the consensus response of its member organisations to the latest proposals, but the spokesperson declined to give details.
With an eye to meeting regulator concerns, redrafted proposals issued in early February by staff at the IASB, the London-based accounting standards setter, would require firms to make clear their reasons for using the option, and show how it fits into their asset-liability management policies. The February redraft also makes clearer the ways that insurers, who were particularly vocal critics of an earlier December draft, can appropriately use the option.
The CEA, along with several individual insurers, opposed any restriction on the use of the option, arguing that banking supervisors' fears should be tackled through general accounting standards, rather than through specific supervisory tools such as restricting the use of the fair value option.
The Basel Committee on Banking Supervision's Arnold Schilder has already said in an informal mid-February reaction that the latest plan is "a strong improvement" on its predecessors (see the current February 2005 issue of Global Risk Regulator newsletter). Schilder is the Dutch central banker who heads the accounting task force of the Basel Committee, the body of senior banking supervisors from North America, Europe and Japan that in effect regulates international banking.
The fair value option is part of the notorious IAS 39 rule on valuing financial assets and liabilities in accounts under the new International Financial Reporting Standards (IFRS), which the IASB developed and which came into effect in January in many countries, including the European Union's 25 member states.
IAS 39 stipulates that items such as derivative contracts and bonds and shares held for trading, for instance, should be measure at fair value, namely current market prices. Other items, such as loans, receivables and bonds held to maturity, are valued at amortised cost.
But the fair value option in IAS 39 gives firms the opportunity to designate any item for measuring at fair value in order to help avoid the distortions that could be caused if economically matched assets and liabilities are measured on different bases, one at fair value and the other at amortised cost.
Banking supervisors fear that unrestricted use of the option could allow troubled banks to undervalue their liabilities, for instance, and thereby possibly threaten financial stability. The IASB issued proposals nearly a year ago for rules-based restrictions on the use of the option, but these were rejected by almost everyone except the regulators. The December principles-based ideas were the result and these in turn were redrafted in the light of comments.
Meanwhile, Australia's financial services watchdog, the Australian Prudential Regulation Authority (Apra), last week issued the first of two planned discussion papers outlining its stance on the adoption of IFRS by the firms that it regulates.
Apra chairman John Laker said the agency's aim is to align its prudential and reporting standards to the new accounting rules where practicable.
(CEA: www.cea.assur.org; IASB: www.iasb.org; Apra: www.apra.gov.au)
David Keefe (dkeefe@globalriskregulator.com)
