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CESR Agrees with EFRAG Response to IASB Proposals: In Need of Serious Revision

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Following its discussions earlier this year with the European Financial Reporting Advisory Group (EFRAG) around the International Accounting Standards Board’s (IASB) revisions of global accounting rules, the Committee of European Securities Regulators (CESR) has yet again stepped in to the fray to identify its own position on the changes. CESR states that it is in agreement with EFRAG regarding the IASB’s exposure draft on rate regulated activities, which it says does not represent an improvement to financial reporting and needs to be seriously revised.

“We, like EFRAG, also find it hard to understand why non-regulated entities should not be in a position under certain circumstances to recognise similar types of assets and liabilities within their activities,” it states.

CESR recommends that the IASB should instead go back to the drawing board and work more closely with the US Financial Accounting Standards Board (FSAB) to come up with a more workable solution. It indicates that it agrees that there is a need to address the divergence that occurs in practice in how entities treat the recognition of assets and liabilities arising from rate regulation, which is the aim of the exposure draft, but does not believe the current proposals are the correct method to go about doing this. It feels the IASB should look towards existing standards in the market rather than forcing brand new rate regulation accounting requirements to be adopted.

The regulator is also keen for the accounting standards body to provide more details about the data that is required related to the nature and extent of these regulated activities. The push for transparency around valuations is part and parcel of the ongoing regulatory agenda to restore confidence and the market and ensure stability in the long term. Accounting standards have therefore come under fire for not adequately protecting end investors by allowing firms to hold too many risky assets off balance sheet. The struggle to determine a fair value, however, has been a hard one throughout 2009 and this is likely to continue well into next year.

The lack of an overarching accounting standards body – the FASB is in charge of the US and has been at odds with the IASB a number of times this year – is also proving problematic. This recent CESR comment is merely representative of a lengthy process of wrangling that has been going on over the last 12 months between regulators, accounting standards bodies and the industry to come to some sort of agreement about how accounting and valuations data should be presented. The CESR response is all part of its agenda to gain more clarity around the IASB’s proposed changes (the full document is available to download below). Regardless of whether this particular issue is settled satisfactorily in the near future, firms can expect 2010 to spell yet more investment in valuations data and systems in order to provide investors and regulators with a sufficient amount of transparency around their pricing practices.

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