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EC’s Barnier Indicates Will Not Go Ahead with Proposed Mark to Market Changes Before IASB Rules are Finalised

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The European Commission’s EU Internal Market Commissioner Michel Barnier has publicly stated this week that Europe will not go ahead with the adoption of the International Accounting Standards Board’s (IASB) proposed mark to market changes before the related accounting rules are finalised. The accounting standards body has been working on a redefinition of fair value over the last few months as part of its revisions to IAS 39, but Barnier does not want to go ahead with the fair value elements of International Financial Reporting Standards (IFRS) 9 standard before the other two main elements are determined.

IASB chairman Hans Hoogervorst has repeatedly urged Europe to adopt the fair value aspects of IFRS 9 in order to ease the impact of the sovereign debt crisis on financial institutions in the region. To this end, the changes would allow banks to price some of the government debt on their books at cost.

However, the European Commission, whose approval is required to implement the changes, has opted to wait until the rest of the related rules are finalised before it takes action. Barnier also noted the Securities and Exchange Commission’s (SEC) delay in taking a stand on IFRS as a potential sticking point, noting this week that the EC wants a “firm decision” soon from the US regulator.

In June last year, SEC chairman Mary Schapiro indicated that the regulator would be kicking off research efforts into how best to move the US from Generally Accepted Accounting Principles (GAAP) to IFRS over the next few years, but she has yet to indicate final approval and any kind of timeline for adoption. The move to IFRS by the US will have a significant impact on the pricing and valuations functions of internationally active financial institutions and, in the short term, on US firms that must adopt the new standards.

It could also have an impact on data standardisation work going on around tracking systemic risk, such as the adoption of a new legal entity identification code, and vice versa. The introduction of cost basis accounting, the concept of revaluation and an emphasis on fair value as part of IFRS are likely to compel the US government to take the next step of validating an entity’s cost basis revenues and the introduction of identification standards. It will not be cheap in the short term for those required to adapt their systems to meet the new requirements, but it could certainly bring down costs for international firms in the long term.

After all, global harmonisation would allow for a more consolidated approach to this function, however such a change would take time. The US regulator has said that it expects US companies would need approximately a four to five year timeframe to successfully implement a change in their financial reporting systems to incorporate IFRS. Therefore, if the regulator determines in 2011 to incorporate IFRS into the US financial reporting system, the first time that US companies would report under such a system would be no earlier than 2015.

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