We seem to be in the middle of a concerted European attack on the IASB which may lead to the demise of international standards.  What is the background to this and is it justified?

Earlier this week the IASB issued the first stage of its revision of IAS 39 Financial Instruments.  IFRS 9 replaces the provisions in IAS 39 that relate to classification and measurement and significantly simplify accounting for financial instruments.  The IASB have replaced a multitude of different categories with just two - fair value or amortised cost.  Basically if the financial instrument is being held for trading purposes then it should be fair valued, if it is being held to maturity and displays the characteristics of a straightforward loan arrangement then amortised cost accounting should be used.  So why is this simplification causing so much angst?

The EC say because under the new standard there will be greater use of fair value leading to greater volatility in financial results and a consequence risk to financial stability.  The message seems to be - let's pretend that the difficult economic conditions are not there and then they just might go away.   The EC have called on the IASB to reconsider its new standard and have delayed endorsement - required before the standard can be used in Europe.  It is now unlikely that European companies will be able to use the new standard for their December year-ends and quite possibly the EC will ‘carve-in' certain provisions to IAS 39 to reduce the prevalence of fair value accounting. 

What I believe is going on is that the EC has chosen the financial instruments debate as a convenient fighting ground.  There are factions within Europe that would prefer European accounting standards to be set in Europe and not by the IASB.  They point to issues with the accountability of the IASB and the overly theoretical nature of the standards produced as evidence that the current system is flawed.

And to some extent the EC has a point.  However the IASB is addressing the issue of accountability and the need for more practical rules.  Earlier this year it set up a Monitoring Board to oversee its work and provide public accountability.  The Board was approved by the heads of IOSCO, the Japanese FSA and the SEC but the EC have not yet.  They call for greater accountability yet when the IASB propose something to assist that has widespread international approval the EC dallies.  As part of the revision to IAS 39 the IASB has undertaken an unprecedented programme of outreach, holding roundtable around the world, visiting preparers, users and auditors and has shown willingness to change its mind on some issues as a result - something that did seem to happen too often in the past.

Neither the IASB nor the standards it produces are perfect.  It is trying to change too much too soon in its headlong aim to get US acceptance of IFRS by 2011 and at times forgetting that what we want is the best standards not necessarily the standards acceptable to the SEC and FASB.  And it is taking far too long to revise its conceptual framework which really should be in place before new standards are worked on.   

It is generally accepted that a carve-in of extra provisions by the EC would inevitably lead to a collapse of the drive towards international standards which would lead to the development of a number of regional alternatives.  And it is this which I believe is the ultimate goal of some continental European politicians.