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Irish Bankers Federation voices Irish banks’ concerns on IAS 39 (and seeks deferral) Back  
Irish banks, alongside their counterparts worldwide, object to IAS 39 as they believe this standard would result in increased volatility in financial statements, partly because of its proposed new provisions on hedge accounting writes Catherine Burke. A temporary solution, she says, would be to proceed with the endorsement of IAS 39, but agree a sectoral carve-out for banks that would apply until IASB and the banking industry resolve the hedge accounting issues.
TThe IBF remains of the view that the standard is fundamentally flawed. As it stands, it would lead to a situation where organisation’s financial statements would fail to reflect the reality of underlying banking business. Business behaviors would be dictated by accounting rules. Our objective has consistently been to more closely align the requirements of the IAS 39 standard with current risk management techniques.

Irish banks, alongside their counterparts worldwide, object to IAS 39 as they believe this standard would result in increased volatility in financial statements, partly because of its proposed new provisions on hedge accounting.

The Irish banking industry remains fully committed to the IFRS programme and to financial reporting harmonisation and has committed enormous resources both to implementation programmes, and to the dialogue with the IASB to resolve the issues. While the discussions on the standard have at times become highly technical, at its simplest the debate has hinged on the issue of hedging. Some progress has been made on hedging proposals that could form the basis of a future standard, but these discussions will not yield a solution by the 2005 deadline.

At its most recent meetings, the EU Accounting Regulatory Committee (ARC), failed to take a formal vote on the standard. All eyes are now on the Commission to see what potential solutions could be found to allow a decision to be taken at the meeting of 08 September 2004.

In an attempt to reach such a compromise, we understand that the Commission has set out proposals by which the endorsement of IAS 39 could be achieved. The proposals outlined below will be discussed at the next ARC meeting with a proposal then likely to go to the Council of Ministers.

The ‘Carve Out’ proposal
Endorsing IAS 39 with the exception of the full fair value option and a limited number of provisions related to hedge accounting (macro-hedging)

The ‘carve out’ is seen by the Commission as consistent with the view that further progress on hedging must be made before IAS 39 can be adopted in full. This would involve deleting certain paragraphs of the standard and related application guidance and inserting additional text. The Commission views the carve out as temporary and is still expecting the IASB to amend IAS 39 in light of discussions with the European Banking Federation on a hedge accounting method that would more closely align to current asset and liability management practices. This would most likely involve an exposure draft by late 2005 with the new standard ready for 2006.

The fair value option has also been carved out because the Commission considers it inappropriate to adopt this option when it is still the subject of a proposed amendment. This is independent of its proposed action on hedging.

Opposed by IBF
The Irish banking industry is firmly opposed to this proposal for technical reasons but also for longer-term strategic reasons. We believe that the current proposal could result in a dangerous precedent that could be viewed as creating a ‘European version’ of the standards. This is in direct conflict with the longer-term harmonisation agenda and could be particularly detrimental to those institutions that have a U.S listing.

Notwithstanding our difficulties with IAS 39, the industry remains committed to the IFRS process. However, from a technical perspective, after many years of discussions it would appear unwise to rush through changes to a very complex standard. At a macro level, it is important to note that all of the standards together represent a framework with multiple dependencies and cross references. It is therefore impossible to simply start extracting paragraphs and adding sentences in any way that would not impact in some way on the wider accounting basis and have unforeseen consequences.

Fair value option fundamental to IAS 39
We consider the fair value option as fundamental to the industry’s ability to implement IAS 39; its withdrawal would have major implications. The option was intended to give a degree of flexibility and ease the burden of implementation. While the current exposure draft is likely to lead to some restrictions to the option, a standard without any form of option is entirely unworkable and unacceptable.

Temporary deferral for the banking industry proposal
Endorsing IAS 39 with a sectoral carve-out for banks: Another proposal is to proceed with the endorsement of IAS 39 but agree a sectoral carve-out for banks that would apply until IASB and the banking industry resolve the hedge accounting issues.

Supported by IBF
The industry would strongly support firm proposals along these lines. A precedent for such an approach exists in the guise of the implementation of the Accounts Directive several years ago. In addition, this would be effective from a political perspective, because it would allow the overall IFRS timetable to be achieved, albeit with a deferral for one industry.

There are likely to be some legal questions surrounding any such approach and in particular we will need to understand whether such a deferral would be obligatory for all banks. A large number of banks in Ireland have overseas parents where the decision has already been taken to go IFRS regardless of the decision in Europe. Such institutions could effectively end up with two sets of accounts. It is also unclear what such a deferral would mean for entities who have adopted the standards from an early stage.

Given these reservations, we still believe that this proposal offers the best overall solution and would allow the discussions with the IASB in relation to the hedging proposals to progress.

Temporary deferral of the endorsement of IAS 39 as a whole
While this option would also suit the industry, it is likely to run into significant political opposition and is probably a step too far, particularly when the banking industry is the most affected by the problems with the standard.

What happens next?
IBF continues to discuss all of these issues with the relevant government representatives and continues to actively contribute to the debate at a European level. In the event that the September ARC meeting brings no resolution, it will be up to the new Commissioner, Charlie Mc Creevy, to resolve the issue.

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