EU-IASB Tensions Flare With Rejection Of Changes to Follow FASB Revisions

By Joe Kirwin

BRUSSELS—Tension between the European Union and the International Accounting Standards Board escalated April 25-27 after the IASB again rejected EU finance ministers' demands to amend International Accounting Standard 39, Financial Instruments: Recognition and Measurement, in response to changes adopted by the U.S. Financial Accounting Standards Board.

A high-level European Commission official, speaking April 27 to BNA on the condition of anonymity, said the EU executive body is now consulting with technical experts and EU finance ministers about whether to follow through with threats to review the EU 2002 accounting regulation requiring all EU listed companies to use international financial reporting standards drawn up by IASB.

“There is total frustration with the IASB at this point,” the commission official said. “There is a strong belief that the IASB ignores its biggest constituent, which is the EU. Therefore we are considering our options and will present them to EU finance ministers at the beginning of May.”

EU Threatens to Withdraw From IASB Process

The international standard-setting group, in an April 24 press release, declined to amend IFRS to match moves on fair value measurement and other-than-temporary impairment taken by FASB. In the first instance, the international standards are very close to the changes that FASB made, the IASB said ; in the second instance, it would be better to totally revise the international standard, than to adopt the FASB changes, the IASB said (see related article in this issue on the IASB action).

The U.S. board April 9 issued as final three FASB staff positions (FSPs) on proposals related to fair value measurement, or mark-to-market, accounting and one associated with accounting for impaired securities, such as mortgage-backed securities, where the impairment is not permanent (5 APPR 349, 4/17/09).

Earlier in April, the EU finance ministers, reacting to FASB's changes, called on IASB to adopt changes to IFRS to ensure that EU companies do not suffer a competitive disadvantage to those in the United States (5 APPR 360, 4/17/09).

In response, the IASB issued a statement April 7 saying it would revamp IAS 39 in a six-month period (5 APPR 358, 4/17/09). The April 24 press release essentially restates the promise.

In addition, the Czech presidency, which holds the rotating EU presidency, called on the commission to “review the functioning of the EU 2002 regulation on international accounting standards.”

After IASB announced April 24 it believed an “immediate response” to the EU demands “was unnecessary,” the threat to withdraw from the IASB process was echoed by European Central Bank Vice-President Christian Noyer, French Finance Minister Christian Lagarde, and the European Commission during the International Monetary Fund-World Bank spring meetings in Washington, D.C.

The European Parliament also weighed in on the issue April 24 when it approved a resolution relating to the Group of 20 economic summit in London held April 2. The resolution said the European Parliament “deplores the fact that the FASB has amended the definition of fair value for United States market players and urges the Commission to bring IAS 39 into line … without waiting for a decision by the IASB.”

Rethink on IFRS Not Unanimous

However, support for EU finance ministers calling for a rethink on IFRS is not unanimous within the European Union. Some EU member states led by the United Kingdom have raised objections.

The European Financial Reporting Advisory Group (EFRAG), which provides technical advice to the European Commission on international accounting standards, and the Committee for European Securities Regulators (CESR) supported the view of IASB that a comprehensive review of IAS 39, which is under way, is the preferred approach, especially when it comes to fair value measurement.

“We are strongly of the view that the IASB needs to move rapidly to a conclusion on the work it is carrying out,” EFRAG said. “A new standard on recognition and measurement of financial instruments that would replace IAS 39 needs to be developed as soon as possible and important aspects of that work need to be in place in time for implementation in the 2009 financial statements. … [T]he IASB needs to organize its work with those time scales firmly in mind.” The IASB's April 24 press release spelled out a time frame for re-evaluation of the IAS 39 that calls for finalization of a proposal by October.

EFRAG was critical of the “haste” with which FASB drew up the changes to U.S. generally accepted accounting principles and raised concerns they could lead to competitive disadvantages for European listed companies.

“Amendments in the nature of piecemeal quick-fix solutions will inevitably slow down the development of a comprehensive global solution. … [S]uch standard setting has a tendency of not taking properly into account the needs of all stakeholders and as a result may compromise on the quality of the financial reporting standards and information provided to users,” EFRAG said in its comments about the FASB proposed changes.

Revised Standard Needed for 2009 Year-End

CESR stated that “it would be better or ideal for the IASB to wait for a comprehensive and joint solution on financial instruments than aiming at issuing piecemeal guidance on various areas of fair value accounting for financial instruments. However, this revised standard needs to be issued expeditiously so that it is available for 2009 year end financial statements.”
Concerning FASB's amendments to the standard on impairment requirements for certain investments in debt and equity securities, CESR said in a statement that “in order to improve significantly the impairment loss recognition requirements for financial instruments under IFRS, a comprehensive mode of impairment loss recognition for all financial instruments is required.
“In the meantime, we are of the view that the thrust of the FSP approach to impairment of Available for Sale Debt securities should be incorporated expeditiously into IAS 39 with appropriate robust disclosure requirements being included in IAS 1 and IFRS 7,” CESR added.

IASB Chairman David Tweedie April 20 told a gathering of the standard setter's Financial Crisis Advisory Group that pressure on the board to deliver interim fixes to international financial reporting standards risks derailing plans to simplify and converge financial instruments accounting overall (please see related article on FCAG meeting in this issue). He noted that constituents have counseled against piecemeal changes to accounting literature.