Brussels Won’t Block Accounting Rule on Loans, Instruments

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By Steve Burkholder

Sept. 26 — The European Parliament won’t block two-year-old accounting rules on loan losses and other aspects of financial instruments, the chief of the International Accounting Standards Board said.

The rules could have a significant affect on banks' and other companies' net earnings. The provisions—according to rulemakers and regulators—are aimed in part at remedying the problems in the 2008-09 financial crisis when banks were widely viewed as recording their loans losses in a “too little, too late” manner.

IASB Chairman Hans Hoogervorst, said Sept. 26 that he gave a “deep sigh of relief” when he heard the European Parliament's decision.

Financial Instruments are financial assets and financial liabilities, ranging from simple cash to loans to complex derivatives.

The lawmakers’ actions make clear that the European legislature won’t formally object to the accounting rules.

The European Parliament’s Committee on Economic and Monetary Affairs essentially gave the cautious green light Sept. 26 to the financial-instruments standard, IFRS 9. The committee clearance of the standard occurred in a vote on a motion for a non-binding resolution, but the voting also contemplated additional actions before a fuller clearance may be made.

The IASB’s financial instruments rules become effective Jan. 1, 2018.

Last Minute Objections

The parliament's clearance came despite last-minute lobbying by some companies, the IASB chairman told a global gathering of accounting standard-setters in London.

Hoogervorst didn’t name the companies or the sector in which they do business.

Bankers' Earlier `Carveout' Set Stage for Rules

The financial instruments standards has a contentious history.

The wide-ranging 2014 rules, IFRS 9, call for more robust and timelier reporting of credit impairments

Credit impairments occur when current values of financial assets dip below their book values, often because of weakening economic conditions that call into question the ability of borrowers to repay a loan, or the ability of a counterparty to financial instrument to perform its side of the transaction.

More than a decade ago, Europe's bankers strongly criticized early derivatives accounting provisions that they said were causing large swings in earnings. However, fair value accounting advocates at the time said the provisions accurately reflected earnings.

But the banks, particularly those in France, won the debate, arguing successfully for a controversial “carveout” of profit-affecting provisions they saw as onerous.

The carveout was part of an earlier version of IASB’s instruments rules, IAS 39.

Today's effective clearance action—or lack of objection—on IFRS 9, comes as a three-month “scrutiny period” by European authorities was about to end Oct. 7.

To contact the reporter on this story: Steve Burkholder, reporting from London, at sburkholder@bna.com

To contact the editor responsible for this story: S. Ali Sartipzadeh at asartipzadeh@bna.com

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