Alice defining Wonderland

By Jennifer Hughes
Published: December 21 2008 23:19 | Last updated: December 21 2008 23:19
Financial Times

Banks will have to provide details of their profits and losses from financial instruments under two measurement systems, according to proposed accounting changes that could come into effect for year-end accounts.

The proposals, from both the International Accounting Standards Board and its US counterpart, would require companies to disclose the profits and losses that would have been reported if financial assets were valued at current market prices and as if they were reported at “amortised cost” – a measurement that ignores market volatility.

The changes are part of a package of credit crunch-related issues addressed by the accounting rulemakers. A number of bankers have complained that the requirement to report the great majority of financial assets at “fair” or market value has resulted in the industry writing down the value of its holdings by hundreds of billions, even though banks’ own expected losses on the instruments are nowhere near as severe as market prices imply.

In October, the IASB was forced by the European Commission to change its rules to allow banks to reclassify some holdings and account for more of them at amortised cost, which produces smoother results. Since then, the IASB has worked alongside the US Financial Accounting Standards Board to produce consistent results and prevent any interest group from being able to influence either board in its favour.

Both groups are publishing their proposals next week and are calling for comments by mid-January so changes can be finalised for year-end accounts. Investors were unhappy with the October rule change and have since resisted any more alterations that they fear risk making accounts less transparent.

As a result, the IASB and FASB have avoided making changes to what can be reclassified.