S&P Warns Against Further Relaxation of Fair Value Standards
Standard & Poor’s today warned against a further relaxation of international fair-value accounting standards as a way to ease the pressures on financial institutions in Europe and elsewhere.
The International Accounting Standards Board has already relaxed International Financial Reporting Standards (IFRS) for assets required to be accounted for at fair value, a boon to banks holding hard to value structured finance products. In an “emergency” response to the current market conditions, changes to IFRS were published by the IASB and approved by the European Commission for use in Europe within one week.
“Despite these momentous steps, taken with unprecedented speed, we understand that there are still further discussions that could lead to additional changes or even a European override of the IASB’s standards, ” S&P says in European Banks: IFRS Revisions Allow Banks Certain Options To Avoid Fair Value Accounting.
We believe that such a move to override IFRS would have significant implications for the quality of financial reporting in Europe and how it is viewed globally.
“We are also concerned that such a move, if taken at this crucial point when even the U.S. is considering implementing IFRS, could harm longer-term prospects for a global set of accounting standards, particularly if changes result in further differences from U.S. GAAP. As a global standard setter, the IASB, in our view, will need to demonstrate that it is independent of regional or political influence, and deliver standards that provide information capable of meeting the needs of a broad range of users of financial statements, including investors and analysts.”
The IASB has introduced changes that give banks the option to reclassify certain assets as early as the reporting of results for the already completed third quarter of this year.
“From a financial analysis standpoint, we believe that the permitted reclassifications will render the balance sheet carrying amounts of transferred assets less meaningful and will generally not facilitate meaningful comparisons,” said Standard & Poor’s credit analyst Sue Harding.
“The result will be neither fair value nor a typical amortized cost. Instead it will be fair value as of a somewhat arbitrary reclassification date, that has then been amortized. Earnings analysis will, in our view, continue to be at least as complex.”
Harding continued: “We expect there to be a trade-off of potentially higher capital requirements in exchange for more predictable reported earnings and capital that should be less of a moving target for banks. Assets transferred to the banking book may on average require capital that is several times the level required if they had been left in the trading book. However, we do not expect increases in capital requirements to be significant overall, as a multiple of a modest capital requirement would still be modest.”
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