Bank urges rethink over accounts rules

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The Independent Online

The Bank of England yesterday intervened in a row over accounting standards, branding as "unsatisfactory" a decision by Brussels that had left two separate versions of a key rule governing risky financial tools.

The Bank of England yesterday intervened in a row over accounting standards, branding as "unsatisfactory" a decision by Brussels that had left two separate versions of a key rule governing risky financial tools.

In unusually frank comments for the Bank, Sir Andrew Large, one of its two deputy governors, said that the resulting confusion threatened to undermine financial stability.

He told an audience of bankers there were two versions of the standard treatment of financial instruments such as hedges - known as IAS 39 - proposed by the European Commission and the International Accounting Standards Board.

"The recent furore over IAS 39 has resulted in a situation which I think all agree is unsatisfactory," he said. "We now effectively have two versions.

"It is essential that accounting standards have a clear economic rationale. Only in that way can investors, creditors and others judge the risks being run by financial institutions and hence exert market discipline. Together these can make an important contribution to financial stability."

Last month the Commission adopted its own version of IAS 39, amending the way companies should treat financial instruments such as derivatives and hedges. The move was criticised by accountancy experts, who said it created a hybrid system.

Sir Andrew called on the bodies to resolve "fundamental issues with financial stability implications". He told the Central Banking Conference in London: "In my view, the only way forward is first to take a few steps back, before work starts on re-engineering the standard."

IAS 39 requires financial instruments to be recorded at "fair value", not the historic cost paid for them. About 7,000 listed companies will begin adhering to them next year.

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