Controversial rules that would force institutional investors to show the true risk of derivatives they hold on their balance sheets for the first time were yesterday proposed by accountancy's global industry body.
The International Accounting Standards Board (IASB) is pushing for banks and other investors to reflect the current market value of complex financial instruments rather than taking account of the price they paid for them.
The move is likely to be the most hotly contested of all the IASB's proposals, which are due to come into force in 2005 as part of a move to standardise accounting procedures across the world.
A number of banks on the Continent, which currently value derivatives and other instruments according to how much they have paid for them, have opposed the reform. Politicians in France and other European countries have also criticised the proposed system, which is already widely used in America.
The IASB's concern about derivatives is that the current system can hide large liabilities which investors may have. This is because the products usually cost little up front since they are a bet on the future movement of a market rather than the current one.
Derivatives can also be highly geared, so while they might not be expensive to buy, the movement of a particular market one way or another can dramatically affect the final profit or loss of the investor.
Critics have argued the new system would be very expensive to install because of the IT systems it would require and opponents have also hit out against the volatility that would be created by having to change valuations according to market price movements.
However, Tom Jones, vice chairman of the IASB, said: "It is important to set international standards which do not ignore derivatives. You cannot ignore the cases where companies have taken on leveraged swaps and been left with large liabilities." The IASB was set up two and a half years ago as a new, more independent, body to regulate the accountancy industry. It has been overhauling all of the old international code to standardise procedures and to try to stamp out repetitions of corporate scandals such as Enron.
It is preparing to do battle next year with the European Commission over derivatives and other issues.Reuse content