The Accountancy Standards Board will today urge companies to accept rules that will make their accounts reflect the reality of turbulent equity markets, even though this will mean more volatile balance sheets.
But the body will sound a cautious note about plans in the rest of Europe to change the way liabilities are calculated. It wants to guard against the possible relaxation of rules surrounding off-balance sheet accountancy leading to a situation like the collapse of Enron happening in the UK.
Mary Keegan, chairman of the ASB, said: "We have got to think about the new proposals in the off-balance sheet area as we don't want to introduce loopholes into balance sheets."
Under the plan, companies will have to recalculate the value of the assets, according to their value in the market, on a regular basis. This system, known as "fair value", differs from the current one under which assets are booked according to the price they were bought for.
Ms Keegan is encouraging listed companies to move to this system by 2004, a year before Europe-wide changes which will oblige all companies in the UK and on the Continent to adopt the practice under the forthcoming International Accountancy Standards. The ASB has published its views on the changes and is asking for feedback from the accountancy industry by October 2002.
The ASB acknowledges that the change will make balance sheets more volatile and give companies less control over the figures they publish.
Ms Keegan said: "The changes give more transparency to accounting. Markets move around a lot and this should be reflected in companies' accounts. It is better to have volatility and get an explanation about it than trying to obstruct the facts in accounts."
Britain's banks already use the fair value system, as do a number of major companies. But other companies are expected to be unenthusiastic about the initiative, which will require more work and expertise among accounting staff.
Banks are also expected to take issue with the fact that the system includes new restrictions surrounding the point at which profits and losses on products such as derivatives are be calculated. Institutions will not be able to offset profits in one year against losses in another, but will have to book returns every year.
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