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Brussels, 19th November 2004
Accounting standards: Commission endorses IAS 39
The European Commission has adopted a Regulation endorsing International
Accounting Standard (IAS) N° 39 on Financial Instruments: Recognition and
Measurement, with the exception of certain provisions on the use of the full
fair value option and on hedge accounting. This text was supported both by a
qualified majority of Member States at the Accounting Regulatory Committee
(ARC) on 1 October and by the European Parliament. The Commission has
also adopted a political declaration stating that it expects the International
Accounting Standards Board (IASB) to bring forward the necessary
amendments to the current full fair value option by December 2004 and to the
provisions on hedge accounting by September 2005. Use of IAS 39, apart
from the ‘carved-out’ sections, will be legally binding for all listed companies
in the EU from 1st January 2005.
Commissioner Frits Bolkestein said: “IAS 39 has been very controversial. I am glad
that we have found a solution. The two ‘carve outs’ are purely temporary because
the Commission expects the IASB to remedy the outstanding problems quickly. The
Commission is not a standard setter and cannot resolve them on its own.”
Before IAS become legally binding for listed companies on 1 January 2005 (see
IP/02/827), they must be endorsed by the Commission, after consulting Member
States in the ARC, the European Parliament and EFRAG, the European Financial
Reporting Advisory Group (composed of independent private sector experts). The
Commission has already endorsed 33 standards (see IP/03/1297) but IAS 39 has
been the subject of revisions.
The Commission has endorsed about 95% of the text of IAS 39. It carved out certain
provisions because - in agreement with most Member States and the European
Parliament – it considers they require further revision. There are two carve outs:
The carve-out of the full fair value option is based on observations from the
European Central Bank and prudential supervisors represented in the Basel
Committee of banking supervisors. The IASB took these observations into
account when issuing an Exposure Draft in April 2004 limiting the scope of the
full fair value option. However, the IASB has not yet taken a final position on
this important issue. In addition, Article 42a of the Fourth Company Law
Directive (Directive 78/660/EEC) does not allow full fair valuation of all
liabilities; the main category of liabilities excluded from fair valuation is
companies fair valuing their own debt. Companies are therefore not allowed to
use the full fair value option. Neither can Member States require mandatory use
of the carved out fair value provisions.
The carve out of certain hedge accounting provisions reflects criticism by
the majority of European banks, which argued that IAS 39 in its current form
would force them into disproportionate and costly changes both to their
asset/liability management and to their accounting systems and would produce
unwarranted volatility. However, because there is no existing EU law on this
issue, individual companies may apply the ‘carved out’ hedge accounting
provisions. A Member State may also make these provisions mandatory under
its national rules.
The Commission’s political declaration is attached:
Declaration by the Commission on the adoption of IAS 39 at the
meeting of the Accounting Regulatory Committee of 1 October 2004
The Commission confirms the crucial importance they attach to the timely adoption
of common international accounting standards (IAS/IFRS) in the European Union
which is essential for the integration of EU capital markets and for the global
convergence of accounting standards. In this perspective, it is the Commission’s
firm intention to adopt all IAS/IFRS standards on time for application in 2005.
The most important remaining case was the adoption of IAS 39 on financial
instruments. As a general rule, the Commission will always prefer full endorsement
of international accounting standards. However, IAS 39 currently represents an
exceptional situation caused by particular prudential and technical complexities
which have not been resolved.
The opinion of the Accounting Regulatory Committee of 1 October 2004 to partially
adopt IAS-39, with 2 carve outs, has helped to pave the way towards an early
adoption of the entire standard in a revised form. In this context, the Commission
confirms that it has no intention to become an accounting standard setter. The
Commission has paid particular attention to remove only a few provisions of the
standard that are distinct, separable and only to the extent strictly necessary. No text
has been added to the standard. Within the limited time available, the Commission
also took all possible practical steps to evaluate the effectiveness of the carve-outs.
The Commission considers that under an optimistic scenario the first carve out on
the full fair value option could be eliminated by April 2005 and the second carve out
on hedge accounting around the end of 2005. This is based on the assumption that
the IASB will have reached a satisfactory solution to the fair value option in early
December 2004 and that the working party set up between the IASB and the
European Banking Federation on hedge accounting can finish its technical work by
April 2005.
The Commission appeals to all parties concerned, the IASB, the ECB, Basle
regulators and European banks to work intensely to find appropriate, balanced
solutions as quickly as possible on the remaining outstanding issues in IAS-39. The
Commission will work with all the parties concerned to obtain this final result.
For further details see MEMO/04/265 and: