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UPDATE 2-IASB proposes simpler fair value rule

Published 07/14/2009, 11:19 AM

* IASB says mandatory use of fair value change from Jan 2012

* Says to reduce categories to two - fair value and at cost

* Says will meet EU request for end of 2009 application

* Full reform of fair value rule to be completed in 2010

(Adds industry reaction)

By Huw Jones

LONDON, July 14 (Reuters) - The International Accounting Standards Board (IASB) on Tuesday proposed to simplify a key valuation rule that European Union finance ministers have blamed for amplifying the financial crisis.

The Group of 20 (G20) industrialised and emerging market countries agreed in April that the fair value rule should be revised to make company statements clearer for investors, after banks shocked markets with their holdings of so-called toxic assets.

"The proposals, which the IASB believes will significantly reduce complexity and make it easier for investors to understand financial statements, address how financial instruments are classified and measured," the IASB said in a statement.

"The proposals also answer concerns raised by interested parties during the financial crisis."

The IASB has faced heavy political pressure, particularly from countries like Germany, to ease the impact of fair value in time for 2009 annual reports, which are compiled from December.

The proposal reduces the categories to two -- fair value and at cost, and only one method for measuring impairment.

Assets that generate a stable and predictable revenue and are being held on the bank's book and not being traded, such as bonds, will be priced at cost.

Traded assets like derivatives with unpredictable revenues would be priced at fair value under the draft proposal.

The overall impact could be little, as some assets priced at cost today will fall into the fair value bucket, with experts expecting moves in the opposite direction as well.

The IASB is reforming the rule in sections, with the first part taking effect at the end of the year.

"The IASB plans to finalise the classification and measurement proposals in time for non-mandatory application in 2009 year-end financial statements," the IASB said.

ACCOUNTANTS CONCERNED

The IASB said it would work closely with its U.S. peer, the Financial Accounting Standards Board, to thrash out a common standard on financial instruments as part of wider efforts to reach a common global set of accounting rules -- another request from the G20.

Accountants and auditors have said accounting rules should not be used to distort the true picture of a company to investors and fear that the reforms will make it too easy to recategorize costs as historical costs and not mark-to-market, or valuing them at the going rate.

The Institute of Chartered Accountants in England and Wales (IACEW) said there was no right answer to how financial instruments should be accounted, but there will be too little time for debate or to test the impact of the proposals.

"Moreover, because the proposed changes are being published in stages, their interaction with each other is unclear," ICAEW's head of financial services, Iain Coke said.

"As the timetable for changes is so short, it might also mean that there will be a need for amendments, adjustments and clarifications before the final package is implemented on a mandatory basis," Coke said.

Some assets have tumbled in value or become untradable during the financial crisis, forcing banks to make writedowns that necessitated raising fresh capital when credit is scarce.

There are over 20 ways to classify different assets, making it complex for a company to decide whether it should be marked to market or priced based on what was originally paid for it.

The IASB plans to complete its reform of the rest of the IAS 39 fair value rule during 2010, although mandatory application will not be before January 2012.

The IASB's rules are used in over 100 countries by all listed companies, including in the 27-nation European Union. (Reporting by Huw Jones, editing Chris Pizzey and Rupert Winchester)

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