The use by Lehman Brothers bank of a U.S. accounting device to strengthen its balance sheet would not have worked under global accounting rules, a top industry official told the Reuters Global Financial Regulation Summit on Thursday.
The now defunct U.S. bank was criticized in a report by a U.S. court-appointed examiner last month for using Repo 105, an accounting rule that allowed Lehman to temporarily remove some $50 billion in assets from its balance sheet.
From an IFRS (International Financial Reporting Standards) perspective I would suspect that most transactions would have stayed on the balance sheet, said Philippe Danjou, a board member of the International Accounting Standards Board (IASB).
It makes a case for convergence, it makes a case that we should not have different outcomes under different accounting standards when you have such big amounts, Danjou told the Reuters Regulation Summit.
The IASB, which draws up International Financial Reporting Standards used in over 110 countries, has been asked by the G20 group of leading economies to converge its rules with U.S. accounting standards by mid-2011.
That deadline is now in doubt due to differences between the IASB and its U.S. counterpart over how many assets held by banks should be valued at the going rate or at cost.
The IASB has opted for a mix of pricing assets at amortized cost and marking-to-market but the U.S. Financial Accounting Standards Board is expected to opt shortly for widening the use of marking-to-market or fair value.
Danjou said convergence was not always an easy task and there may be a need for a bridge solution.
Convergence is the aim. It is a very desirable goal but you cannot force it ... In that case we have a plan which is to establish this bridge, Danjou said.
Financial Stability Board Chairman Mario Draghi said last week there is a very material risk of ending up with large divergences in accounting rules.
European Central Bank executive board member Gertrude Tumpel-Gugerell dismissed the U.S. move to full fair value on Tuesday, saying convergence should not come at the expense on quality, and she was not optimistic about the 2011 deadline.
LIABILITIES, HEDGE ACCOUNTING
The IASB will know by year end whether to shift to Plan B, and several other key changes to IASB rules are in the pipeline.
The board will soon propose changing how investment banks account for financial liabilities.
Liabilities are ok as they are, there is no need to change radically how you classify major financial liabilities, Danjou said.
But banks will no longer record profits when they are downgraded or losses when their situation improves, Danjou said.
There will be a more radical approach to reforming hedge accounting or where companies use instruments such as derivatives to guard against the risk of adverse price moves such as in raw materials and currencies.
We are putting everything on the table. We are not starting from a white sheet of paper but we are rethinking probably everything with a view to try to simplify, Danjou said.
There will be a lot of good things for corporates in this project, Danjou said.
He took a swipe at calls from regulators for accounting rules to not only give investors a health check on a company but also help keep the financial system stable by not amplifying a crises.
To move away from this notion of clear, neutral and transparent information to investors would be detrimental to financial stability in my view, Danjou said.
We are conscious of financial stability but we should not put that objective above financial transparency, Danjou added.
(Reporting by Huw Jones, editing by Rupert Winchester)