'Can Accounting Standards Save the Banks?'

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24 Apr 2008

In an article published in the 21 April 2008 edition of La Tribune (the French business daily), Nicolas Veron defends accounting standards such as IAS 39 that require banks to measure most financial instruments at fair value at each reporting date.

Mr Veron, a research fellow at European 'think tank' Breugel, argues that mark-to-market standards, when rigorously applied, serve the public interest by providing investors with 'relevant, reliable, comparable, and understandable information'. Banks will actually benefit from accounting that reflects economic reality and provides full disclosure, Mr Veron suggests. Investors will understand any resulting earnings volatility. Click to download the article, titled Can Accounting Standards Save the Banks? (PDF 40k), which we have posted with the kind permission of the author. An excerpt:

Accounting losses are accepted by the marketplace when companies face up to them and explain. Evidence is the remarkable 15% hike in UBS shares upon its announcement of a USD19 billion write-down on 1 April.

Conversely, there can be no doubt that reducing accounting transparency, whether by reverting to historical cost or by authorising banks not to reflect market developments in their financial statements, would hurt the market and have negative consequences. This was illustrated by the 1990s Japanese crisis, when the opaque accounts of banks fed the general mistrust.

In a nutshell, fair value accounting may not be satisfactory, but the alternatives are worse. Pending the return of liquidity, investors prefer to view the world through the fuzzy lens of fair value, rather than being left to complete corporate discretion or have information which only reflects an outdated past.

We have also posted a publication by Mr Veron from the Bruegel Blueprint Series that we believe will also be of interest to IAS Plus visitors: The Global Accounting Experiment (PDF 1,111k), which argues that the adoption of IFRSs by the EU must now be accompanied by follow-on measures at several levels, one of which is a chief accountant for Europe.

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