Accounting board proposes change to liability rule

LONDON Tue May 11, 2010 11:03am BST

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LONDON (Reuters) - A top accounting standards setter has proposed changing the way banks measure their liabilities so they can no longer book a profit and confuse investors after a ratings downgrade.

The International Accounting Standards Board (IASB), whose rules are used in over 110 countries, including the European Union, said the draft change was in response to an extensive consultation.

"Whilst there are theoretical arguments for treating financial assets and liabilities in the same way, it is hard to defend the accounting as providing useful information when a company suffering deterioration in credit quality is able to book a corresponding large profit," IASB Chairman, David Tweedie, said in a statement on Tuesday.

The "counter intuitive" rule angered policymakers during the financial crisis when profits were being booked by banks despite a ratings downgrade to "own credit."

"Changes in 'own credit' will therefore not affect reported profit or loss," the IASB said.

Under the existing rule a ratings downgrade pushes down the value of any liability priced at the going rate. The amount by which the liability falls in value can then be recorded as a profit.

The proposal is part of an overall revamp of the IASB's fair value or marking to market rule which will be finalised by the end of this year but it is unclear when it comes into force.

The G20 group of leading countries called last year for the revamp of the overall rule in a bid to limit how it can amplify extreme market moves as seen during the credit crunch.

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