The ASB has spelt out the implications for UK financial reporting of the modified version of International Accounting Standard (IAS) 39 ‘Financial Instruments: Recognition and Measurement’ proposed by the European Commission.

On 1 October 2004 the EU voted to adopt as an EU-adopted international accounting standard a version of IAS 39 that has been amended by the European Commission (‘amended IAS 39’) rather than IAS 39 as published by the IASB (the ‘unamended IAS 39’). This decision raises important issues both for the Board and for companies in the UK.

ASB conclusion

The ASB strongly supports the view that all UK companies should comply as far as possible with the full hedging provisions of the standard and not the amended version, and we will be issuing guidance on this and the amended fair value option as soon as possible.

ASB action for companies following EU-adopted international accounting standards

Hedge accounting
The implications of the EU's decision for entities reporting under EU-adopted international accounting standards are not straightforward. The Board has considered how it believes UK entities applying EU-adopted international accounting standards should proceed, and has concluded that it should strongly recommend compliance with the hedge accounting requirements in full.

In this regard the following points are relevant.

• The European Commission has stated that Member States are permitted to require companies reporting under the IAS Regulation to comply in full with the hedge accounting requirements of IAS 39. If this power to mandate full compliance lay with the Board, it would do so immediately. However, the Board understands that, as a consequence of the IAS Regulation, the Board may not currently have this power. The Board intends to explore all possible means of mandating compliance with the hedging requirements as soon as possible.
• The EU’s proposed interpretation of IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’ is that compliance with the EU-adopted version of IAS 39 should be interpreted as first-time adoption within the meaning of IFRS 1. There remains considerable uncertainty about how that will work in practice. The Board suspects that applying that interpretation might raise issues for some enforcement agencies and might also create difficulties for the companies involved when the EU-adopted version of IAS 39 is eventually brought into line with the IASB's version. Compliance in full
  with the deleted hedge accounting requirements from 2005 will avoid these problems.

The fair value option
Many UK entities that will be reporting under EU-adopted standards had intended to use the fair value option more widely than now permitted under the amended IAS 39 - for example toeliminate the artificial volatility that would otherwise arise from accounting for linked transactions on differing bases, or to simplify the application of the standard by using fair value in place of detailed hedge accounting requirements. There is, as a result, much interest in understanding precisely the effect of the EU’s decision.

Guidance to be issued
The Board does not support the EU’s approach, but understands the urgent need to address the concerns of UK companies to know the implications of the amended fair value option for their 2005 reporting - accounting systems need to be operating in compliance with the standard from 1 January 2005. The Board intends to issue guidance as soon as possible on these issues. This will set out its views on the interaction between the amended IAS 39, other adopted international standards and the legal requirements.

ASB action for companies following UK standards

To date the Board has been following a convergence process that will ultimately mandate compliance with unamended IAS 39 by all companies that are continuing to follow UK standards. Notwithstanding the EU’s decision, the Board has decided to continue with that strategy. As a first step, a UK standard implementing in full the measurement and hedge accounting requirements of the unamended IAS 39 for some entities will be issued shortly (see pages 4 and 5).

Further proposals on extending the scope of that standard to other entities and on implementing the recognition and derecognition parts of the standard will be issued next year.