Financial Planning > Behavioral Finance

Don't Mandate Transition to New Rules, Guide It

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LONDON (–The International Swaps and Derivatives Association, commenting on a draft recommendation by European regulators for a transition to continent-wide financial accounting standards, cautioned that disclosures of specifics regarding a firm’s transition should not be mandated.

“The timing of the provision and the format of such information is better left to the individual firms,” ISDA stated.

The new standards are known as the International Financial Reporting Standards, and they would serve as a Europe-wide substitute for various local generally accepting accounting practices. Two aspects of IFRS that concern participants in the privately negotiated derivatives industry are International Accounting Standards 32 and 39.

IAS 32 requires a broad range of disclosures about derivatives, including information as to their fair value.

IAS 39 establishes conditions for determining when control over a derivative has been transferred to another party and subsequently can be taken off the books of the party transferring control.

In October, the Committee for European Securities Regulators issued its “Draft Recommendations for Additional Guidance Regarding the Transition to IFRS.” The CESR said then that approximately 7,000 listed companies within the European Union will have to make significant changes in their presentation of financial data by 2005, and it proposed a transition in steps.

First, within an issuer’s financial statements for 2003 it should “explain in a narrative form the key differences in accounting methods that have been identified” and communicate to investors how it intends to carry out the transition.

Second, issuers should be encouraged to give quantitative information on the effect of the new standards by the end of 2004.

Melissa Allen, chair of the ISDA European Accounting Committee, submitted ISDA’s response to the Secretary General of CESR, Fabrice Demarigny, in November.

She wrote that IAS 32 and 39 have not yet been finalized and that many of ISDA’s member firms are engaged in a “continuing dialogue with the IASB in an attempt” to polish them. “As such any requirement or guidance encouraging forms to disseminate information regarding major differences between present accounting policies and IFRS before these standards are finalized … may result in firm’s issuing misleading or inaccurate information.”

ISDA believes, she wrote, that CESR guidance concerning company disclosures on the transition to, or the impact of, IFRS should be regarding as recommendations, not as mandates.

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