In a letter to the European Securities and Markets Authority (ESMA), dated August 4, IASB Chair Hans Hoogervorst said there are "indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses" in a manner that is inconsistent with the norms. The letter was published on the IASB website today.
"This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds," the London-based agency, which sets accounting rules, said. "This is a matter of great concern to us."
This case demonstrates "visibly inconsistent application", the IASB said, which is the independent standard-setting body of the IFRS Foundation.
The IAS 39 Financial Instruments: Recognition and Measurement accounting standard requires a company to recognize any impairment loss in profit or loss when there is objective evidence that available-for-sale financial assets are impaired. The impairment calculation for such financial assets is based on the fair value of the assets.
While determining whether the Greek bonds are impaired, some firms are using the the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required in IAS 39, Hoogervorst pointed out in the letter.
Further, some firms have stated that they are relying on internal valuation methodologies, rather than on market prices, to measure the fair value of the assets as at June 30, 2011, the letter added. The reason generally given for such practice is that the market for Greek government bonds is currently inactive and hence does not provide reliable information, Hoogervorst said.
"In measuring fair value, IAS 39 prioritizes the use of quoted prices in active markets over the use of valuation models developed using internal assumptions," the letter said.
Hoogervorst also drew attention to the fact that transactions are still taking place in Greek government bonds, though the level of trading activity in them has decreased.
"A company cannot ignore relevant market data (including observable transaction prices) when it is clear that market participants would use that data in determining the price at which they would be willing to enter into a transaction for the financial asset," Hoogervorst added.
"It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used," he said.
A spokeswoman from the Paris-based ESMA reportedly said the market regulator is reviewing whether there are differences among banks and other financial institutions in the treatment of sovereign debt. The agency is maintaining a close and regular dialog with the IASB and the general findings will be shared with the them, she added.
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