Saturday, July 19, 2014

European Central Bank Chief Wants Swift Implementation of Accounting Standard for Valuing Financial Instruments

The President of the European Central Bank, Mario Draghi, called for the speedy implementation of IFRS 9 on the valuation of financial instruments. It is very important to have IFRS 9 as part of global accounting standards as swiftly as possible, he emphasized in recent remarks. More than 100 countries speak the same accounting language today, he noted in recent remarks, whereas a decade ago, no major economy used the International Financial Reporting Standards (IFRS). This momentum must be kept going and built upon, he said. The financial crisis would not have been as severe if there had been more integration, not less integration in Europe, he averred, and the future lies with more integration. The European Union has required the use of IFRS since 2005.

IFRS 9, to issue in July, completes the IASB’s response to the financial crisis by providing a comprehensive package of improvements to financial instruments accounting. IFRS 9 introduces a new, expected-loss impairment model that limits the ability of banks and others to defer the timely recognition of loan losses and provides a logical single classification approach driven by cash flow characteristics and how cash flow is managed.

It solves the so-called own credit issue, whereby banks and others are able to book large gains through their P&Ls as a result of the value of their own debt falling due to a decrease in credit worthiness. It allows companies, both within and outside of the financial sector, to better reflect their risk management activities in their financial statements. It also significantly reduces the complexity associated with the accounting for financial instruments.