Accounting Rule on Derivatives Sparks Veto by 4 EU Nations

Four countries have voted down the latest version of a rule on accounting for derivatives, continuing a years-long debate and creating doubt that a full package of accounting standards will be passed by January.

France, Italy, Spain and Belgium vetoed the compromise at a meeting of an advisory group called the Accounting Regulatory Committee, according to a European diplomat as reported in the New York Times. The committee is made up of representatives from the European Union’s 25 member states. It advises the European Commission, which will make the final decision on whether to pass accounting rules. Fifteen countries were in favor of passing the derivatives rule. Six other countries, including Germany, abstained.

The derivatives rule is part of a set of global accounting standards, called International Financial Reporting Standards, being promoted by the International Accounting Standards Board. The separate accounting rules of each European country are set to be replaced in 2005. The idea behind uniform, stricter standards is to avoid the corporate corruption scandals seen in the U.S., and to harmonize U.S. and European rules.

The derivatives rule, IAS 39, requires that investments in derivative securities be measured at their market value as opposed to their historical cost, as is now the practice in Europe. The vote of the four large states indicates the rule could be blocked, as the commission is unlikely to approve the rule over substantial opposition, observers say. Some European banks have also opposed the derivatives rule, saying it would cause too much volatility in financial statements.

More changes may be made to the rule before the commission acts. Some indication of the commission’s action is expected by the end of July, the diplomat told the Times.

Opponents of the measure have argued that a stop-gap rule could be developed, or accepting the international accounting standards could be delayed until 2006.

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