FINANCIAL REPORTING: COUNCIL WAVES THROUGH FAIR VALUE ACCOUNTING DIRECTIVE.

The speed of the fair value proposal's adoption is due to close co-operation between the Council of Ministers, European Commission and Parliament as the draft was only proposed in February 2000. The new Directive fits in with the trend towards fair value reporting and also with the planned switchover by all EU listed companies to International Accounting Standards by 2005. IAS 39 on the valuation of financial instruments is mandatory as of financial year 2001 and the new Directive will enable companies to fully apply it within the framework of the Accounting Directives.The Directive defines those financial instruments that can be fair valued in line with IAS 39. It also lays down rules for Member States to define the scope of companies that shall be permitted, or can be required, to use fair value. A Member State can, for example, permit or require fair value only for listed companies. The Directive requires that all companies disclose information on derivative financial instruments such as options, swaps, and futures in the notes on the accounts. However, small companies can be excluded from this disclosure.The amendment will not replace historic cost as the basis of accounting valuation in the Accounting Directives but will complement it, particularly since there is no international consensus that fair value accounting is appropriate in all cases. For example, there is as yet no international agreement on whether a company should be required to fair value its own debt or whether such fair value should take account of the company's own credit risk. Fair value accounting will therefore not be permitted for balance sheet items such as fixed assets (for example land and buildings or plant and equipment). Similarly, certain financial instruments, such as long-term debt, will continue to be stated at historical cost.Although banks have now been included in the scope of the Directive, it should be clear that this is not about the introduction of "full" fair value reporting, a concept raising concerns with the banking industry, which is presently being discussed at international level and which will be assessed on its own merits by the Commission."With an international capital market, it is...