Reference no: EM132752602

Deferring Accounting Standards:

• Lobbying by bankers and the French Government has led to postponement by the European Union (EU) of the implementation of the IASB new derivative accounting standards, which all European companies will be required to use. The EU must endorse the derivative standards before they become compulsory.

• European banks and insurance companies are afraid that the new standards will impact adversely on their balance sheets because they would now have to account for any derivative gains or losses. The present practice of most companies is to list the costs of acquisition of financial instruments, so often derivatives do not appear in the company accounts.

• The French Government has also lobbied against the proposed derivative standards. They 'would have harmful consequences on financial stability', according to President Jacques Chirac when he wrote to the EU last year.

• The EU commissioner charged with leadership of the move towards European financial unity, Frits Bolkestein, said that he would not proceed with imposing the two new accounting standards if agreement couldnot be reached by the parties in dispute.

• "We will see what we can settle before the mid-March deadline and we will park what now cannot be settled and get a high-level committee to look at it and come up with solutions", said Mr Bolkestein, as he announced the establishment of a committee of 'industry specialists' tasked with examination of the standards in dispute.

• The result of leaving the new standards on hold would be that EU companies would continue to account for their financial instruments in the usual way but also have to implement the bulk of the new accounting standards which the EU has already endorsed.

• Advocates for the new accounting standards that were drafted after the collapse of Enron, the US energy company, are convinced that the rules are essential for a complete understanding of the health of a company's finances, and that the new rules would have made it impossible for Enron to proceed as it did. Enron concealed its massive debt by private partnership, 'special purpose vehicles', to shift assets that were underperforming.

• Although the IASB did make some revisions to the proposed standards (which were not regarded by critics as far-reaching enough), the 'fair value' principle where all of a company's assets have a market value is fundamental for the IASB. Its long-term objectives is the eventual compatibility of European and American accounting standards.

• The IASB will not publish the financial details on the two disputed standards until mid-March. A spokesperson for the IASB has said that: "The board is in continuing discussion with many interested parties and our expectation is to conclude the deliberations by the end of March'.

• It is feared by observers of the disputes that the two sides are too committed to their opposing positions on the derivatives standards and that a compromise is unlikely.

Required:

Problem 1: Using a particular theory of regulation(choose the most appropriate one), explain what factors might have motivated the then president Jacques Chirac to lobby against the accounting standard in question.