Amendment to the EU Fourth Directive
ACCA’s response to the UK’s Department of Trade and Industry regarding the European Commission’s proposals is set out below.
Thank you for the invitation to comment on the Commission's proposals at this point.
You mentioned in your letter that this revision was intended to be for financial instruments only and specifically to allow IAS39 to be used in conformity with the Directives. The restrictive nature of this amendment with regard to proposals from the Joint Working Group, or in relation to IAS40, are obvious. We might prefer something more wide-ranging, and I think that this highlights the practical problems of trying to amend the Directives so as to allow the use of IAS. I note, however, your comment that any other changes to the Directives would realistically have to be dealt with separately.
Banks and insurance companies are excluded from the scope thus far. As entities where financial instruments assume the greatest significance, it seems important that their specific directives are amended as soon as possible.
Commodity dealing companies will still not be able to mark-to-market their stock while remaining in compliance with the valuation rules of the Directives.
Our other comments below take the scope of the amendment as read.
Article 42(a)
This article seems excessively convoluted. Instead of the double negative would it not be better if there was simply a positive allowance for member state to permit or require the fair valuation of financial instruments, with the existing restrictions in paragraph 4.
I think that the new article could be clearer on its relationship with Articles 33 to 42. The article is specifically in derogation to Article 32 and it does form a new section 7a. Does this mean that it is notwithstanding the whole of the rest of Section 7 ( i.e. Articles 33 to 42). In particular Article 33 allows assets that are not financial instruments to be revalued to fair value, whereas Article 42a would prohibit it.
Paragraph 4(d) seems slightly odd on two counts. Such commodity-based contracts would not seem to be financial instruments, so it then seems odd to exclude them. If this paragraph is still required, it should presumably read "exclude from valuation at fair value", or words to that effect.
Article 42b
Paragraph 1 seems unnecessary, as the definition of fair value could be left to accounting standards. The proposed amendments to the Directive have, rightly in our view, not attempted to define other key items, for example financial instruments or derivatives.
If it were to be retained however, where the text refers to "reliable market" should this be "reliable market value"?
Article 42c
In paragraph 3(a) where it states "allows such changes" should this not be "requires such changes"?
Article 43a
In this article and in 43b separate disclosures are required of derivative financial instruments. Given these requirements it might make sense to add specific headings in the formats in Articles 9 or 10 for derivatives, which do not exist at present.
Articles 43b and 46a
Should these articles be applied to the same classes of companies? At present 43b is to be followed where a company is permitted to use fair values, on the basis presumably that member states might for example permit listed or large companies but not others. Article 46a appears to be applicable to all companies, large and small. I think we would prefer that both of these articles would apply only to selected appropriate classes of companies.