The Greek economy went into recession in 2009, with the largest budget deficit and government debt to GDP ratios in the European Union. Since then, markets have worried that Greece will not be able to avoid defaulting on its debt. As a result, the value of Greek bonds has fallen well below their par value.
Many European banks hold Greek bonds. The reporting of their holdings on their balance sheets raises concern about the enforcement of International Accounting Standards. Reporting of financial instruments such as Greek bonds is covered by IAS 39 Financial Instruments: Recognition and -Measurement. Commentators report that some companies, especially French banks, are not following IAS 39. The French securities regulator is faced with a situation where banks within its ambit have acted as if the value of Greek bonds did not fall below par. If the securities regulator forces the banks to change their accounting, then the securities regulator risks incurring the ire of the French government and French banking regulators. If the French securities regulator ignores the lack of compliance with IAS 39, then the inherent weakness of international standards (a lack of consistent enforcement) will be clear.
There is no common legal enforcement mechanism for international accounting standards. The hope was that audit firms would ensure consistency but this has not happened, especially in relation to IAS 39.
Although auditing firms use similar names in various countries, the firms are organised as national partnerships. While the firms make efforts to assure consistency across borders, they are obviously aware of the political aspects of their decisions in various constituencies. Greek bonds should be accounted for as investments in equity instruments — marked to market values. Write-downs do not have to be shown in the income statement unless their values are impaired. France’s largest bank argues that the market for Greek bonds is ¬inactive (although there is trading in them happening daily), so market prices are no longer representative of fair value. Greece’s largest lending bank categorised most of its holdings of Greek bonds as either ‘held to maturity’ or ‘loans and receivables’ which allowed it to avoid using fair value for the bonds so classified.
The IASB reacted to the accounting of Greek bonds by sending a letter to the European Securities and Markets Authority, a letter which was kept secret until it was leaked to a leading British financial paper. This secrecy, as well as the differential treatment of Greek bonds within Europe, raises issues about whether international accounting standards will deliver on the comparability and consistency that was promised as advantages of their adoption.
Source: Based on information from Vincent Papa, ‘EU debt crisis highlights shortcomings of financial instrument accounting’, CFA Institute; Michael Rapoport & David Enrich, ‘Officials warn lenders on Greek-debt values’, Wall Street Journal; Reuters, ‘Accounting board criticizes European banks on Greek debt’, The New York Times.51

Questions
1. What is ‘GDP’?
2. What is meant by ‘par value’?
3. Do you consider the lack of a common legal enforcement mechanism for IASs a weakness of the concept of common international accounting standards? Give reasons for your answer.
4. Why would commentators regard the letter by the chairman of the IASB to the European Securities and Markets Authority as a form of lobbying?
5. Does the need for the chairman of the IASB to lobby an authority highlight the weaknesses of the enforcement system for IASs?
6. Give reasons why you think the chairman of the IASB kept the letter secret.
7. The broad principle set out for accounting for financial instruments was that they should be measured at fair value with gains and losses being recognised in the period in which they occur. Why do you think the IASB changed the principle to the rules in the current standard which allows companies to avoid measuring financial instruments at fair value and so violate the principle?
8. What theory would explain the actions of the IASB? Give reasons for your answer.