EU governments missed the goal of introducing fully comparable accounting standards in 2005 by endorsing a compromise on Friday that will allow banks to choose between slightly different bookkeeping rules.
European Union states cleared the final obstacle to adopting new International Financial Reporting Standards (IFRS) next year as they backed a watered-down version of the controversial IAS 39 derivatives rule that is key for banks, EU diplomats said.
But under a compromise to end a year-long impasse, EU states would be free to allow their banks to use tougher provisions on hedge accounting, a move that will help global firms reconcile their financial data with US accounting rules.
Permitting the use of two versions of IAS 39 will result in banks publishing different accounts when 7,000 listed firms adopt IFRS rules on January 1, 2005.
"Because there will be a certain degree of optionality, this will defeat the objective of trying to get a common standard," Ken Wild, global IAS leader at Deloitte & Touche told Reuters.
But the European Commission, the EU's executive, played down the risk of inconsistent accounts by saying the changes affected less than 5 pct of the text of the standard and that a full-blown international review of the rule was on the way.
"We shouldn't over-exaggerate the impact of this. This is one standard out of many... So let's get things in proportion here," said Commission spokesman Jonathan Todd.
The IAS 39 standard will shake-up EU accounting practices by introducing the use of fair or market value for financial instruments such as derivatives, shares and bonds. Todd said firms will not in any case be able to fair value their own debt.
Wild said he expected only a handful of banks to apply the diluted IAS 39 rule, mainly in France and Italy. HSBC, Europe's largest bank, has already said it will use IAS 39 in full and many globally active banks are expected to follow suit.
Some banks, especially in France, are opposed to the full implementation of IAS 39 amid concern it could damage their risk management practice and lead to wildly-fluctuating earnings.
IAS 39 requires bank to measure volatile derivatives at fair or market value, as opposed to historical costs. Banks can reduce volatility through hedge accounting, but the original version of IAS 39 imposes strict limits on such practices.
Shaken by corporate scandals of the like of Enron, Ahold and Parmalat, the EU boldly decided to boost the quality of its accounting by vowing to ditch divergent national accounting practices in favour of common IFRS rules.
The move was expected to lead to greater transparency as investors across the 25-nation bloc would be able to compare financial statements from companies in Germany, France or Malta.
But the decision sparked a politically-charged row as soon as banks around Europe realised the move to IFRS would force them to account derivatives at fair value, a practice which is commonplace in the United States.
French President Jacques Chirac and European Central Bank President Jean-Claude Trichet joined the dispute and warned standard-setters at the International Accounting Standards Board in London against the risks posed by IAS 39.
After months of tough negotiations, the Commission, in charge of endorsing accounting standards in the EU, decided to end the row by deleting the most controversial bits from IAS 39, but did not bar banks from complying with the original standard.