By JOYCE HOOI

IF bankers are currently the bad boys of the G-20 Summit being held in Pittsburgh, International Accounting Standard 39 was the summit's whipping boy in London earlier this month.

A decidedly less glamorous concept than the Saville Row-clad banker, IAS 39 is the unassuming piece of accounting jargon that was blamed by many for exacerbating last year's financial meltdown.

The mark-to-market application of IAS 39 had accounted for the bulk of the losses in the fair value of assets held by banks that contributed to rising levels of red ink and panic after Lehman Brothers' collapse.

Now, perversely, the suggested changes to IAS 39 might still be keeping some bankers up at night, for entirely different reasons.

One of the upshots of the International Accounting Standards Board's (IASB) proposed changes to IAS 39 will be that any financial instrument lacking a basic loan feature will not be recorded at amortised cost.

It will instead have to be recorded at fair value, with the rise or fall in value reflected in the profit-and- loss (P&L) statement.

Issuers of convertible bonds will be among those affected, as they will now have to subject the liability portion of the convertible bond, formerly held at amortised cost, to a fair-value treatment.

This will put banks and listed companies in a fairly contentious position, reckons Chen Voon Hoe, a financial services industry practice partner at PricewaterhouseCoopers (PwC) Singapore.

'As the IASB proposes no bifurcation of embedded derivatives with financial host, it will result in these listed companies fair-valuing their own debt,' said Mr Chen.

The upshot of this is that when firms' credit ratings improve, a loss will surface on the P&L statement, and vice versa - an outcome that is counter-intuitively punitive.

International banks, laden with convertible bonds, have now ironically begun to worry about their improving credit ratings, thanks to the amended IAS 39, which could be ready in time for the Dec 31 year-end statements this year.

BT understands that local banks, however, will not have as rude an awakening.

While their financial instrument of concern is structured deposits which will also be subjected to the fair-value treatment, at least one of the local banks has already put it into practice with apparently little fallout.

The project to overhaul IAS 39 had ironically carried the objective of simplifying the original standard, long criticised as complicated and confusing.

The amendment effort, however, has been marked with criticism from various quarters. The Institute of Chartered Accountants in England and Wales (ICAEW) had earlier this month expressed their concern over the pace of the change to the IASB.

Pressed by governments to act quickly after the financial meltdown, the IASB had acted with a speed uncharacteristic of the industry, coming out with the first exposure draft in July.

'Do you know how long it took to develop the original IAS 39? Ten years,' an accountant with one of the Big Four accounting firms told BT.

Mark Billington, the regional director of Southeast Asia for ICAEW, is also concerned about the piecemeal approach to amending IAS 39, currently being conducted in three phases.

'There is usually a more holistic approach with a longer consultation period for amending standards. Without that, there is more of a chance of missing something. There might also be wholesale confusion - for the users and preparers of the accounts,' Mr Billington told BT.

On top of that, the motives driving this project have been called into question. Earlier this week, the ICAEW warned the Group of 20 leaders against mixing financial reporting with financial stability.

'The main purpose of financial reporting is to help investors and lenders to make informed decisions, not to smooth financial results or to achieve macroeconomic policy objectives,' said Nigel Sleigh- Johnson, head of the ICAEW Financial Reporting Faculty.

In addition, the accounting profession has not taken well to politicians' assertions that IAS 39 had caused the liquidity of banks to dry up during the crisis.

'IAS 39 merely reflected the fall in fair value as the market itself had no liquidity in the first place,' said PwC's Mr Chen.

This article was first published in The Business Times.