By Siow Li Sen

Singapore banks will have greater flexibility to cushion the impact of the financial crisis as the fair value or mark-to-market accounting rule was eased internationally - and the change is likely to take effect here.

Under the changes, the 100 countries that use International Financial Reporting Standards will be able to reclassify some investments so they no longer have to book paper gains and losses as credit markets fluctuate.

But it is not clear to what extent the three local banks will adopt the amended rules, given they are not as badly affected by the crisis as US and European banks.

'Singapore banks will welcome this as it gives them greater flexibility,' said PricewaterhouseCoopers partner Chen Voon Hoe, who noted that the local banks have relatively smaller trading books.

Banks that make use of the rules amendment have to make full disclosures to give investors transparency.

On Monday, the International Accounting Standards Board (IASB) amended accounting rules - IAS 39 on financial instruments and IFRS 7 on disclosure of the financial instruments. Companies and banks can use the amendments straight away, if they wish.

Singapore follows IASB standards and the amendments are expected to be adopted here, probably in time for fourth-quarter results.

'We adopted fully 39, word for word, and looking at the global turmoil, it would be hard to imagine we won't (adopt the amendments),' said Ernest Kan, vice-president of the Institute of Certified Public Accountants in Singapore (Icpas).

Icpas will look at the amendments urgently and submit them to the Accounting Standards Council, Mr Kan said.

The amendments apply only to non-derivative financial assets such as loans and securities.

Under the changes, loans have to be held to maturity, which means banks can't sell them, and securities have to be re-classified out of the trading category, which means they too cannot be traded.

Banks also have to disclose in full how their profit would have be reduced under the previous mark-to- market rule.

'There will be extensive disclosures. It will be very transparent to investors, who can judge what has been transferred,' Mr Chen said. 'Banks can't sweep these things under the carpet.'

By adopting the amendments, banks will not have to suffer the mark-to- market impact of those loans or securities on their financial statements.

'It will have a positive effect,' Mr Kan said.

Rule 39 has been blamed for causing the credit crunch, as the value of banks' assets collapsed when credit markets dried up. Banks have been booking billions of dollars of unrealised losses under the mark-to-market rule, and governments have had to step in to recapitalise them.

'People are accusing accountants of playing a big part in causing this credit crisis,' Mr Chen said.

But he warned that once the amendments are adopted there is no going back, which means that when markets recover and the value of these financial assets improves, banks cannot use the mark-to-market rule to revalue them.

'Banks must realise this,' he said. 'They have to think it through, because if the securities improve, they cannot transfer back to trading.'

There may also be a bigger amortisation impact later, he said. 'It's just an interim solution, it's not an ideal solution,' he said.

Mr Chen, who spoke to BT from Stockholm where he is attending a global PwC meeting, said the amendments have been discussed there.

Some say it is too early to gauge what impact the amendments will have on banks, and how much will be re-classified.

This article was first published in The Business Times on October 15, 2008.