The International Account Standards Board (IASB) recently issued a statement that European banks may have inflated their balance sheets by not recording the full writedowns on distressed Greek debt.

The IASB, which is responsible for regulating standards but not enforcing them, took a highly unusual hands-on approach on Tuesday by publishing a letter from chairman Hans Hoogervorst to the European Securities and Markets Authority. The letter stated that some banks have been using models to mark down their Greek assets, rather than market valuations.

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Financial Reports Inconsistent Across Europe

Under International Accounting Standard 39, using models to record the value of assets is acceptable only in situations where real market valuations, taken from actual transaction prices, do not exist.

The letter from the IASB chairman Hoogervorst stated, “There have been indications in the market that some European companies are applying the accounting requirements for fair value measurement and impairment losses in a way that seems to differ from the objective of [accounting standards].

“This is evident particularly in their accounting for distressed sovereign debt, including Greek government bonds. Those indications have now been confirmed by recently published financial reports, which show inconsistent application across Europe. This is a matter of great concern to us.”

While specific banks were not mentioned, the Financial Times said that the letter pertained to the accounting of BNP Paribas and CNP Assurances.

This is evident in their accounting, as these banks took 21% writedowns on Greek debt, while other banks, including the Royal Bank of Scotland, took the much larger hit of a 51% markdown. The inconsistent calculations mean that something is not accurate.

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Over-inflated Assets

“It appears that some companies are not following IAS 39 when determining whether the Greek government bonds are impaired. They are using the assessed impact on the present value of future cash flows arising from the proposed restructure of those bonds, rather than using the amount reflected by current market prices as required,” the IASB letter continued.

This kind of accounting can make potential buyers of these bonds pay much more than their actual market value is worth, and makes the companies holding the Greek bonds appear to have much more in assets than they actually have.

Since the writedowns that are officially recorded do not reflect market prices, Hoogervorst went on to state, “”It is hard to imagine that there are buyers willing to buy those bonds at the prices indicated by the valuation models being used.”

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