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The Israeli Accounting Standards Board yesterday approved switch from inflation-adjusted financial reporting to nominal from January 2003.

The Board team, after listening to expert opinions, agreed by a majority of 6 to 1 not to postpone the new standard despite the high inflation rate in the first half of this year. inflation for 2002 - including the negative rate in August - is now 6.6 percent.

The Bank of Israel may issue a provisional order directing banks to distribute dividends aligned with the lower of the two results - nominal or inflation-adjusted - sources in the banking sector said. This would take care of concerns that nominal reporting would indicate much higher profit margins and enable banks to distribute generous dividends.

The central bank's Supervisor of the Banks now prohibits banks distributing dividends because of the poor results they have posted. Had nominal reporting been in place this year, the reported profit of each of the two large banks, Hapoalim and Leumi, would have been about NIS 500 million higher than under the inflation-adjusted system and they would have thus been able to distribute dividends despite results that in reality do not justify it.

The Board decided to implement the switch as planned despite objections by the two agencies that comprise the Board, the Institute of Certified Public Accountants and the Securities Authority. Both agencies previously supported the plan but changed their mind as inflation reached an annual 6.6 percent rate.

On September 9 the Institute decided that implementing the new standard should be postponed to January 2004, and again if inflation in 2003 was a two-digit figure. However, the Institute said it would not challenge the decision of the Board if it ruled otherwise.

The Securities Authority now has a new chairman instead of Miri Katz, who in the past was an avid supported of the changed but has recently said the timing is wrong. It is still unclear what is the position of the new chairman, Moshe Terry.

The Board meeting yesterday focused on the inflation forecast for the coming year. The deputy of the governor of the Bank of Israel, Meir Sokoler, said the central bank - which projects 2 percent inflation for the next 12 months - supports the switch to nominal reporting as planned. The Bank of Israel believes the inflation rate jump in the last few months was a one-off anomaly.

Yaakov Sheinin of Economic Models Ltd., who advocated postponing the switch, projects 2.4 percent inflation for the next 12 months. "Since most analysts talk about 2-3 percent inflation, the Board decided almost unanimously not to delay implementing the standard to 2004," the chairman of the Board, Eli Amir, said.

Even if inflation continues at the same rate as today, nominal reporting is still the best option, because it reflects financial results better, Amir said.