Banks Claim Accounting Standard 15 Will Backfire

If the new accounting Standard 15 is implemented, banks will be forced to rewrite the terms of many loans, which would negatively affect corporations throughout the country that are already struggling under a shrinking economy, senior bank executives warned Wednesday.

It would also negatively affect the banks, which have already had to significantly increase their provisions for doubtful debts over the past year.

These warnings will almost certainly be repeated at today's discussion by the Israel Accounting Standards Board (IASB) on the matter of Standard 15. The standard was originally supposed to take effect this month, but on January 2, at a late night session, the public council of the IASB agreed unanimously to postpone its implementation.

The new standard requires investments - whether in affiliated companies, subsidiaries, real estate, equipment or intangible assets - to be recorded according to their current market values. In practice, therefore, it would require many companies to write down their investments - which in turn would reduce the value of the company, and sometimes also the value of the collateral they have given the banks.

The issue is highly relevant in today's environment, when share prices have fallen. In 2002, the Tel Aviv Stock Exchange's blue-chip Maof Index lost over 27 percent of its value. The revised accounting representation of investments would therefore make more companies record losses, with holding companies likely to suffer in particular.

The banks have an additional problem with Standard 15: Not only will many of their customers suddenly appear less healthy, according to the books, but the bank themselves will have to adjust the guarantees in their credit portfolios.

It is common practice when granting a loan to impose conditions on the client with respect to the company's financial standing and its value. Under the new standard, since many of the banks' clients will find their investments worth less, their own equity will also be lower. Thus they may suddenly find that they have violated the terms of their bank loans.

Some banking executives are worried over the effect the new standard would have on the stability of the economy. One senior banking source noted that Standard 15 "reduces the discretion of company managers and imposes a greater dependence on three or four valuations. We have already learned in the past year that there are great differences among different valuations, and therefore the proposed standard is fraught with problems."