FOR nearly a decade Spain has resisted the received wisdom, and European regulations, on accounting. In 2005 the European Union required all of its members to adopt IFRS, the dominant accounting standard outside America. One of the biggest changes between the new rules and many of the national guidelines that preceded them was a ban on banks writing down the value of their loans in anticipation of future losses, a practice some had abused to disguise volatility in their earnings. Instead, IFRS imposed a strict “incurred-loss” method, in which debt was valued at par until a borrower actually stopped paying.While nodding at the new rules, Spain in practice retained its old ones. Its banks, more than those of any other European country, had tended to wait until the last possible moment to recognise bad loans, amplifying the ups and downs of the credit cycle. Its central bank was therefore keen on the sort of smoothing of losses that IFRS was trying to eliminate: in 2000 it had forced banks to adopt “dynamic provisioning”, making bigger writedowns in boom times and smaller in bad.The financial crisis tested both systems, and revealed flaws in each. Because banks elsewhere in Europe could not write down their loans based on the deteriorating economic environment, their quarterly results failed to reflect the full horror to come, to investors’ cost. In contrast, Spanish banks had...
from The Economist: Finance and economics http://ift.tt/1mJ59Es
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