PARIS: The effort to impose an accounting rule that would force European banks to disclose the market value of their investments in derivative securities ran into an obstacle Monday as four countries - at least two more than had been expected - told the European Commission they opposed the rule.

The four governments that objected to the rule at a meeting of the European Union's Accounting Regulatory Committee were France, Belgium, Italy and Spain, according to an EU diplomatic source who asked not to be identified. He said that six other countries, including Germany, abstained. Backers of the rule had not anticipated opposition from either Italy or Spain.

While the 15 other European states backed the rule of the International Accounting Standards Board, which has modified it in an effort to win Commission approval, the fact that large states opposed the rule raised the possibility it could be blocked.

Under complicated EU voting rules, the four opponents do not now have enough votes to form a blocking minority, but will when the rules change in November. And that assumes that none of the abstainers join in opposition. While the commission could ignore the committee, that is viewed as politically unlikely.

Until now, each European country has had its own accounting rules. But those are scheduled to be replaced in 2005 by standards developed by the International Accounting Standards Board. All of its rules save one are set to take effect without controversy, but some European banks have fought the international board's derivatives rule. For each rule to take effect, it needs the consent of the commission, whose members are appointed by the member states of the EU.

Opponents of the rule have complained that it will cause needless volatility in financial statements, causing reported profits to rise one year and fall another simply because of temporary changes in financial market prices. Proponents say blocking the rule would set a dangerous precedent and undermine the integrity of financial statements issued by European companies.

Alexander Schaub, the commission's director general for the internal market, asked the countries to put their views in writing by June 30. A spokesman said the commission would act after getting those views, as well as the final report of a different advisory committee whose preliminary report showed most members were opposed to the rule.

The amount of opposition raised the possibility that efforts might be made to force more changes in the rule before the commission acts.

This commission could wait until just before a new set of officials takes over at the commission in October, but that would leave little time for companies to comply with the new rule if it takes effect as planned on Jan. 1, 2005. Some word on the commission's action is expected by the end of July, the diplomat said.

The commissioner with responsibility for internal markets, Frits Bolkestein, had pushed the international accounting board to compromise. Earlier this month, Bolkestein said in a speech that he favored approval if the board made concessions to change the way some figures were presented and to study more changes later. The board complied with those requests.

In a preliminary recommendation earlier this month, six of the 11 members of the European Financial Reporting Advisory Group opposed the rule, arguing that "significant distortions induced by artificial equity volatility cannot be coped with through explanations inserted as disclosures."

The body, which provides technical advice to the commission, nonetheless recommended the rule be approved, explaining that under its procedures a two-thirds majority was needed to oppose a rule approved by the international accounting board. It will make a formal recommendation July 5.

"Without such a standard," said the members of the group supporting the rule, "the accounting regime for Europe would have major omissions," unable to deal with impairment of financial assets or valuing derivative securities, which often are structured so they have no initial cost although they can lead to large losses or profits depending on how markets change.

Current rules allow institutions to ignore changes in the value of derivatives, making it much easier to smooth profits from year to year, since profits or losses can be taken as needed by closing out positions in the derivative securities. The advisory group members backing the rule said that without it, investors "would regard information provided by EU-listed companies as second-rate, potentially inconsistent and lacking in transparency."

Opponents of the measure have argued that some stop-gap rule could be devised, and that if none was there could simply be a delay in accepting the international standards until 2006.

The rule itself allows companies to avoid showing the changing value of derivative contracts in their accounts if those derivatives can be shown to be hedging assets or liabilities that rise or fall in value. While the American rule requires that derivatives must be hedging the changes in value of specific assets or liabilities to be eligible for that accounting treatment, the European rule allows companies to use "macro hedging," in which disparate things are lumped together to be hedged.

That change persuaded some European financial institutions to stop opposing the rules. Others were pleased that the IASB promised to study a possible new way to hedge, which would be designed to lock in the profits banks get from demand deposits.

That was one of the changes Bolkestein had requested.

In an interview Monday before the results of the meeting were known. Tom Jones, the vice chairman of the IASB and a former chief financial officer of Citigroup, said the changes had not damaged the usefulness of the rule.

"We have not given way on marking derivatives to market," he said. "I don't think it will that easy for people to hide volatility, or anything else."

A spokesman for the international board declined to comment last night.

At the basis of some of the opposition is a belief that financial markets are unreliable. "The idea behind mark-to-market is that the market is right," said Claude Bébéar, the chairman of the supervisory board of AXA, the French insurance group, in an interview last week. "But everyone knows the market is wrong."

Bébéar noted that AXA's financial results reported in the United States are more volatile than those it reports in France. He said investors should leave it up to managements to decide whether an asset needed to be written down, rather than depending on market prices that could rise as rapidly as they fell.

International Herald Tribune