Buildings in the 100 block of King Street and Bay Street, Canada's financial district. Canada is set to split with the United States over a key accounting rule Brent Foster/National Post
Canada is set to split with the United States over its response to the financial crisis and reject a move to let banks duck losses by inflating the value of troubled assets, according to people familiar with the matter.
The country's top accounting watchdog reached the decision during a closed-door board meeting on Monday, giving a thumbs-down for now to a U.S. move to loosen accounting standards.
The decision, due to be announced this week, is a big blow to Bay Street and means Canadian companies will have to record hits on distressed assets that are hard to sell.
Shares in Canadian banks rallied last week along with Wall Street after Washington's politically charged decision to ease so-called mark-to-market rules that experts said could goose bank profits by 20%.
Bay Street executives had lobbied for Canadian authorities to follow the American lead, and will be bitterly disappointed by the decision to break with Washington and align with Europe.
"There would be deep concern if the Canadian accounting sector failed to move in step with the U. S. because of the close ties the Canadian industry has to our neighbours," said a person in the banking industry.
"A lot of big Canadian companies are raising money in the U.S. and if there is divergence it would be viewed negatively," the person said.
Banks are expected to try to overturn the decision and seek political intervention to persuade the Canadian Accounting Standards Board to change course.
The pressure will likely begin this week when chief executives of top banks start a series of meetings on the fallout from the financial crisis with Jim Flaherty, the Finance Minister.
The one-on-one sessions will provide CEOs with a chance to make direct personal appeals to the Minister, as Ottawa develops the next phase of its response to the crisis following a summit of world leaders in London.
The international community has been split by attempts to ease mark-to-market rules, which banks argue force companies to take losses on troubled assets that will likely bounce back, exacerbating the crisis.
Auditors, analysts, and institutional investors tend to argue the bid to loosen the rules amounts to financial chicanery and will only further dent confidence in banks' books.
The American decision was blasted by the European industry as an example of "political interference [which] will only serve to further destabilize confidence in the system."
The U.S. changes will make it easier for companies to price assets using their own internal models rather than market prices, and allow them to recognize only part of any losses in their income statements.
A smaller first step in this direction was taken last October by the United States, and followed by the Canada's accounting watchdog, under political pressure.
But Canada's accounting board on Monday decided the American action was not in the "public interest," according to people familiar with the deliberations in Toronto.
The watchdog will instead move in step with an international body with strong support in Europe.
The international umbrella organization is currently not scheduled to revisit its rules on mark-to-market accounting for many months, but is due to meet later this month and could yet strike a compromise.