The International Accounting Standards Board (IASB) signed off on a hotly contested new standard that governs the way banks account for derivatives used to protect their loan portfolios and deposits against interest rate changes.

It also approved a new rule requiring insurers to reveal more about their insurance liabilities, the first step of a wider push to force insurers to base their accounts more on market values, rather than historical or nominal values.

The EU's internal market commissioner, Frits Bolkestein, must now decide whether to resist objections from some European banks and insurers and adopt the new rules, in line with the EU's promise to use international accounting rules by 2005.

European banks, unlike their US counterparts, are not uniformly required to value derivatives -- usually interest rate swaps and credit derivatives -- in their accounts.

Under the patchwork of national accounting regimes in the EU, some do not even have to declare they hold derivative positions.

But if the EU adopts all of the IASB's rules for the region's 7,000 listed firms as promised next year, banks could find they are forced to report big losses -- or gains -- in their books, sending profits on a potential roller coaster.

Insurers, too, are worried adoption of the IASB's rules could give investors a misleading impression of their financial health and make profits much more volatile.

Many of the banks and insurers are unhappy with the IASB's push toward "fair value" accounting, even though this broadly mirrors US accounting practices.

European banks and insurers that report profits in their home countries can often post big losses when using US accounting rules.

Banks will be forced to give an actual or estimated market value for their derivative positions and to do the same for any loans that are held for trading purposes.

Insurers will be forced to do the same for their financial assets unless they can show that they plan to hold these investments, such as bonds, to maturity.

The IASB has made some concessions to European banks and insurers but has so far drawn a line on fair value accounting, mindful it cannot bow too much to EU pressure without jeopardising its wider campaign to harmonise accounting rules worldwide.

In announcing the latest rules, IASB Chairman David Tweedie offered another olive branch and vowed to work with European companies and regulators beyond the 2005 adoption date on the extent to which fair-value accounting should be applied -- "a topic on which the IASB has not reached any conclusion.