Guiding principles for the revision of accounting standards for financial instruments issued by the Basel Committee
The Basel Committee on Banking Supervision released today a set of high level guiding principles to assist the IASB in addressing issues related to provisioning, fair value measurement and related disclosures. As the IASB develops new financial instrument accounting standards, the principles will help it produce standards that improve the decision usefulness and relevance of financial reporting for key stakeholders, including prudential regulators. Moreover, the principles would ensure that accounting reforms address broader concerns about procyclicality and systemic risk.
The principles are in response to recommendations made by the G20 leaders at their April 2009 summit to strengthen financial supervision and regulation. The G20 leaders called on "the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards". The principles were provided to the IASB in July. The Committee believes that these principles should facilitate continued, necessary coordination among standard setters, supervisors and regulators in their respective efforts to implement the G20 recommendations.
The principles reflect accounting lessons learned from the financial crisis, and note that the new standard should:
- reflect the need for earlier recognition of loan losses to ensure robust provisions;
- recognise that fair value is not effective when markets become dislocated or are illiquid;
- permit reclassifications from the fair value to the amortised cost category; which should be allowed in rare circumstances following the occurrence of events having clearly led to a change in the business model;
- promote a level playing field across jurisdictions.
To address particular concerns about procyclicality, the new standards should provide for valuation adjustments to avoid misstatement of both initial and subsequent profit and loss recognition when there is significant valuation uncertainty. Moreover, loan loss provisions should be robust and based on sound methodologies that reflect expected credit losses in the banks’ existing loan portfolio over the life of the portfolio.
Nout Wellink, Chairman of the Basel Committee and President of the Netherlands Bank, said: “In developing the high level principles, the Basel Committee closely examined the lessons learned from the financial crisis. One of those lessons is that any new accounting rules must be consistent with sound practices in risk management and enhance transparency to help supervisors, banks, investors and other stakeholders achieve their respective objectives.”