Two key areas of supervisory guidance are addressed:

• What constitutes a set of sound risk management and control processes around use of the option?
• How might a bank's use of the option affect supervisory assessments of a bank's risk management systems and regulatory capital? The guidance suggests additional information that supervisors might collect to help them better understand how banks are using the fair value option and how this use impacts the supervisory assessment of banks' financial condition.

The proposal does not impose additional accounting or disclosure requirements beyond those in the June 2005 IAS 39 Fair Value Option Amendment. Under the approach proposed in the consultative document, for those banks capable of fully meeting the supervisory expectations set out in this paper, no adjustments to regulatory capital would be required as a consequence of their use of the fair value option. One exception to this general approach is the Committee's view, published in June 2004, that gains and losses arising from changes in a bank's own credit risk associated with its liabilities should not be included in a bank's regulatory capital. For banks that do not meet the supervisory expectations set forth in the consultative paper, a range of possible supervisory responses is discussed, including possible supervisory actions with respect to regulatory capital. The comment period ends 31 October 2005. Click to download:

• Consultative Document (PDF 83k)
• Press Release (PDF 24k)

The amendments are effective for annual periods beginning 1 January 2006, with earlier application permitted. The intent of the amendments is to clarify which standard – IAS 39 or IFRS 4 – should be followed in accounting for financial guarantee contracts. Near-final drafts may be accessed by subscribers to IASB publications.

"We see this as an opportunity to further harmonise accounting standards in Europe and globally," the letter to the IASB states. EFRAG recommends that the IASB develop SME standards with a typical medium-sized SME in mind. "All the decisions it makes about the transactions to be addressed and the simplifications to be made should be based on that type of entity. We would though recommend that the IASB should include all other non-publicly accountable entities within the scope of its SME standards and should leave each jurisdiction to decide exactly where to draw the line between entities that should follow the listed entity standards and entities that are permitted to apply SME standards."

Links to all past Alerts are Here.

This will be one of the first tests for our supervisory structures. It is a test we cannot afford to fail. If we do we will lose the prize now within our sights of reducing costs for business through recognition of equivalence of accounting standards. In a globalised economy Europe has to act in a global way – and lead.

19-21 July 2005, London Tuesday 19 July 2005 Accounting Standards for Small and Medium-sized Entities – Educational Session discussing (a) the UK Financial Reporting Standard for Smaller Entities (FRSSE) and (b) how banks use financial statements in making lending decisions for SMEs. Insurance Contracts Phase II – Educational Session: Briefing by the FASB staff on risk transfer in insurance and reinsurance contracts, as well as a brief update on other FASB activities relating to insurance contracts. Financial Instruments – Update on July 2005 Financial Instruments Working Group Meeting Control (including Special Purpose Entities) (Consolidation) Wednesday 20 July 2005 Extractive Industries – Educational Session: This education session will involve a question and answer session with minerals and oil and gas industry experts focussing on reserve definitions. Insurance Contracts Phase II – Educational Session: Life insurance. Conceptual Framework – Qualitative Characteristics Thursday 21 July 2005 (afternoon only) Short-term Convergence – Income Taxes. The following topics will be discussed: Further guidance on tax bases Special deductions Uncertain tax positions Transition Agenda Plan

AASB 2005-4 amends AASB 139 Financial Instruments Recognition and Measurement to reflect the restrictions on using the fair value option recently adopted by the IASB. This Accounting Alert provides an overview of that change. Links to all past Alerts are Here.

The European Commission has published (PDF 94k), providing the Commission's views on the following questions:

• Why did the Commission carve out the full fair value option in the original IAS 39 standard?
• Do prudential supervisors support the IAS 39 FVO as published by the IASB?
• When will the Commission to adopt the amended standard for the IAS 39 FVO?
• Will companies be able to apply the amended standard for their 2005 financial statements?
• Does the amended standard for IAS 39 FVO meet the EU endorsement criteria?
• What about the relationship between the fair valuation of own liabilities under the amended IAS 39 FVO standard and under Article 42(a) of the Fourth Company Law Directive?
• Will the Commission now propose amending Article 42(a) of the Fourth Company Directive?
• What about the remaining IAS 39 carve-out relating to certain hedge accounting provisions?

We remind IAS Plus visitors that the deadlines for submitting comments on the following IFRIC Draft Interpretations are 18 July 2005:

• IFRIC D16 Scope of IFRS 2 (issued 19 May 2005)
• IFRIC D17 IFRS 2 – Group and Treasury Share Transactions (issued 19 May 2005)

Click for:

• IASB press release (PDF 42k)
• Our summary of IFRIC 3