Assessment criteria. First, the report puts forward ten criteria deemed important from the perspective of financial stability with which accounting standards should be consistent. The selected criteria are:

• reliance on principles-based accounting standards;
• use of reliable and relevant values;
• recognition of the allocation and magnitude of risks;
• provision of comparable financial statements;
• provision of clear and understandable financial statements;
• portrayal of the financial situation of banks (solvency, profitability, liquidity);
• alignment of accounting rules and sound risk management practices;
• promotion of a forward-looking recognition of risks;
• avoidance of negative and promotion of positive externalities, in particular regarding the behaviour of banks; and
• enhancement of market confidence and corporate governance.

• the overall increase in comparability and transparency, which enhances the level playing field between financial institutions and strengthens market discipline;
• the provision of early warning signals on exposures or risks, which is relevant both for the risk management function of financial institutions and for effective market discipline; and
• the use of a principles-based framework, which provides for an adequate degree of flexibility in implementation.

• the reliability of 'fair' values: fair values should be accurately measured and appropriately documented, so as to avoid an inappropriate upfront recognition of gains that are unrealisable and behaviour that is based on accounting figures rather than on the underlying economic factors;
• the economic basis for hedge accounting: the accounting framework should reflect the underlying economic situation and adequately take into account strictly documented risk management practices, as this would further encourage better risk management;
• provisioning: the provisioning regime should not be conducive to increasing pro-cyclicality, but should encourage the use of methods that are aimed at identifying credit losses already inherent in a particular credit portfolio at the present time.

Compliance with Section 404 of the Sarbanes-Oxley Act of 2002

The SEC has proposed for comment guidance on complying with the requirements of Section 404. Section 404 requires a management evaluation and report on internal controls and related auditor's report on compliance with internal controls. In 2003, the Commission adopted implementation rules for Section 404 regarding management's evaluation, but those rules did not prescribe any specific method or set of procedures for management to follow in performing its evaluation. The current proposal would amend the 2003 rules by allowing management to focus its evaluation of internal controls on those areas that pose the greatest risks to reliable financial reporting. The Commission also proposed amendments to Regulation S-X to clarify the auditor's reporting requirement pursuant to Section 404(b) of the Sarbanes-Oxley Act. The proposals will have a 60-day comment period. A related auditing standard is to be proposed next week by the Public Company Accounting Oversight Board.

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The Commission proposed new rules governing when a foreign private issuer may deregister its securities under the Securities Exchange Act of 1934 and cease making filings with the Commission. The proposed deregistration thresholds are based solely on trading volume, not on the percentage of US holders. Comments are requested in 30-days, and the Commission expects to adopt final rules in the first quarter of 2007.

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