The study focusses on price-to-book ratios (P/Bs) as one metric investors monitor when valuing banks and as a metric widely referenced by policymakers as a yardstick for the financial health of banks. It is based on a sample of 51 banks (31 from the European Union and 20 from Australia, Canada, Japan, and the United States). The sample includes large, complex banking groups and the analysis period is 2003–2013, i.e. it covers the periods before, during, and after the financial crisis.

A key analytical angle in the study concerns the relationship between loan impairments and P/Bs as loans are a key element of a bank's financial assets, and their impairments affect both the market value of equity (stock price) and the equity. The survey coincides with a (not yet published) survey by the CFA Institute identifying improved requirements in the accounting for impairments as the second-most important required regulatory reform to avert future financial crises and the current initiatives from IASB (the final version of IFRS 9 Financial Instruments is expected to be issued later this month), the FASB, and other regulatory bodies aimed at improving the accounting for financial instruments and the overall transparency of banking financial institutions.

The study shows that during the financial crisis, the representation of loan impairments on balance sheet and non-performing loans lagged the capital markets' economic writedown of these loans and this lagging trend was particularly evident for the EU banks. In addition, comparing the pre-provision income and net income for the sample banks showed that loan impairments significantly contributed to reduced overall net income at different junctures during the financial crisis. The authors of the study also found an incremental risk aversion toward the bank sector, translating to relatively higher risk premiums, lower stock prices, and lower P/Bs.

Based on these findings, the report contains two major policy recommendations:

• In addition to amortised cost carrying values, fair value measurement of loans should be recognised on the face of the balance sheet as a means of avoiding "too little, too late" recognition of loan losses and providing decision-useful information.
• Bank risk disclosures should be enhanced as a better understanding of bank business models reduces the risk premium that investors assign owing to limited transparency of bank financial statements.

The report is available for download on the CFA Institute website. The CFA Institute has announced that part 2 of the report, Relationship between Disclosed Loan Fair Values, Impairments and the Risk Profile of Banks, will be released in August 2014.

The amendments to European accounting legislation had been proposed by the European Commission in April 2013 and adopted by Parliament in April 2014. They currently await adoption by the Council and publication in the Official Journal of the European Union after which they will become law. Current expected transposition date for EU Member States is autumn 2016.

The FEE factsheet outlines key aspects of the new legislation. Please click to download it from the FEE website.

EFRAG is calling for candidates in view of the current preparer vacancies and the fact that the present mandate period of three EFRAG TEG members expires on 31 March 2015 and in anticipation of vacancies that might result from the new EFRAG governance structure. It is expected that some reappointments will take place.

Applications must be submitted by 1 October 2014. More information is available through the press release on the EFRAG website.

This new consultation complements the consultation on preparers' views launched on 30 June 2014.

Again, the objective of the consultation is to obtain examples where contracts or transactions could qualify as leases under a single-model approach (IASB) or a dual-model approach (FASB), but are viewed by constituents as in-substance services. In addition, the EFRAG and European standard-setters are seeking input on which of the two alternative approaches is preferred.

Users interested in participating can either do so through an interview of no more than 30 minutes or through filling in and submitting a questionnaire. Questionnaires must be submitted by 29 August 2014.

Further information, contact details for the interview, and a link to the questionnaire are available through the press release on the EFRAG website.

The Financial Reporting Council (FRC) has approved the CCAB as the recognised SORP-making body for issuing a recognised SORP for LLPs incorporated in Great Britain under the Limited Liability Partnerships Act 2000.  The members of the CCAB are; The Institute of Chartered Accountants in England and Wales (ICAEW), The Institute of Chartered Accountants of Scotland (ICAS), The Institute of Chartered Accountants in Ireland (ICAI), The Association of Chartered Certified Accountants (ACCA) and The Chartered Institute of Public Finance and Accountancy (CIPFA).  

SORPS issued by the CCAB apply to LLPs preparing accounts under UK GAAP to present a ‘true and fair view’. 

The revised SORP updates the previous SORP (2010) to reflect the requirements of FRS 102 ‘The Financial Reporting Standard applicable in the UK and Republic of Ireland’. 

The key changes included in the revised SORP as a result of FRS 102 are: 

updating the guidance on business combinations and group accounts (paragraphs 102-119) to reflect the fact that FRS 102 only allows merger accounting to be used for group reconstructions and some public benefit entity combinations;

updating the guidance on contractual or constructive obligations (paragraph 76) and annuities (paragraph 80) to reflect the fact that FRS 102’s requirements relating to financial liabilities differ from current UK GAAP requirements; and

updating references throughout to reflect the introduction of the option to produce a single statement of comprehensive income, including adding an additional exhibit in Appendix 1. 

A number of other changes have also been made to clarify areas of the 2010 SORP “where there were known issues or misunderstandings”: 

clarifying the requirements in relation to automatic division of profits to make it clear that payment is unavoidable where profits are automatically divided among members in accordance with the LLP agreement in force at the time, and that in such instances a liability should be recognised;

clarifying that if a reconciliation of members’ interests is to be shown as a primary statement in place of the statement of changes in equity then comparatives must be shown for all figures presented;

improving the table that follows paragraph 60 to ensure the recommended format not only provides a reconciliation of members’ interests but also meets related Companies Act requirements;

providing more guidance on cash flow statement presentation to reduce divergent practices; and

refining the examples in Appendix 2 to focus on more commonly encountered scenarios and to eliminate some duplication. 

Additionally LLPs will not be required to produce a separate Members’ Report; however the disclosures that would previously have had to be included in the Members’ Report are retained as these are “considered helpful”.  The CCAB comment that “LLPs may still wish to produce a Members’ Report, but the SORP now allows them to include these disclosures elsewhere in the financial statements if they prefer”.

The CCAB highlights that the revised SORP will be kept under review for changes in accounting practice and new developments.  It also highlights that changes to accounting standards since 2 July 2014 have not been reflected in the revised SORP.

The revised SORP will be effective for accounting periods beginning on or after 1 January 2015 and earlier, if an entity chooses to early adopt FRS 102. 

Click for:

• Press release (link to CCAB website):
• Statement of Recommended Practice — Accounting by Limited Liability Partnerships (link to CCAB website).
• Our previous UK Accounting Plus news item on the draft SORP for LLPs

The IFRS Foundation and ESMA statement of protocols for cooperation on International Financial Reporting Standards published today reiterates the current relationship between the two organisations, and identifies three new areas for mutually supportive work.

In the area of standard development, ESMA currently supports the IASB through participation in working groups, submitting comment letters and coordinating the fatal-flaw review by European enforcers, when appropriate. Regarding the consistent application of IFRSs, ESMA makes submissions to the Interpretations Committee, coordinates the response from European enforcers to outreach requests from Interpretations Committee staff, and submits comment letters to the Interpretations Committee on draft interpretations and tentative agenda decisions whilst the IASB reaches out to ESMA when planning post-implementation reviews and selecting parties for input to help the IASB determine the focus of the review. The IASB also meets with the European Enforcers Coordination Sessions (EECS) regularly, while ESMA invites IASB members and staff to attend and contribute to seminars and workshops ESMA offers and consults with the IASB before issuing publications that relate to IFRS application in the EU.

The new areas of cooperation identified in the statement of protocols are the following:

• IASB staff will interact with ESMA as part of ESMA's assessment of the IFRS Taxonomy in the context of its mission of drafting regulatory technical standards for use in electronic filings by EU listed entities.
• IASB staff will explain what pressure points they anticipate are most likely to arise in the implementation of its new or significantly amended standards.
• ESMA will bring to the IASB's attention emerging financial reporting issues arising from financial innovation and other new developments.

The Statement of Protocols is available on the IASB website.

CRD IV was agreed by the European Council on 20 June 2013 and the legislation was published in the Official Journal on 27 June 2013.  CRD IV is intended to apply from 1 January 2014. 

Article 89 CRD IV requires, among other things, all “credit institutions” and “investment firms” to report on a country-by-country basis from 1 July 2014.  This will include a requirement to disclose annually: 

• Their name;
• Nature of activities and geographic location;
• Number of employees; and
• Turnover on a consolidated basis by country where they have an establishment. 

Certain “important institutions” will also be required to disclose additional information  contained in sub-paragraphs (d), (e) and (f) being their pre-tax profit or loss, their taxes paid and any public subsidies received by 1 July 2014. 

The European Commission, pursuant to Article 89 must carry out a general assessment as regards potential negative economic consequences of the public disclosure.  The European Commission comment that:

The purpose of this consultation is not only to receive views on any negative effects of disclosure, but also on the positive effects, so that a balanced picture of the consequences can be formed.

In particular, the European Commission are keen to understand the impact of the information to be disclosed under sub-paragraphs (d),(e) and (f).  Should this disclosure not be deemed to be prejudicial all credit institutions and investment firms will have to disclose this information from 1 January 2015.  

The UK is required to transpose CRD IV into national law and final guidance and Regulations (SI 2013/3118) which transpose the country-by-county reporting requirements under Article 89 CRD IV were approved by HM Treasury in December 2013.

Comments are invited until 12 September 2014.

Click for:

• Further information on the consultation and how to comment (link to European Commission website).
• Our previous UK Accounting Plus news item on HM Treasury Regulations and guidance.

The EU Regulation on the continued of financing of the IFRS Foundation and PIOB for the period 2014-2020 and of EFRAG for the period 2014-2016 had stipulated that the Commission shall submit annual reports to the European Parliament and to the Council on necessary governance reforms in the area of accounting and financial information in respect of EFRAG, taking into account, inter alia, the developments following the recommendations set out in the the Maystadt report and on the steps that EFRAG has taken to implement those reforms. The Commission has now published its first report.

In its report the Commission notes that the revised EFRAG Statutes and EFRAG Internal Rules reflect recommendations regarding the following issues included in the Maystadt report:

• Extension of membership of the General Assembly to include National Funding Mechanisms and other private or public organisations.
• Criteria, commitments and rights for membership of the General Assembly.
• A minimum of two year financial commitment for members of the General Assembly.
• Voting rights in the General Assembly, inspired by the notion that no single organisation should be able to block the operations of EFRAG.
• Tasks of the General Assembly.
• Nominating Committee with an advisory role on certain aspects of the nomination and selection process.
• Profile and criteria of the Board.
• Role of the President of the Board.
• Responsibilities of the Board.
• Fallback procedures for the Board for cases where no consensus can be reached.
• Responsibilities of EFRAG TEG.
• Profile and criteria for the membership of EFRAG TEG.

The Commission recognizes that in many cases the level of detail of these amendments goes beyond the recommendations provided in the Maystadt report. However, the Commission also notes that there were departures from the recommendations in the Maystadt report. These concern the composition of the new Board (necessitated by the fact that the European Supervisory Authorities and the European Central Bank declined to accept full membership of the Board), decision-making in the Board with a fall-back solution introduced for cases where no consensus can be reached, and combining the functions of CEO of EFRAG and Chairman of EFRAG TEG (a suggested requirement of Mr Maystadt's report that was turned into a possibility).

Overall, the Commission comes to a favourable conclusion regarding the progress made:

On the basis of the above, it can be concluded that overall EFRAG has made promising progress in implementing the reforms following the key recommendations of the Maystadt report. [...] The Commission will continue to closely monitor the implementation of the reform of EFRAG and will duly report on that to the European Parliament and the Council.

Please click for access to the full report on the European Commission's website.

Agenda consultation

The IVSC Standards Board Agenda Consultation seeks to garner constituent views on the agenda priorities of the IVSC for the three year period commencing January 2015. The IVSC expects to give highest priority to projects that are consistent with the objectives of the IVS, which are focused on building confidence and trust in valuation assignments, narrowing differences in valuation and promoting convergence through increased use and adoption of IVS. Projects will be evaluated against established project criteria when determining whether to be added to the agenda.

The agenda consultation outlines a number of existing projects that are expected to continue into 2015, and requests information about the extent to which difficulties are encountered as a result of a lack of a globally recognised valuation standard on those topics:

• Extractive industries (mining and quarrying and extraction of energy resources such as oil and gas)
• Forestry (valuation of forests or woodland used primary for timber production under IAS 41 Agriculture)
• Trade related/going concern property (specialised buildings such as hotels and other structures designed for a specific business activity)
• Specialised public sector assets (assets for which there are seldom active markets, typically held by public sector entities for public service purposes)
• Derivatives (equity derivatives, fixed income, with later consideration of credit, foreign exchange and commodity derivatives)
• Funding valuation adjustments (reflecting the cost of funding an uncollaterised instrument or position)
• Valuation for resolution and recovery (when entities are in financial difficulty).

In addition, the consultation paper encourages suggestions for other projects to be added to the IVSC agenda.

IVS structure and scope

A separate consultation paper, Structure and Scope of the International Valuation Standards, seeks constituent feedback on how the IVSC can ensure that IVS are presented in the clearest possible manner, and what changes might be required to the structure of IVS to improve their clarity.

Issues discussed in the consultation paper include:

• Should the word "standard" be reserved solely for rules that are intended to be mandatory?
• Different views as to what is meant by "mandatory" in the context of standards
• An apparent lack of clarity as to what constitutes a 'Technical Information Paper' (TIP) and its relationship with the other parts of the standards
• Whether the IVSC should issues commentaries, guidance and information to support the concepts, principles and requirements in IVS.

The consultation paper also compares and contrasts four sets of international standards used in financial markets, namely International Financial Reporting Standards (IFRS), Engagement Standards issued by the International Auditing and Assurance Standards Board (IAASB), the International Standards of Actuarial Practice (ISAPs) and the Global Investment Performance Standards (GIPS). The consultation paper seeks feedback on aspects of the way these standards are presented that the IVSC should consider in improving the presentation and clarity of IVS.

Both consultation documents are open for comment until 10 October 2014. Click for (links to IVSC website):

• IVSC Standards Board Agenda Consultation
• Structure and Scope of the International Valuation Standards – Consultation Paper.

The project is aimed at achieving a step change in the quality of financial reporting of smaller listed and AIM companies over a three year period.  The project will be in three phases:

• Phase 1 - gather and assess evidence of the root causes of the challenges and exploration of ways in which the FRC can support companies to make improvements. 
• Phase 2 - implementation of supporting actions
• Phase 3 - evaluate whether the quality of financial reporting has improved. 

The FRC would like to gather the views of both preparers and users of annual reports, both to understand the challenges that smaller companies encounter when preparing their annual reports and to also obtain input on suggestions as to how smaller companies can be helped to improve the quality of their reporting.

More information on this project and how to contribute can be found on the FRC website.