Disclosure or Off-Balance Sheet Risks

The Board then started deliberations on the off-balance sheet risk disclosures that are part of the Consolidation project.

Disclosure objective

The staff presented the Board with the proposals starting with the disclosures objective. The aim was to enable users to understand the risks arising as a consequence of its activities with structured entities. Staff acknowledged that 'structured entity' is an undefined term but is intended to be wider than 'special purpose entity'. It was noted that the proposals include a 'capture all'-clause that would require entities to provide additional disclosures if the minimum requirements in IFRS were not sufficient to meet the disclosure objective.

The Board agreed.

Disclosures about structured entities

The staff then turned to disclosures about structured entities that the reporting entity created or sponsored. Staff does not propose to define the term 'set up' or 'sponsor' in the standard, because these terms are frequently used and well understood in the banking community. Some Board members were concerned over the use of undefined terms that might mean different things to different people.

The required disclosures on fee income and assets held by the structured entity were aimed to enable users to understand the level of income and the level of activities from such relationships. The staff noted that the requirement to provide information for two comparative years was somewhat arbitrary, but staff believe that an extended period is necessary to allow a comprehensive risk assessment. Staff acknowledged that retrospective application in connection with such a requirement would be onerous for some entities as they possibly do not have the data readily available. Some Board members responded that there should be no 'undue cost or effort' exemption and that IAS 8 already provided an impracticability exemption. One Board member asked the staff whether it would be useful to require entities to provide more comparative information if this was considered necessary to get the full picture.

Others were concerned about the term 'retained interests' used throughout the document. The staff responded they would use a term like 'continuing interest', but will tidy up the wording in due course.

The Board also asked whether other (non-financial) entities could be subsumed under the 'structured entities' umbrella, for example, an R&D vehicle. The staff confirmed that this is the case and agreed to include such entities in the examples.

The staff confirmed that the disclosure to be made about the assets securitised in unconsolidated entities were the cumulative securitisations during the reporting period, not only at the reporting date. Also, it was acknowledged that fee income would have to be defined for the purpose of this disclosure as it was not clear what this would encompass. However, it was clear that this would include set up and ongoing fees.

Overall, the Board seemed to concur with the staff proposals.

Risks

The staff introduced its proposal on off-balance sheet disclosures for relationships that are within the scope of IFRS 7. The disclosures would aggregate carrying amounts of the relationships, maximum losses and assets held by the entity (at the reporting date). It noted that whenever disclosures about relationships scoped into IFRS 7 required the disclosure of amounts, these were current amounts. While the majority of the Board agreed, there was some concern about practicability to provide current information for entities the reporting entity did not control, due to different reporting dates and different accounting frameworks. One Board member responded that he wanted to have a red flag if an entity invoked the impracticability exemption as users should know when a reporting entity had relationships where it could not assess the risks properly. The staff agreed to include words reflecting this concern.

Furthermore, Board members expressed concerns that the disclosures about leverage (that is, exposures that were disproportionally higher than one would expect from the relationship) was not appropriate and not extensive enough.

The staff asked the Board whether it was necessary to use the word 'significant' for some disclosure requirements. The Board decided that it considered such a requirement not necessary, but decided to raise this question in the Invitation to Comment.

Generally, the Board seemed to agree with the direction.

Off-balance sheet relationships outside the scope of IFRS 7

The final relationships to be addressed were off-balance sheet relationships that were not captured by IFRS 7. The staff noted that reputational risk was hard to disclose without ending up in boilerplate notes. Many Board members agreed noting that reputational risk is a subset of general business risk. Again, the Board discussed certain aspects but seemed to agree with the majority of the staff proposal set out in the agenda paper.