UK adjustments to IFRSs for regulatory capital

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31 Oct 2004

The UK Financial Services Authority has published a consultation paper proposing four adjustments to capital as measured under IFRSs for the purpose of measuring "prudential regulatory capital" in the financial services industry.

FSA Press Release (PDF 54k, contains link to consultation paper and a related newsletter):
  • In the treatment of cash-flow hedges, we propose to eliminate from the measurement of regulatory capital all fair value gains and losses arising from the fair valuation of derivatives that have been accumulated in equity;
  • In the treatment of available-for-sale assets we propose to follow the US approach and to leave equities at fair value, but write available-for-sale debt instruments back to cost or amortised cost;
  • For fair value options we propose that unrealised gains or losses arising from the fair valuation of a firm's own credit risk should be eliminated from regulatory capital; and
  • In accounting for defined benefit pension schemes we propose that the accounting measure of actuarial losses should be eliminated for regulatory purposes. It should be replaced by the company's best estimate of the level of additional funding that it will need to provide for its pension scheme over the next five years.

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