European Central Bank report on IFRSs

21 Dec 2006

The European Central Bank (ECB) has published a report titled Assessment of Accounting Standards from a Financial Stability Perspective that was prepared by the ESCB Banking Supervision Committee.

The Committee comprises representatives of the national central banks and banking supervisory authorities of the European Union and the ECB.

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.

Positive findings.The report analyses IFRSs based on these criteria. Positive features of the IFRSs from a financial stability point of view identified in the report include:

  • 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.

Concerns.Then the report identifies areas where concerns could arise from a financial stability perspective. These include:

  • 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.
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Proposed revisions to internal control audit standard

20 Dec 2006

The US Public Company Accounting Oversight Board has proposed to revise its Auditing Standard No. 2 An Audit of Internal Control Over Financial Reporting Performed in Conjunction With an Audit of Financial Statements.

The revision reflects the PCAOB's experience with the first two years of auditors' implementation of the internal control provisions of the Sarbanes-Oxley Act, The revised standard is designed to focus the auditor on the most important matters, increasing the likelihood that material weaknesses will be found before they cause material misstatement of the financial statements. At the same time, the proposed standard would eliminate audit requirements that the PCAOB has concluded are unnecessary to achieve the intended benefits. It would also provide direction on how to scale the audit for a smaller and less complex company. Comment deadline is 26 February 2007, Any final standard adopted must be submitted to the Securities and Exchange Commission for approval. Click for:

SEC postpones SOX 404 for small companies

19 Dec 2006

The US Securities and Exchange Commission has further postponed the date by which smaller public companies must comply with the internal control reporting requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002.

Previously, non-accelerated filers (companies that do not meet the Exchange Act definition of either an accelerated filer or a large accelerated filer) were scheduled to begin including both management's assessment and an auditor's attestation to management's assessment on the effectiveness of the filers' internal control over financial reporting in their annual reports for fiscal years ending on or after 15 July 2007.
  • The extended date for providing management's assessment of internal controls is annual reports for fiscal years ending on or after 15 December 2007.
  • The new date for compliance with the auditor attestation requirement is fiscal years ending on or after 15 December 2008.
Deferred implementation of the auditor's attestation report requirement will provide smaller public companies and their auditors with additional time to consider the anticipated revisions to Auditing Standard No. 2, as well as any implementation guidance that the PCAOB plans to issue for auditors of smaller companies. Click for SEC Press Release (PDF 53k).

New Global Offerings Services newsletter

19 Dec 2006

We have posted the October-November 2006 Edition of the Deloitte Global Offerings Services Newsletter.

Global Offerings Services is a global team of Deloitte practitioners assisting non-US companies and non-US practice office engagement teams in applying US and International accounting standards (that is, US GAAP and IFRSs) and in complying with the SEC's financial reporting rules. The GOs Newsletter is an update on relevant GAAP, regulatory, and other matters, webcasts, and publications. Click for Newsletter (PDF 115k) Past GOs Newsletters are Here.

Notes from third day of December 2006 IASB meeting

16 Dec 2006

The International Accounting Standards Board held its December 2006 Board meeting at its offices, 30 Cannon Street, London, on Tuesday through Thursday 12-14 December 2006.

We have combined all of the preliminary and unofficial notes taken by Deloitte observers at the meeting on our December 2006 Meeting Notes Page.

New financial institution loan loss policies

16 Dec 2006

Five United States agencies that regulate banking institutions have revised their 1993 policy statement on the allowance for loan and lease losses (ALLL) to ensure consistency with generally accepted accounting principles (GAAP) and more recent supervisory guidance.

The statement outlines expectations for directors and management of banks and savings associations as well as bank examiners related to the development and assessment of the ALLL estimate. This revision expands the scope of the policy statement to include credit unions. In addition, the agencies have also issued a set of frequently asked questions (FAQs) to assist institutions in complying with GAAP and ALLL supervisory guidance. Click to download:

Public sector board issues two new standards

15 Dec 2006

The International Public Sector Accounting Standards Board (IPSASB) has issued two new International Public Sector Accounting Standards (IPSASs):

  • IPSAS 23 Revenue from Non-Exchange Transactions (Taxes and Transfers) (PDF 240k). IPSAS 23 addresses:
    • Recognition and measurement of revenue from taxes
    • Recognition of revenue from transfers, which include grants from other governments and international organisations, gifts. and donations
    • How conditions and restrictions on the use of transferred resources are to be reflected in the financial statements
    IPSAS 23 is effective for annual periods beginning on or after 30 June 2008, earlier application encouraged. Press Release (PDF 60k).

CEBS guidelines on financial reporting

15 Dec 2006

The Committee of European Banking Supervisors (CEBS) has published a new release of the Guidelines for the Implementation of the Framework for Consolidated financial Reporting (FINREP).

These guidelines are intended to be used by credit institutions when preparing prudential reports to be sent to any European Union Supervisory Authority according to the IASs/IFRSs endorsed by the European Commission.
Click for Guidlines (PDF 344k).

SEC eases SOX 404 and deregistration requirements

14 Dec 2006

The US Securities and Exchange Commission has proposed rules intended to simplify compliance with US securities laws by public companies without reducing investor protection.

The rules relate to (a) Section 404 of the Sarbanes-Oxley Act of 2002 on assessment of internal controls and (b) deregistration by foreign issuers.

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.

Deregistration by a Foreign Issuer

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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