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FSF urges IASB to improve accounting for off-balance sheet entities

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12 Apr 2008

The Financial Stability Forum, a global organisation of regulators and central bankers, has submited a report on Report on Enhancing Market and Institutional Resilience to the G7 Ministers and Central Bank Governors.

The IASB participated in preparing the report. The report analyses the causes and weaknesses that have produced the recent turmoil in financial markets worldwide and makes recommendations for correcting those weaknesses. The report addresses the following areas:
  • Strengthened prudential oversight of capital, liquidity and risk management
  • Enhancing transparency and valuation
  • Changes in the role and uses of credit ratings
  • Strengthening the authorities' responsiveness to risks
  • Robust arrangements for dealing with stress in the financial system
Regarding accounting and disclosure standards for off-balance sheet entities, the report concludes:

The IASB should improve the accounting and disclosure standards for off-balance sheet vehicles on an accelerated basis and work with other standard setters toward international convergence. The report notes: Off-balance sheet treatment in financial reports can arise as a result of the standards for derecognition (e.g., removing assets from balance sheets through securitisations) and consolidation (e.g., special purpose entities). The standards of the IASB and the US Financial Accounting Standards Board (FASB) differ for both topics and with respect to the required disclosures about off-balance sheet vehicles. The IASB and FASB have projects underway to converge their standards in these areas and this work should be accelerated so that high-quality, consistent approaches can be achieved. In doing so, and consistent with their required due process, the IASB and the FASB should consider moving directly to exposure drafts on off-balance sheet issues, rather than discussion papers, to meet the urgent need for improved standards. Standards should require the risk exposures and potential losses associated with off-balance sheet entities to be clearly identified and presented in financial disclosures. The IASB and FASB should consult investors, regulators, supervisors and other stakeholders for their views during this process, and should take note of issues that have come to light during the current market turmoil and the progress reflected in 2007 annual reports and other disclosures.

Regarding valuations, the report concludes that:

International standard setters should enhance accounting, disclosure and audit guidance for valuations. The report states that:

  • The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.
  • The IASB will examine its principles and requirements for disclosures about the valuation of financial instruments to identify areas for enhancement in light of lessons learned from the market turmoil. This effort will assess disclosures in year-end 2007 annual reports and draw on the views of investors, firms, auditors, supervisors and regulators about the quality of valuation disclosure practices.
  • The IASB will enhance its guidance on valuing financial instruments when markets are no longer active. To this end, it will set up an expert advisory panel in 2008.

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