Do not confuse investor reporting and prudential regulation

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02 Apr 2009

The European Contact Group (ECG) – a European forum of representatives of the six largest international accounting networks, including Deloitte – has written to Charlie McCreevy, the European Commissioner for Internal Market and Services, concerning 'dynamic provisioning' for determining appropriate bank provisions for loan losses.

The ECG letter characterises various dynamic provisioning proposals into two general categories:
  • Improvements to or changes from the 'incurred loss' model employed by current IFRSs, and
  • Introduction of a 'buffer fund' to address economic cyclicality

Regarding the first type, the ECG supports the current projects of IASB and FASB to improve impairment recognition for debt and equity instruments, including possibly replacing the 'incurred loss' model by an 'expected loss' model. But ECG does not support proposals to introduce into financial reporting intentional excessive conservatism that could undermine the ability of financial statements to give a true and fair view of financial position and financial performance for the period.

Regarding the buffer fund approach, ECG notes that while this may be something that bank regulators may wish to consider for prudential regulation purposes, incorporating this into financial reporting standards is wholly inappropriate. "Applying a mixture of financial and prudential accounting in the financial statements will damage the transparency, consistency and comparability of financial statements to the detriment of capital market users."

On 25 March 2009, FEE, the Federation of European Accountants, published a Policy Statement with a similar message. Also, EFRAG made essentially the same point in its Letter to the Joint IASB Financial Crisis Advisory Group (PDF 76k):

One of the issues that is being much debated at the moment is the relationship between general purpose financial reporting and prudential reporting. While there are links between the general purpose financial reporting and prudential reporting and there are advantages to be gained the closer general purpose financial statements and the prudential returns are to each other, the information needs of capital market participants are not the same as those of prudential regulators. Therefore, we think it is fundamentally important that it is recognised that those different information needs mean different financial reporting objectives, and that could mean different reporting.

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