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Disclosure, valuation and accounting

Recent market events have led to an increased focus on the disclosure of positions in structured products, valuation practices for use when market prices are no longer available (where there have recently been several clarifications and amendments), and the consolidation and reporting of off balance sheet vehicles.

International and European Union regulatory developments

The International Accounting Standards Board (IASB) is in the process of introducing two new International Financial Reporting Standards (IFRS) for insurance contracts (IFRS 4); and for the treatment of financial instruments (IFRS 9) which aim to increase transparency and consistency in financial reporting globally.  IFRS 4 has been in force since 2004 and will move from Phase 1 to Phase 2 in 2015 at the earliest.  Phase 2 will harmonise accounting methodologies for measuring insurance liabilities and presenting the performance and position of insurance contracts.  IFRS 9 will replace International Accounting Standard 39 (IAS 39) in its entirety through a three-phased approach (classification and measurement; impairment of financial assets; and hedge accounting). Firms were originally required to apply the new reporting standards from January 1st 2013; however in December 2011 the IASB issued amendments to IFRS 9, extending the deadline to 1st January 2015. In November 2011, the FSB tasked the Basel Committee on Banking Supervision (BCBS) to review its 2008 report on external audit quality and banking supervision. In December 2011 BCBS published a consultation on more detailed capital (Pillar III) disclosure requirements which aim to improve the transparency and comparability of banks’ capital base.  The paper includes a requirement for banks to complete a ‘main features template’ detailing minimum levels of disclosure with respect to their financial instruments. Under the proposed changes banks will be required to disclose the date of issuance, the amount recognized in regulatory capital and write-down features relating to each regulatory capital instrument.

In Europe, in November 2011, the European Commission (EC) released a proposal on audit regulation with the aim of improving auditor independence and reducing market concentration. The proposed rules include the rotation of clients after a maximum engagement of six years, the legal separation of the audit and consulting services and an oversight and coordination role for the European Securities and Markets Authority (ESMA).  Additionally the European Banking Authority (EBA) is currently consulting on a paper on draft Implementing Technical Standards (ITS) on supervisory reporting requirements for institutions with the aim of ensuring standards are implemented uniformly across the sector.

UK regulatory developments

In the UK, in June 2010 the Financial Services Authority (FSA) and the Financial Reporting Council (FRC) published a joint consultation paper to examine the effectiveness of audit and assurance, followed by a further FSA consultation in Q4 2010. In March 2011, the FSA released a policy statement on improving the auditors’ report on client assets. The FSA’s intention is to increase the quality and consistency of information provided in auditors’ client assets reports, as well as improve firms’ governance of its auditors. In the same month, the FSA published a feedback statement on the role of auditors in enhancing prudential regulation, following a joint discussion paper with the Financial Reporting Council (FRC) in June 2010, which amongst other things recommends increased focus on the valuation of traded positions.

External Reading list

More regulatory themes

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