14 Apr 2008
Accounting standard setters have been urged to 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 recommendations, from the global Financial Stability Forum which reviewed the issues that led up to the credit squeeze, were welcomed by the G7, who met in Washington on Saturday.
The FSF – which includes the International Monetary Fund and other financial and regulatory bodies – said that the build-up and subsequent revelation of significant off-balance sheet exposures highlighted the need for clarity about the treatment of these structures and the risks they posed to the institutions carrying them.
'The use of off-balance sheet entities created a belief that risk did not lie with arrangers and led market participants to underestimate firms’ risk exposures. Risk exposures and potential losses associated with off-balance sheet entities should be clearly presented in financial disclosures, and the accounting standards affecting these entities should be enhanced and their international convergence accelerated based on the lessons learned,' the report said.
The group noted that the standards of the IASB and the US Financial Accounting Standards Board differed.
'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,' the FSF urged.
The G7 nations are set to begin an FSF-recommended 100-day program of restoration to the global financial system.
Bank of Italy governor Mario Draghi said the G7's embrace of the recommendations lays the groundwork for the regulatory response needed to ease the severe financial stress now taking its toll on the world economy, Forbes.com reported.
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