Banking rule may make reporting ‘hugely complex’

Proposed banking rules could add 100 pages of extra disclosures to annual reports, according to a report by the UK Accounting Standards Board (ASB).

The board has detailed a string of concerns and criticisms surrounding the proposed standard, likely to be the subject of heated debate as accounting reforms roll out following the financial crisis.

The standard, the second phase of the International Accounting Standards Board’s (IASB) review of financial instruments, proposes a forward-looking approach when banks account for loans. Banks would continually reassess the health of their loans, then downgrade profits if they “expect” some might turn bad.

The standard aims to stop banks booking profits from loans they reasonably expect might turn sour. However, according to the ASB, there remain a plethora of issues still to be ironed out.

Among them is the ASB’s concerns the standard might trigger a deluge of extra disclosures by banks, which may have to estimate their loan losses on a portfolio-by-portfolio basis, sometimes more than 25 years in advance.

“One regional building society in the UK identified at least 300 portfolios in its vintage mortgage book. Larger banks that operate in many geographical markets across a number of different products will have significantly more,” the report stated.

“A trade-off between meaningful disclosures and volume of disclosures will have to be made. One large UK bank stated that they would need almost 100 extra pages in their annual report to provide the loan triangles at a meaningful level of analysis.”

Banks have among the weightiest annual reports. HSBC’s 2007 annual report weighed 3lbs, leading postmen to limit how many they could deliver in a single run.

The IASB set an extended eight-month consultation period for the standard, in an acknowledgment of the deep structural change the proposals entail. It is also discussing the implications of the rule with credit risk experts, rather than technical accountants, to understand the real-world effect of the changes.

The measures respond to G20 leaders’ recommendations to reform accounting for financial instruments, which wiped billions from the value of banks during the crisis.

The ASB is also concerned the rules could increase volatility with key assumptions based on largely subjective interpretations of economic conditions. “If economic conditions are factored into the IASB model, the question remains whether bank management will have sufficient information to make calls about all the markets they operate in, to ensure comparability of assumptions,” the report stated.

The British Bankers Association (BBA) estimated it would cost £225m for the UK’s largest banks, to implement the changes. Paul Chisnall, its executive director, said while there is “conceptual” agreement on the IASB’s aim, the specific model would be “hugely complex”.

“The precise model the IASB has proposed is an extremely complex one and would involve the development of a considerable amount of extra data fields – it would be a hugely complex task and would take several years before banks were in a position to provide the reporting”, he said.

The IASB is still seeking feeback on the proposals. The consultation period will end on 30 June 2010.