Finance ministers mull fresh measures to aid regulators

European finance ministers will consider including regulatory data in
financial statements under a plan which may break the stalemate between
regulators and accountants in the wake of the crisis.

Sir David Tweedie, chairman of the International Account­ing Standards Board
(IASB), told a meeting of European finance ministers about a proposal to set
aside a page within companies’ financial statements which could be used to
regulate banks.

Speaking in Brussels on Tuesday, Sir David raised the possibility of
including an additional income statement for the sole use of regulators.

The proposal, first revealed in Accountancy Age, would provide regulators
with the financial data they need to force banks to set aside rainy-day
provisions or restrict remuneration, without smoothing profit and loss numbers.

“Providing such a statement would enable us to meet our primary objective of
providing transparency to a wide range of users of financial statements. At the
same…the statement would provide (regulators) with information that they require
to meet their financial stability objectives,” he said.

European finance ministers have been working closely with the Basel Committee
on Banking Supervision and international regulators in their search for a model
which would force banks to put away money in good times, to prepare for the bad.

However, standard setters fear this may fall on accounting rules and result
in artificially smoothed profit and loss numbers.

Under the plan regulators could use net profit as a starting point to distill
regulatory numbers. Individual regulators around the world could deduct an
economic-cycle reserve or unrealised gains, to arrive at a new “regulatory
income”.

This income could be used to underpin remuneration data or dividend payments.
Significantly, the net profit would be recorded so investors are still able to
judge company performance.

Last week, the UK financial watchdog, the Financial Services Authority, said
the idea was “worth an initial exploration”.

It has also received tentative support from auditors and reporting
regulators. Pauline Wallace, head of public policy at PwC described it as “an
interesting idea,” while Ian Wright, director of corporate reporting at the
Financial Reporting Council, said investors “would welcome greater information
about the views of prudential regulators”.

Support from the EU could provide the catalyst for the proposal, which if
adopted, could be applied by countries across the world.

However practical questions remain, for example, how would multinational
companies reconcile “regulatory income” from different countries, at a group
level.

Also, how would regulators define unrealised gains with UK guidance on the
subject stretches to 121 pages.

In our view

Sir David Tweedie needs to make this proposal, or a close variation, work

if he wants to avoid a damaging international standoff about the role
of accounting. Regulators seem intent on putting in place a form of
“through-the-cycle” provision, which would force banks to set aside reserves for
a rainy day, but standard setters are equally intent on stopping any attempts to
smooth the numbers.Sir Davids plan seems like a neat solution. However if this
fails, what’s plan B.

Further reading:

iasb.org