Finance ministers mull fresh measures to aid regulators

by Mario Christodoulou

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18 Mar 2010

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Sir David Tweedie

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.

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