Turner and Tweedie to the rescue

Standard setters and regulators may join forces under a plan which could preserve global economic stability without manipulating accounting rules.
The International Accounting Standards Board (IASB) has proposed including a new “regulatory page” in the annual reports of banks and other financial institutions that would include modified income figures that could be used for calculating bonuses and share dividends. This would leave the core financials separate and “unpolluted” by regulatory calculations.

The board is hoping the special page will be enough to fend off pressure from regulators for the standard setter to modify accounting in an effort to smooth the peaks and troughs of economic cycles. The page is intended to serve the regulators’ needs for measures to maintain a healthy market without undermining the desire of investors for accounts to present verifiable facts – two interests which are often seen as conflicting.

Income figures on the regulatory page could exclude key numbers including “unrealised gains” on financial instruments, a figure which has proved highly controversial during the credit crunch. Regulators could also
tell institutions to deduct an “economic cycle provision” to insure against downturns.

It addresses con­cerns expressed by bodies including the Fin­an­cial Stability Board and the Basel Committee on Banking Supervision. Both bodies are understood to be considering the idea.

As the postmortem of the crisis ends, the spotlight has turned to concrete reforms which address the underlying issues contributing to the crisis. Under pressure, the IASB has been trying to reconcile the conflicting demands of both investors and regulators.

The IASB’s Sir David Tweedie has been urged to include a “through-the-cycle” provision which would force financial institutions to set aside revenue depending on which point they are in the economic cycle. In January, FSA chairman Lord Adair Turner called for an “extra line” in accounts, a variation on this provision.

Observers have so far welcomed the idea and view it as a good fit to resolve the difficulties faced by regulators and the IASB. Kathryn Cearns, consultant accountant at law firm Herbert Smith, said: “It’s good to have the information segregated and the capacity for confusion would be considerably reduced.”

She added: “As long as the financial statements remain intact and aimed at investors it will be fine.”

The issue is likely to be debated when Basel releases advice on provisioning for banks in the coming months.

Further reading:

Fair value fattened bankers' bonuses: Lord Turner