Watchdog to look into plans for ‘regulatory page’ in reports

The UK’s financial watchdog, the Financial Services Authority, will explore a plan to force banks to record modified earnings figures including a “regulatory income”.

Last week, Accountancy Age revealed a plan currently being discussed within the International Accounting Standards Board (IASB) to give regulators a space within financial statements.

Regulators would control an extra page where companies would record a modified regulatory income figure. This figure could be used to limit bonus payments or distributable earnings.

It is hoped the idea would stop regulators smoothing profits and manipulating accounting data to address concerns that emerged in the wake of the banking crisis.

The Financial Services Authority said that while plans were still embryonic the proposal should be investigated.

“I understand that this is very early days for this IASB proposal so, at this point, we would just say that the idea is worth an initial exploration,” a spokesman said.

It is for the IASB to take this idea forward with the prudential regulators.”

The FSA has been in favour of a “through the cycle” provision which would force banks to put money aside in an economic boom to be released in a bust, but is working with the IASB on a range of possible models.

The comment came as the IASB discusses the plan with the Basel Committee on Banking Supervision.

The past week saw the proposal gain momentum from within the UK reporting regulator.

Ian Wright, director of corporate reporting at the Financial Reporting Council, said: “Investors would welcome greater information about the views of prudential regulators.

“One might reasonably expect a prudential regulator to do what it says on the tin – offer a cautious view of profits and capital.”

The “extra page” would use net income as a starting point to distill regulatory numbers. Individual regulators around the world could deduct an economic cycle reserve or unrealised gains from net income to arrive at a new “regulatory income” line.

This line could be used to underpin remuneration data or dividend payments.

Significantly, the net income would be preserved so investors are still able to judge company performance.

Pauline Wallace, head of public policy at PwC and a recent appointee to the Accounting Standards Board, said any new information has to be underpinned by a clear framework.

“This is an interesting idea. It is exactly what we should be doing as a profession, looking at alternative solutions, but we should not ignore the questions that need to be answered before we can determine how effective it
can be,” she said.

Auditors have also raised concerns about how the arrangement would work in practice. For example, how would multinational com­panies reconcile “regulatory income” from different ­countries, at a group level. Also, how would regulators define unrealised gains. UK guidance on the subject stretches to 121 pages.

“We must first understand what is being proposed,” Wallace said.
Meanwhile, Basel is preparing advice on general provisions to be released in coming months.