Published today by the Accounting Standards Board, the proposals would force banks to measure their assets and liabilities using market values rather than historical cost, as they do now. The proposals have been put forward by a group of standard setters from ten countries.
Tim Sweeney, director general of the British Bankers’ Association, said: ‘If acted upon they have the potential to destabilise institutions within the sector and disrupt their ability to act as providers of long-term finance to industry and commerce. The standard setters are aware the banking industry considers these proposals to be substantially flawed. They have shown themselves insensitive to the concerns.’
If approved, the proposals would require listed companies to calculate the value of all financial instruments in the same way and show them at fair value on the balance sheet. Financial instruments include shares, bonds, debtors, creditors, deposit accounts, forward currency contracts, futures, swaps and other types of derivative contracts. The proposals reflect a trend among world standard setters to increase harmonisation, transparency and disclosure through calculations using market values.
ASB chairman Sir David Tweedie, said: ‘As many financial instruments are a contract for performance in the future, there is no present cost, so there is nothing to recognise in historical cost based accounting.
Yet the contract may quickly become a large asset or liability, meaning huge gains or losses can accumulate off-balance sheet and not be recognised until the contract is fulfilled.’
The BBA publishes its case against the proposals in the Bank of England’s Financial Stability Review, published today.
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