Banking rule may make reporting ‘hugely complex’

Proposed banking rules could add 100 pages of extra disclosures to annual
reports, according to a report by the UK Accounting Standards Board (ASB).

The board has detailed a string of concerns and criticisms surrounding the
proposed standard, likely to be the subject of heated debate as accounting
reforms roll out following the financial crisis.

The standard, the second phase of the International Accounting Standards
Board’s (IASB) review of financial instruments, proposes a forward-looking
approach when banks account for loans. Banks would continually reassess the
health of their loans, then downgrade profits if they “expect” some might turn

The standard aims to stop banks booking profits from loans they reasonably
expect might turn sour. However, according to the ASB, there remain a plethora
of issues still to be ironed out.

Among them is the ASB’s concerns the standard might trigger a deluge of extra
disclosures by banks, which may have to estimate their loan losses on a
portfolio-by-portfolio basis, sometimes more than 25 years in advance.

“One regional building society in the UK identified at least 300 portfolios
in its vintage mortgage book. Larger banks that operate in many geographical
markets across a number of different products will have significantly more,” the
report stated.

“A trade-off between meaningful disclosures and volume of disclosures will
have to be made. One large UK bank stated that they would need almost 100 extra
pages in their annual report to provide the loan triangles at a meaningful level
of analysis.”

Banks have among the weightiest annual reports. HSBC’s 2007 annual report
weighed 3lbs, leading postmen to limit how many they could deliver in a single

The IASB set an extended eight-month consultation period for the standard, in
an acknowledgment of the deep structural change the proposals entail. It is also
discussing the implications of the rule with credit risk experts, rather than
technical accountants, to understand the real-world effect of the changes.

The measures respond to G20 leaders’ recommendations to reform accounting for
financial instruments, which wiped billions from the value of banks during the

The ASB is also concerned the rules could increase volatility with key
assumptions based on largely subjective interpretations of economic conditions.
“If economic conditions are factored into the IASB model, the question remains
whether bank management will have sufficient information to make calls about all
the markets they operate in, to ensure comparability of assumptions,” the report

The British Bankers Association (BBA) estimated it would cost £225m for the
UK’s largest banks, to implement the changes. Paul Chisnall, its executive
director, said while there is “conceptual” agreement on the IASB’s aim, the
specific model would be “hugely complex”.

“The precise model the IASB has proposed is an extremely complex one and
would involve the development of a considerable amount of extra data fields – it
would be a hugely complex task and would take several years before banks were in
a position to provide the reporting”, he said.

The IASB is still seeking feeback on the proposals. The consultation period
will end on 30 June 2010.

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