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