The proposed changes are published in a consultation paper today and reflect the introduction of International Accounting Standards (IASs) and the increased use of fair value principles. Under EU accounting requirements all listed companies will be
required to use IASs for their annual consolidated financial statements from 1 January 2005.
Michael Folger, the FSA's Director of Prudential Standards, said:
"The accounting standards for regulated firms are undergoing great changes with the introduction of IASs for listed firms and moves to converge UK accounting standards with IASs. To give firms some stability for their planning, we are proposing the minimum changes necessary to ensure that financial accounts can continue to form the basis of the regulatory capital framework.
"The changes in accounting standards, and firms' application of
them, are likely to shake down through the next couple of years. So we look to revisit the implications for our rulebook on that
timescale."
The paper proposes four key changes to the financial reporting made by regulated firms. The proposed rule changes are needed to allow the FSA to continue to apply the same prudential requirements to firms, as the results would be different if the
revised accounting standards were applied without making adjustments. Of these changes, the first three relate to the figures produced under IAS 39:
• in the treatment of cash-flow hedges, we propose to eliminate from the measurement of regulatory capital all fair value gains and losses arising from the fair valuation of derivatives that have been accumulated in equity;
• in the treatment of available-for-sale assets we propose to follow the US approach and to leave equities at fair value, but write available-for-sale debt instruments back to cost or amortised cost;
• for fair value options we propose that unrealised gains or losses arising from the fair valuation of a firm's own credit risk should be eliminated from regulatory capital; and
• in accounting for defined benefit pension schemes we propose that the accounting measure of actuarial losses should be eliminated for regulatory purposes. It should be replaced by the company's best estimate of the level of additional funding that it will need to provide for its pension scheme over the next five years.
