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Accounting for banks


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Banks, because of their central role in operating the payment system and in managing customers’ income and savings, have always been subject to stricter financial reporting rules than other companies.

Financial reporting in the banking sector In the EU is governed by the Banking Accounts Directive (86/635/EEC), which was approved in 1986. This directive shares many of the elements of the Accounting Directives (the Fourth and Seventh Company Law Directives) and applies to all entities engaged in banking business. The Banking Accounts Directive requires entities carrying out banking activities to produce financial statements with profit and loss accounts and balance sheets to a particular format, sets out specific measurement principles and requires a number of additional disclosures to be made in notes to the accounts.

BankingAfter the EU required companies listed on EU stock markets to use EU-endorsed International Accounting Standards (IAS), listed EU banks were required to use these reporting standards (IAS and their replacement – International Financial Reporting Standards, IFRS) in preparing their consolidated financial statements. However, the relevant reporting standard (IAS 39 on financial instruments) was only endorsed by the EU after a section on hedge accounting had been removed ("carved out").

The International Accounting Standards Board (IASB) is currently in the process of replacing IAS 39 with a new standard on financial instruments, IFRS 9 (see current developments for further details).

In addition, the Committee of European Banking Supervisors (CEBS, whose role was taken over by the European Banking Authority – EBA – in January 2011) has drawn up a set of financial reporting guidelines for EU banks for supervision purposes. These FINREP guidelines are designed to streamline the reporting requirements for EU banks. These FINREP guidelines, which are based on IAS/IFRS as endorsed by the EU, were originally published in December 2005 with the most recent revision (FINREP rev2) being published in December 2009.


Recent developments/current issues

Convergence between IFRS and US reporting standards

There are significant differences between IFRS, set by the IASB, and US accounting standards, set by the US Financial Accounting Standards Board (FASB), especially in their treatment of financial instruments. The international financial crisis has led to increased pressure from international financial regulators and investors for convergence between the two sets of reporting standards in order to make the financial statements produced by banks and other financial institutions more comparable. This pressure has been reflected at the political level, with successive G20 summits calling for greater convergence between the two sets of standards. The G20 summit in Seoul in November 2010 called on the IASB and the FASB to complete their “convergence project” by the end of 2011 (see paragraph 38 of the Summit document). There has recently been some progress in reducing the main differences between the two bodies but significant gaps remain.

Fair value accounting and amortized cost

The financial crisis reignited the long-running debate over how bank and other financial institutions should value financial assets – whether at “fair value” (the value that would be placed on the asset by an outside investor in normally functioning market conditions) or at amortized cost (the discounted value of the cash flows due from the asset). It is argued by some that the amortized cost treatment allowed banks to present a misleadingly optimistic picture of their balance sheets during the financial crisis, while others argue that the fair value approach introduces excessive volatility into the valuation of banks, and, as a result, makes the banking system less stable.

This issue has been one of the main stumbling blocks standing in the way of agreement between the IASB, whose standards (IAS 39 and the proposed IFRS 9) retain a significant role for amortized cost as a means of valuing conventional loans, and the US Financial Accounting Standards Board (FASB), which has generally put more emphasis on “fair value” accounting methods. However, in January 2011, the FASB Board modified its previous position and decided to recommend that amortized cost be used for “financial assets that an entity manages for the collection of contractual cash flows through a lending or customer financing facility”, with fair value continuing to be used for other assets. If endorsed by the US accountancy profession, this recommendation will significantly reduce the differences between IFRS and US acccounting standards.

The development of IFRS 9 – the new IASB standard on financial instruments

The International Accounting Standards Board (IASB) is currently drawing up a new reporting standard on the valuation of financial instruments (IFRS 9) to replace the present standard (IAS 39). Work on the new standard has been divided into three main parts:

  • The classification and measurement of assets and liabilities
  • Impairment methodology
  • Hedge accounting

The IASB effectively completed work on the first element of the standard (on the classification and measurement of assets and liabilities) in October 2010, when it approved the new standards’s treatment of liabilities.

The IASB issued an exposure draft (ED) on “Financial instruments: amortised cost and impairment” in November 2009. This provoked a lengthy debate, with attention being focused on the treatment of loan losses and, in particular, whether the draft standard would lead to loan losses being recognized too late, leading to a reduction in confidence in the reliability of bank financial statements. In response, the IASB and the US Financial Accounting Standards Board (FASB) jointly published a supplementary ED on impairment accounting on 31 January 2011, with a deadline for comments of 1 April 2011.

An ED of the section of the standard on hedge accounting was published in December 2010, with a deadline for comments of 9 March 2011.

In addition, the IASB surveyed users’ views on how the “netting” of derivatives and other financial instruments should be treated – one of the other remaining differences between IFRS and US accounting standards - in August 2010. Following this survey and further discussions between the IASB and the FASB, the two bodies published a joint ED on "netting" on 28 January 2011.

The IASB originally aimed to to complete work on IFRS 9 by the second quarter of 2011, with at least the first part of the new standard becoming effective in January 2013. However, parts of the proposed standard have proved controversial and the need to consider the comments received on the various exposuire drafts and to secure greater agreement with the FASB has led to delay. In August 2011, the IASB proposed that IFRS 9 would have a mandatory effective date of 1 January 2015, two years later than originally planned.

In addition, the new standard will have to be endorsed by the EU before it can be used by entities based in the EU. The European Commission decided in November 2009 not to push the first section of IFRS 9 on classification and measurement through an accelerated endorsement process. In the meantime, EU-based entities will continue to use the EU-endorsed version of IAS 39.

Revision of FINREP guidelines

The FINREP guidelines on prudential reporting by European banks set by CEBS and its successor body, the European Banking Authority (EBA). CEBS announced in December 2010 that revised FINREP guidelines (FINREP rev3) would be issued by the end of 2011, with an application date of 1 January 2013. These new guidelines would take into account the new IFRS 9, in as far as it had then been endorsed by the EU. In the meantime, countries should use FINREP rev2.

Although the EBA has not yet made any formal announcement, the slower than expected progress in developing IFRS 9 may lead to delays in the issue of FINREP rev3.

External Resources

External resources

The latest consolidated text of the Bank Accounts Directive can be found here.

A range of materials on the development of IFRS 9, including texts of exposure drafts and the finalized parts of the new standard; latest details of discussions about the standard at the IASB Board; and webcasts explaining the new standards can be found on the website of the IFRS Foundation (free registration is required to download some of these materials).

The latest version (FINREP rev2) of the CEBS/EBA reporting guidelines for supervised banks can be found here.

CFRR Resources

Presentations for download

The following materials were presented at CFRR events and provide additional information on accounting for banks and, in particular, on the current (IAS 39) and planned future (IFRS 9) internation reporting standards for financial instruments. The most recent presentations contain the most up to date information. While the CFRR tries to ensure that this material is as up to date as possible, some of the content, especially in the earlier presentations, may not reflect the latest developments. Presentations in languages other than English are available for the materials given at GDLN events - please follow the link to the webpage of the original event to find these materials.

Right click or option-click the link and choose "Save As..." to download these files.

This presentation on how IAS 39 deals with the issue of accounting for hedging arrangements was given at a GDLN event for the IFRS for Prudential Regulators group on 16 May 2011.

These three presentations were given at the workshop for the IFRS for Prudential Regulators group held on 8-9 February 2011. The first gives an overview of the main elements of the IASB's new IFRS 9 on financial instruments, while the second summarizes the existing reporting standard, IAS 39. The third presentation gives some examples illustrating the use of IAS 39.

This presentation, which gives a brief overview of developments in reporting standards and bank and insurance regulation in 2010, was given during a GDLN event organized for the IFRS for Prudential Regulators group on 15 December 2010.

These two presentations were given at the workshop for the IFRS for Prudential Regulators group held on 6-7 September 2010. The first describes how Central Bank of Macedonia interprets the treatment of impaired assets in IAS 39, while the second describes the main features of the IASB's project to develop IFRS 9.

These two presentations were given at the workshop for the IFRS for Prudential Regulators group held on 3-4 May 2010. The first describes the key aspects of a bank annual report (including the financial statement and notes) prepared under IFRS. The second presentation outlines some of the accounting issues raised by the financial crisis and how this had led to a range of proposals to revise IAS 39.

Video Presentations

IAS 39 - Examples and Case Studies
Anna Czarniecaka

Anna Czarniecka discusses examples of use of IAS 39

Anna Czarniecka gives examples and case studies of the application of IAS39.

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Source: Workshop for IFRS for Prudential Supervisors Group,
8-9 February 2011

Technical Update for Banking and Insurance Regulators
Shamim Diouman

Shamin Diouman during the GDLN workshop

1. Overview and update on financial reporting and other related issues
2. Update on accounting for financial instruments and Basel III for banking regulators
3. Update on accounting for insurance contracts and Solvency II for insurance regulators

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Source: IFRS for Prudential Supervisors GDLN event,
15 December 2010

IFRS 9, the treatment of impairment under IAS 39 in Macedonia and Basel III
Henning Göbel, Maria Efremova and Joachim Wassmann

Videos of presentations made at the workshop for the IFRS for Prudential Supervisors Group held on 6-7 September 2010.

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