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Main liabilities
Customer deposits : 50%
Interbank borrowing : 5%
Trading interbank & customer deposits & debt securities issued : 20%
Derivatives : 10%
Shareholder’s equity : 6%
Held for trading and fair valued under IAS 39 and FAS 115
accounting standard classifications
e.g. equity and debt securities, reverse repos, loans traded in
market
(b) Trading: security held for short term sale purposes, security
accounted for under fair value accounting,
• Level 2 assets
- market prices of assets not directly observable, but fair values can
be derived from models using directly observable market inputs
such as interest rate yield curves and option volatilities
e.g. convertible bonds, interest rate swaps, FX swaps
• Level 3 assets
- valuation model uses unobservable market data e.g. MBS
Fair value adjustments for levels 2 & 3 assets: bid-offer spreads, liquidity
premium.
Accounting standards (Fair Value Measurement)
IAS 39
IAS 39
- Revision in 2005 allows a firm to designate a financial asset or a
financial liability on initial recognition as one to be measured at fair value.
- Designation is irrevocable. Conditions include:
a) selected financial asset/liability must contain embedded derivatives,
b) selected financial liability with amounts contractually linked to
valuation of asset at fair value,
c) changes in financial instrument value offset changes in fair values
of financial assets/liabilities such as derivatives.
Accounting standards (Derivative accounting)
IAS 39 & FAS 133
- Trading derivative fair values recognised in income statement.
- Derivatives designated as hedging, accounting treatment as follows:
a) Fair value hedge - derivatives hedge the exposures to changes in
fair value of fixed rate exposures; derivatives’ gains/losses recognised in
earnings.
Securitization entity consolidated with issuer when former does not have
legal right to foreclose on the securitized assets.
Rapid growth in securitization many securitization entities which do
not have such rights were not consolidated. (Ryan, 2008)
Reform of Accounting standards
Revisions to IAS 39 in the following phases (IFRS 9):
Phase 1 – derecognition criteria (ED – April 2009)
Existing derecognition conditions:
a) any substantial transfer of risks and rewards,
b) who has control over assets,
c) whether transferor has continuing involvement in assets.
Revisions – simplify the conditions and use the key tests of control.
Future expected cash flows (factor expected credit loss over life of the
loan) at original effective interest rates
Recognition threshold of loss event removed.
120000
100000
ED
80000 Impairment
bal sheet
allowance
60000
$
ED
Impairment
P&L
40000
IAS39 P&L
20000
0
1 2 3 4 5
Years
Deloitte, 2010
Comparison of Expected Loan Loss versus Incurred Loan Loss models
Scenario 1: At start of year 2, expectation of loss revised to be 10% at maturity
120000
100000
ED
80000 Impairment
bal sheet
allowance
60000
$
ED
Impairment
P&L
40000
IAS39 P&L
20000
0
1 2 3 4 5
Years
Deloitte, 2010
Comparison of Expected Loan Loss versus Incurred Loan Loss models
Scenario 2: At start of year 2, expectation of loss revised to be zero at maturity
120000
100000
80000 ED
Impairment
bal sheet
allowance
60000
$
ED
Impairment
40000 P&L
0
1 2 3 4 5
-20000
Years
Deloitte, 2010
Reform of Accounting standards
ICAEW proposals (ICAEW, 2010)
- Auditors may provide assurance on new summary risk statements
of banks.
1. Deloitte, 2010. IFRS 9 proposals: Accounting for financial instruments following a financial crisis.
2. Epstein, Nach, Bragg, 2008. GAAP 2009 Interpretation and Application of Generally Accepted
Accounting Principles. John, Wiley & Sons, Inc.
3. Financial Stability Forum, 2009. Reporting of the Financial Stability Forum on Addressing
Procyclicality in the Financial System.
7. MacKenzie, D., 2010. The Credit Crisis as a Problem in the Sociology of Knowledge. Working
Paper.
9. Power, M., 2009. The risk management of nothing. Accounting, Organizations and Society 34,
849-855.
10. Ryan, S., G., 2008. Accounting in and for the Subprime Crisis. The Accounting Review 83, 1605-
1638.
11. Turner, A., 2010. Financial Services Authority Chairman address to the Institute of Chartered
Accountants in England and Wales (ICAEW) in London.