21 May 2008

The Financial Stability Forum establishes an expert advisory panel

In April 2008 the Financial Stability Forum (FSF) issued a report, Enhancing Market and Institutional Resilience [PDF], to the G7 Ministers and Central Bank governors. The report analyses the causes and weaknesses that have led to the current financial market turmoil and set out recommendations for increasing the resilience of markets in the future.

The report was the result of an intensive collaborative effort of many national bodies and international organisations, including the IASB. The report recommends actions in the following areas:

  • Strengthened prudential oversight of capital, liquidity and risk management
  • Enhancing transparency and valuation
  • Changes in the role and uses of credit ratings
  • Strengthening the authorities' responsiveness to risks
  • Robust arrangements for dealing with stress in the financial system

The report recommends that the IASB:

  • improve the accounting and disclosure standards for off-balance sheet vehicles
  • improve the guidance and disclosures about valuations, methodologies and the uncertainty associated with valuations

What are We Doing?

Guidance and disclosures about valuations

In its report, the FSF recommends that the IASB:

  • examine the requirements and principles for disclosures about the valuation of financial instruments to identify areas in which they can be improved
  • enhance guidance on valuing financial instruments when markets are no longer active

To this end, the IASB has created an expert advisory panel to discuss the valuation of financial instruments in inactive markets and the related disclosures. The discussions of the panel will provide input for the IASB’s work on financial instruments and fair value measurement.

Accounting and Disclosures for Off-balance Sheet Vehicles

The FSF recommendations relate to two projects, both of which the IASB had been working on before the current credit crisis developed:

  • derecognition  (identifying the circumstances in which it is appropriate for an entity to remove an asset from its balance sheet) and
  • consolidation  (identifying the circumstances in which an entity should combine its financial statements with those of another entity- including special purpose entities and structured investment and securitisation vehicles).

The IASB is giving priority to these projects.

Along with the consolidations and derecognition projects, the IASB will review IFRS 7 Financial Instruments: Disclosures to assess its effectiveness in ensuring that entities disclose information that reflects their exposure to risk and any potential losses arising from financial instruments with the off-balance sheet entities with which they are involved.

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