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COMPARISONS OF CLASSIFICATIONS: RISK REGULATIONS AND IFRS

It is useful to contrast the regulatory treatment before and after IFRS, as well as the classifications used by IFRS and the classification under risk regulations. Both are summarized in Tables 21.5 and 21.6.

The current debate, arising from the financial crisis, with fair value accounting cannot be dismissed easily. This effect is well defined in an article from The Economist, dated September 18th, 2008:

TABLE 21.5 Comparison of accounting treatment and regulatory treatment by asset category: before and after IFRS

Before IFRS

After IFRS

Accounting treatment

Risk regulatory treatment

Accounting treatment

Risk regulatory treatment

Market value

Trading portfolio, market

Fair value through

Trading portfolio, market

risk amendment

P&L

risk amendment

Amortized cost

Banking portfolio Credit capital charge

Fair value through equity

Banking portfolio Credit capital charge

Amortized cost

Banking portfolio

Credit capital charge

TABLE 21.6 Comparison of accounting treatment and regulatory treatment by asset category

IAS 39

Accounting treatment

Risk regulatory treatment

Fair value or trading portfolio

Fair value through P & L

Trading portfolio

Available for sale

Fair value through equity

Market risk amendment

Loans and receivables

Amortized cost

Banking portfolio

Held-to-maturity

Amortized cost

Credit capital charge

"Bankers say that in a downturn fair value accounting forces them to recognize losses at the same time, impairing their capital and triggering fire sales of assets, which in turn drive prices and valuations down even more. Under traditional accounting, losses hit the books far more slowly."

All's Fair - The crisis and fair value accounting

The IASB and the FASB also committed themselves, in October 2008, to a joint approach to dealing with reporting issues arising from the global financial crisis. They set up the Financial Crisis Advisory Group (FCAG) in December 2008, to advise the two boards about standard-setting implications of the global financial crisis and potential changes to the global regulatory environment. Topics being discussed include fair value accounting, loan provisioning, structured entities and other off-balance sheet vehicles.

 
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