Basel Committee on Banking Supervision Issues Principles for Financial Instrument Accounting Standards

Today, the Basel Committee on Banking Supervision issued a set of principles aimed at guiding the International Accounting Standards Board (IASB) in addressing issues concerning the fair value of financial assets.

Based on the principles, a new accounting standard should:

• reflect the need for earlier recognition of loan losses to ensure robust provisions;
• recognize that fair value is not effective when markets become dislocated or are illiquid.
• permit reclassifications from the fair value to the amortized cost category; which should be allowed in rare circumstances following the occurrence of events having clearly led to a change in the business model;
• promote a level playing field across jurisdictions.

The Basel Committee also noted:

To address particular concerns about procyclicality, the new standards should provide for valuation adjustments to avoid misstatement of both initial and subsequent profit and loss recognition when there is significant valuation uncertainty. Moreover, loan loss provisions should be robust and based on sound methodologies that reflect expected credit losses in the banks’ existing loan portfolio over the life of the portfolio.

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