G-7, Endorsing FSF Report, Asks IASB, Other Standard-Setters Take Action Within 100 Days on Off-Balance Sheet, Valuation

In a Joint Statement issued on April 11, the G-7 Finance Ministers “strongly endorsed” recommendations for wide-ranging actions contained in a report presented to them by the Financial Stability Forum (FSF), and recommended that certain actions be undertaken “within the next 100 days” in response to the current market turmoil. This includes a recommendation that the IASB and other relevant standard setters “initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress. "

The G-7 statement supports recommendations contained in the FSF report issued April 11, “Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience.” However, the G-7’s 100 day timetable for certain actions is more aggressive than that set forth by FSF.

Actions to be taken within 100 Days
The G-7 state, “We have identified the following recommendations among the immediate priorities for implementation within the next 100 days:

Firms should fully and promptly disclose their risk exposures, write–downs, and fair value estimates for complex and illiquid instruments. We strongly encourage financial institutions to make robust risk disclosures in their upcoming mid-year reporting consistent with leading disclosure practices as set out in the FSF's report.

The International Accounting Standards Board (IASB) and other relevant standard setters should initiate urgent action to improve the accounting and disclosure standards for off-balance sheet entities and enhance its guidance on fair value accounting, particularly on valuing financial instruments in periods of stress.

Firms should strengthen their risk management practices, supported by supervisors' oversight, including rigorous stress testing. Firms also should strengthen their capital positions as needed.

By July 2008, the Basel Committee should issue revised liquidity risk management guidelines and IOSCO should revise its code of conduct fundamentals for credit rating agencies.”
Additionally, the G-7 endorsed other FSF proposals to be implemented by year-end 2008.

The FSF’s recommendations are summarized in this 10 page press release; if you’d like something more concise, see the 2 page Executive Summary (pdf pages 7-8) of the FSF report. Annex A to the FSF’s report contains the List of Recommendations, and Annex B provides “Leading Practice Disclosures for Selected Exposures.” Annex C lists members of the “Working Group on Market and Institutional Resilience” which authored the report. The U.S. representative was SEC Chairman Christopher Cox.

FSF Recommendations Relating to Accounting, Disclosure
Section III of the FSF report deals with “Enhancing Transparency and Valuation.”

In the subsection “Risk Disclosure by Market Participants,” the FSF’s recommendations include:
- The FSF strongly encourages financial institutions to make robust risk disclosures using the leading disclosure practices summarised in this report, at the time of their upcoming mid-year 2008 reports.

- Going forward, investors, financial industry representatives and auditors should work together to provide risk disclosures that are most relevant to the market conditions at the time of the disclosure.

- The BCBS [Basel Committee on Banking Supervision] will issue by 2009 further guidance to strengthen disclosure requirements under Pillar 3 of Basel II for securitisation exposures, sponsorship of off-balance sheet vehicles, liquidity commitments to ABCP conduits, and valuations.

Recommendations relating to accounting for off-balance sheet vehicles include:

• The IASB should improve the accounting and disclosure standards for off-balance sheet vehicles on an accelerated basis and work with other standard setters toward international convergence
  
• The IASB and the FASB should consider moving directly to exposure drafts on off-balance sheet issues, rather than discussion papers, to meet the urgent need for improved standards

Recommendations relating to accounting standards for valuation (including fair value) include:

• The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.
  
• The IASB will examine its principles and requirements for disclosures about the valuation of financial instruments to identify areas for enhancement in light of lessons learned from the market turmoil.
  
• This effort will assess disclosures in year-end 2007 annual reports and draw on the views of investors, firms, auditors, supervisors and regulators about the quality of valuation disclosure practices.
  
• The IASB will enhance its guidance on valuing financial instruments when markets are no longer active.
  
• To this end, it will set up an expert advisory panel in 2008.
  

In addition to accounting standards setters, others who should take action regarding valuation, notes the FSF, include financial institutions, the Basel Committee, auditing standard-setters, and others. Specifically, the FSF recommends:

• Financial institutions should establish rigorous valuation processes and make robust valuation disclosures, including disclosure of valuation methodologies and the uncertainty associated with valuations.
  
• The Basel Committee will issue for consultation guidance to enhance the supervisory assessment of banks’ valuation processes and reinforce sound practices in 2008.
  
• The International Auditing and Assurance Standards Board (IAASB), major national audit standard setters and relevant regulators should consider the lessons learned during the market turmoil and, where necessary, enhance the guidance for audits of valuations of complex or illiquid financial products and related disclosures.
  

In related news, see also our posts from earlier this week on recommendations issued by the IMF and IIF, and our post subtitled, EU’s McCreevy, ECOFIN Talk Fair Value.

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