The Basel Committee on Banking Supervision Thursday released a set of principles today that call for international accounting standards setters to incorporate lessons learned from the financial crisis when revising the accounting rules around issues related to provisioning, fair value measurement and disclosure.

“As the [International Accounting Standards Board] develops new financial instrument accounting standards, the principles will help it produce standards that improve the decision usefulness and relevance of financial reporting for key stakeholders, including prudential regulators. Moreover, the principles would ensure that accounting reforms address broader concerns about procyclicality and systemic risk,” explained the committee.

The principles were produced in response to recommendations made by the G20 leaders at their summit in London in April regarding the need to strengthen financial supervision and regulation. They called on the accounting standard setters to work with regulators, “to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards”.

The principles, which were provided to the IASB in July, incorporate lessons learned from the financial crisis, and note that the new 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 amortised cost category in rare situations; and, promote a level playing field across jurisdictions.

Additionally, it noted that, to address 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.”

Nout Wellink, chairman of the Basel Committee and president of the Netherlands Bank, said, “In developing the high level principles, the Basel Committee closely examined the lessons learned from the financial crisis. One of those lessons is that any new accounting rules must be consistent with sound practices in risk management and enhance transparency to help supervisors, banks, investors and other stakeholders achieve their respective objectives.”

IE