UK: Banking Update - Newsletter for Non-US Based Banks

Last Updated: 15 March 2005
Most Read Contributor in UK, August 2017

Deloitte’s Financial Services Industry team offers clients industry knowledge as well as deep and broadly based professional services globally. This, plus our hands-on approach to high quality client service, whether it is assurance or implementing the solutions we design, means that clients can expect creative, pragmatic advice. We offer the experience of working with leading financial services businesses globally in all sectors. Our Global Offerings Services team comprises a group of practitioners assisting non US companies and non US practice office engagement teams in applying US and International accounting standards (i.e. US GAAP and IFRS) and in complying with the SEC’s financial reporting rules.

Deloitte held two banking seminars, one on 17 November 2004 in London, UK and the other on 15 Feb 2005 in New York, USA. These seminars discussed the challenges related to the adoption of new US accounting standards as well as aspects related to the implementation of IFRS, especially IAS 32 and 39, for the first time in Europe.

Following on from these events, we are pleased to issue this newletter, which provide you with updates on the topics discussed during these seminars, including other recent changes that may potentially affect non-US banks.

We believe that certain specific accounting areas (besides those that are applicable for the first time during the year ended December 31, 2004 and discussed later on in this newsletter) are likely to receive higher levels of scrutiny as a result of recent accounting breakdowns that have been highlighted in the financial press, these are:

Other than temporary impairments

In September 2004, the FASB delayed the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This delay does not suspend the requirement to recognize other-than-temporary impairment (OTTI) as required by existing authoritative literature, nor does it relieve preparers of the need to comply with the disclosure requirements of paragraphs 21 and 22 of Issue 03-1.

In applying the existing OTTI guidance, public companies should remember the following:

  • Issue 03-1 requires the investor’s assessment of whether an investment (other than a costmethod investment) is impaired to be performed each reporting period (including interim periods). This guidance currently is effective and is not part of the deferral provided by FASB Staff Position No. EITF 03-1-1, Effective Date of Paragraphs 10-20 of EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments."
  • As noted in SEC Staff Accounting Bulletin nr. 59, (SAB 59), "other-than-temporary" impairment does not mean permanent impairment.
  • In the current rising interest rate environment, it is expected that a number of public companies will need to recognize an OTTI for securities whose decline in value is attributable solely to interest rate fluctuations. In other words, an OTTI may or should be triggered by factors other than issuer credit concerns.
  • SAB 59 lists the holder’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value as a factor that should be considered, when determining if a decline in fair value is other than temporary. Accordingly, public companies should be aware that sales of underwater securities may leave open to challenge the company’s intent to hold other underwater securities in its portfolio until anticipated recovery. In his speech at the 2004 AICPA National Conference on Current SEC and PCAOB Developments, Professional Accounting Fellow John James noted that the SEC staff does not believe that the tainting concept that arises from sales of securities from a held-to-maturity portfolio should be applied in the same manner to the SAB 59 analysis. The staff believes that the individual facts and circumstances around individual (or larger groups of) sales of securities should be evaluated in determining whether the hold to recovery assertion for the remaining securities continues to be valid. Therefore, although the SEC staff does not endorse applying a strict held-to-maturity tainting model to sales of underwater securities out of an available-for-sale portfolio, it does not rule out the possibility that such sales could cause a taint of underwater securities in the portfolio. If a public company contemplates selling an underwater security out of its available-for-sale portfolio, it should document clearly the unique reason for the sale to support an assertion that such a sale does not call into question management’s intent to hold other underwater available-for-sale securities until a forecasted recovery.
  • A public company that grants a third-party investment advisor total discretion to manage the company’s investment portfolio likely will be unable to assert intent to hold an underwater investment until anticipated recovery.
  • SAB 59 also notes that public companies should consider the length of time and the extent to which market value has been less than cost, and the financial condition and near-term prospects of the issuer.

We also emphasize that the accounting for other-than-temporary impairment in certain retained beneficial interests in securitization transactions that are accounted for as sales under Statement 140 and certain purchased beneficial interests in securitized financial assets should be in accordance with EITF 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets.

Application of Statement 91

FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated With Originating or Acquiring Loans and Initial Direct Costs of Leases, prescribes the accounting for discounts, premiums and commitment fees associated with the purchase of loans and other debt securities such as corporate bonds, Treasury notes and bonds, groups of loans, and loan-backed securities, (e.g. pass-through certificates, collateralized mortgage obligations, and other "securitized" loans).

Statement 91 requires a company that holds such securities to amortize any net origination fees or costs, and investment premiums and discounts, into interest income so as to generate a constant effective yield on the investment (i.e., application of the interest method). In general, the effective yield must be calculated using the contractual terms of the asset; however, Statement 91 allows any company that holds a large number of similar assets, for which prepayments are probable to include anticipated prepayments into the yield computation, provided the timing and amount of prepayments can be reasonably estimated. If actual prepayment experience differs from anticipated prepayment experience, Statement 91 requires the company to recognize an immediate catch-up adjustment in income. Specifically, paragraph 19 of Statement 91 requires that if the enterprise anticipates prepayments in applying the interest method and a difference arises between the prepayments anticipated and actual prepayments received, the enterprise shall recalculate the effective yield to reflect actual payments to date and anticipated future payments. Furthermore, the net investment in the loans shall be adjusted to the amount that would have existed had the new effective yield been applied since the acquisition of the loans and the investment in the loans shall be adjusted to the new balance with a corresponding charge or credit to interest income.

In a recent high-profile accounting restatement, an entity incorrectly applied Statement 91 in circumstances in which estimates of anticipated prepayments changed due to interest rate fluctuations. Instead of recognizing the catch-up adjustment immediately in current income, the company chose to amortize the catch-up adjustment over an extended period. Public companies should review how they apply the guidance in Statement 91, particularly:

  • A company may consider estimates of future principal prepayments in its effective yield computation only if it meets the conditions described in paragraph 19 of Statement 91. The FASB Staff Implementation Guide for Statement 91 provides additional guidance about these conditions. Moreover, a company that anticipates prepayments is required to disclose that policy and significant assumptions underlying the prepayment estimates.
  • The differences between anticipated prepayments and actual prepayment experience will trigger immediate recognition of a retrospective "catch-up" adjustment in income. It is not appropriate to recognize the catch-up adjustment prospectively.
  • The income recognition model adopted in Issue 99-20 only may be used for beneficial interests that fall within the scope of Issue 99-20.
  • A company that considers not booking the adjustments required by Statement 91, because such adjustments are immaterial to the financial statements, should refer SEC Staff Accounting Bulletin Topic No. 1.M, Materiality, particularly those sections addressing qualitative materiality considerations and failure to correct known misstatements.

Derivatives and hedging issues

Documentation of hedging relationships

FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, requires any company that wishes to qualify for hedge accounting to prepare detailed documentation regarding the hedging transaction. This documentation must be completed at the inception of the hedge.

Qualifying for Short-Cut Method

Paragraph 68 of Statement 133 allows an entity to assume no ineffectiveness in a hedging relationship of interest rate risk involving a recognized interest-bearing asset or liability, and an interest rate swap (or a compound hedging instrument composed of an interest rate swap and a mirror-image call or put option), if certain criteria are satisfied. The criteria are highly restrictive and must be interpreted literally.

Indexed to other than benchmark

As noted above, use of the shortcut method cannot be applied to hedging relationships that hedge a risk exposure other than interest rate risk or that involve hedging instruments other than interest rate swaps. It still is possible, however, to create a hedging relationship that allows an entity to assume no ineffectiveness. Paragraph 65 of Statement 133 notes that if the critical terms of the hedging instrument and of the entire hedged asset or liability (as opposed to selected cash flows), or hedged forecasted transactions are the same, an entity can conclude that changes in fair value or cash flows attributable to the risk being hedged are expected to completely offset at inception, and on an on-going basis (i.e., the entity can assume no ineffectiveness). As with the shortcut method, the requirement that the critical terms be the same should be interpreted literally (i.e., the terms should be identical).

The hedged forecasted transaction

FAS 133 stresses that the documentation of the hedged forecasted transaction must be sufficiently specific such that when a transaction occurs, it is clear whether or not that particular transaction is the hedged transaction. Thus, the documentation of the forecasted transaction should include reference to the timing (i.e., the estimated date), the nature, and amount (i.e. the hedged quantity or amount) of the forecasted transaction.

US GAAP update

The following section is a high-level overview of the more significant US GAAP standards applicable for the year ended December 31, 2004 and it also includes statements that are applicable for those foreign registrants that file quarterly financial statements with the SEC. Please refer to the actual standards themselves for additional details.

New Standards effective for the fiscal year ended December 31, 2004

FAS 132(R), employers’ disclosures about pensions and other postretirement benefits
This Statement retains the disclosure requirements contained in FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits, which it replaces. It requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required information should be provided separately for pension plans and for other postretirement benefit plans.

Effective date

For domestic plans, for all new provisions except for estimated future benefit payments disclosures, effective for fiscal years ending after December 15, 2003; for foreign plans and nonpublic entities, for all new provisions and for estimated future benefit payments disclosures for all entities, effective for fiscal years ending after June 15, 2004; and for interim-period disclosures, effective for quarters beginning after December 15, 2003. For calendar year-ended foreign private issuers all the disclosure requirements are effective for the year ended December 31, 2004.

FAS 150, classification of certain financial instruments with characteristics of both debt and equity
This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity.

Effective date – public entities

Effective for financial instruments entered into or modified after May 31, 2003; otherwise effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments for both subsidiaries and consolidated entity which the effective date was indefinitely deferred.

FIN 46(R), consolidation of variable interest entities
This Interpretation addresses consolidation by business enterprises of certain variable interest entities as defined in the standard.

Effective date

For public entities (enterprises), either Interpretation 46 or Interpretation 46R shall be applied to variable interest entities or potential variable interest entities commonly referred to as special-purpose entities by the end of the first reporting period ending after December 15, 2003. Interpretation 46R shall be applied to all variable interest entities by the end of the first reporting period ending after March 15, 2004. Different effective dates apply to nonpublic entities and small business issuers. For calendar year-ended foreign private issuers FIN46R is applicable for all potential variable interest entities at December 31, 2004.

SAB 105, loan commitments accounted for as derivative instrument
Loan commitments that relate to the origination of mortgage loans that will be held for resale must be accounted for as derivatives in accordance with FASB 133 by the issuer of the commitment. (Note: Loan commitments that relate to the origination of loans other than mortgages, and loan commitments for the origination of mortgage loans that will be held for investment, are exempt from the scope of FASB 133. Since holders of loan commitments will not know if the mortgage loan underlying the commitment will be held for sale, holders of loan commitments also are exempt from applying FASB 133 to the commitments.)

At the December 2003 AICPA National Conference on Current SEC Developments, the SEC staff expressed their views and provided guidance on the accounting for loan commitments that relate to the origination of mortgage loans that will be held for resale. SAB 105 supersedes the views of the SEC staff as communicated in that speech. Entities who originate mortgage loans that will be held for resale should follow the guidance in SAB 105 with respect to derivative loan commitments.

Effective date

The staff will not object if registrants that have not been applying the accounting described in SAB 105 continue to use their existing accounting policies for loan commitments accounted for as derivatives entered into on or before March 31, 2004. For loan commitments accounted for as derivatives and entered into subsequent to that date, the staff expects all registrants to apply the accounting described in this bulletin. Financial statements filed with the Commission before applying the guidance in SAB 105 should include disclosures similar to those described in SAB 74, Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period.

SOP 03-1, accounting and reporting by insurance enterprises for certain non-traditional long duration contracts and for separate accounts
This Statement of Position (SOP) provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts.

On September 17, 2004, the American Institute of Certified Public Accountants (AICPA) issued the following Technical Questions and Answers to address financial accounting and reporting issues related to this SOP:

  • TPA 6300.05, Definition of an Insurance Benefit Feature.
  • TPA 6300.06, Definition of an Assessment.
  • TPA 6300.07, Level of Aggregation of Additional Liabilities Determined under SOP 03-1.
  • TPA 6300.08, Losses Followed by Losses.
  • TPA 6300.09, Reinsurance.
  • TPA 6300.10, Accounting for Contracts that Provide Annuitization Benefits.

Effective date

This SOP is effective for financial statements for fiscal years beginning after December 15, 2003, with earlier adoption encouraged. This SOP should not be applied retroactively to prior years’ financial statements. Initial application of this SOP should be as of the beginning of an entity’s fiscal year.

EITF 02-14, whether the equity method of accounting applies when an investor does not have an investment in voting stock of an investee but exercises significant influence through other means
Companies sometimes have the right to significantly influence the operating and financial policies of another entity and share in a substantial portion of the economic risks and rewards without owning a voting interest in that entity. The consensus reached by the Task Force was that an investor should only apply the equity method of accounting when it has investments in either common stock (as already required by APB 18) or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee.

Effective date

The consensuses in this Issue should be applied in reporting periods beginning after September 15, 2004. The SEC Observer noted that, in the past, the SEC staff has required registrants with significant influence over an investee to apply the equity method to interests that were other than common stock interests in situations in which it was obvious that there were no substantive differences between the instrument and the common stock of the investee. In those situations, the SEC staff has required restatement for correction of an error. The SEC staff will continue to require restatement for correction of an error in those instances.

EITF 03-6, participating securities and the two-class method under FAS 128, earning per share
FAS 128, Earning per Share, provides guidance on the calculation and disclosure of earnings per share (EPS) and defines EPS as "the amount of earnings attributable to each share of common stock" and indicates that the objective of EPS is to measure the performance of an entity over the reporting period. In this EITF, a consensus was reached to require the use of the two-class method of computing EPS for those enterprises with participating securities or multiple classes of common stock.

Effective date

This EITF is effective for fiscal periods beginning after 31 March 2004. Prior period earnings per share amounts presented for comparative purposes should be restated to conform to the consensus guidance.

EITF 03-16, accounting for investments in limited liability companies (LLC)
The issue addressed is whether an LLC should be viewed as similar to a corporation or similar to a partnership for purposes of determining whether noncontrolling investments in an LLC should be accounted for using the cost method or the equity method. The Task Force reached a consensus that an investment in an LLC that maintains a "specific ownership account" for each investor – similar to a partnership capital account structure – should be viewed as similar to an investment in a limited partnership for purposes of determining whether a noncontrolling investment in an LLC should be accounted for using the cost method or the equity method.

Effective date

This Issue is effective for reporting periods beginning after June 15, 2004.

EITF 04-01, accounting for preexisting relationships between the parties to a business combination (purchases after October 13, 2004)
EITF 04-01 addresses the accounting for a preexisting relationship when the parties to the relationship subsequently enter into a business combination. Specifically, whether the business combination should be viewed as a single transaction or as one with multiple elements (i.e., a business combination and a de facto settlement of the previous relationship(s)). It also addresses the recognition and measurement of a settlement of a preexisting relationship and whether certain reacquired rights should be recognized as intangible assets, apart from goodwill. The consensus is that the consummation of a business combination between two parties that have a preexisting relationship(s), is a multiple element transaction. The Task Force also developed a model to address the accounting for the settlement of the preexisting relationship. The Task Force determined that this consensus should be applied to executory contracts, lawsuits and reacquired rights. The Task Force also reached a consensus that a reacquired right should be recognized as an intangible asset apart from goodwill because it meets the separability criteria of Statement 141.

Effective date

The consensuses in this Issue should be applied to business combinations consummated and goodwill impairment tests performed in reporting periods beginning after October 13, 2004.

EITF 04-8, the effect of contingently convertible debt on diluted earnings per share
Contingently convertible debt instruments, commonly referred to as Co-Cos, add a contingent feature to convertible debt. Co-Cos generally are convertible into common shares of the issuer after the market price of the issuer’s common stock exceeds a predetermined threshold for a specified period of time (market price trigger). Frequently Co-Cos include includes other complex features (e.g., parity provisions and contingent call or investor put rights). The Task Force reached a conclusion that Co-Cos should be included in diluted EPS in all periods (except when inclusion is anti-dilutive) regardless of whether the contingency is met or whether the market price contingency is "substantive." That is, a market price contingency should be ignored in calculating diluted EPS.

Effective date

Reporting periods ending after December 15, 2004.

New standards effective for fiscal years ending after December 31, 2004

FAS 123 (R), share based payments
The main difference between FAS 123(R) and FAS 123 is the elimination of alternative accounting methods, and as a result, the improving of the comparability of reported financial information. The Board believes that similar economic transactions should be accounted for similarly: that is, share-based compensation transactions with employees should be accounted for using a fair-value-based method. Accordingly, FAS 123R requires share based compensation transactions with employees to be accounted for at fair value and the recognition of compensation expense over the appropriate period.

Effective date – public entities

a. For public entities that do not file as small business issuers – as of the beginning of the first interim or annual reporting period that begins after June 15, 2005.

b. For public entities that file as small business issuers – as of the beginning of the first interim or annual reporting period that begins after December 15, 2005.

EITF 04-10, determining whether to aggregate operating segments that do not meet the quantitative thresholds
EITF 04-10 addresses the aggregation of segments that do not meet the quantitative thresholds under paragraph 18 of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information.

Effective date

This consensus is effective for fiscal years ending after March 15, 2005.

SOP 03-3, accounting for certain loans or debt securities acquired in a transfer
This Statement of Position (SOP) addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP limits the yield that may be accreted (accretable yield) to the excess of the investor’s estimate of undiscounted expected principal, interest, and other cash flows (cash flows expected at acquisition to be collected) over the investor’s initial investment in the loan. This SOP requires that the excess of contractual cash flows over cash flows expected to be collected (nonaccretable difference) not be recognized as an adjustment of yield, loss accrual, or valuation allowance. This SOP prohibits investors from displaying accretable yield and nonaccretable difference in the balance sheet. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life. Decreases in cash flows expected to be collected should be recognized as impairment.

This SOP prohibits "carrying over" or creation of valuation allowances in the initial accounting of all loans acquired in a transfer that are within the scope of this SOP. The prohibition of the valuation allowance carryover applies to the purchase of an individual loan, a pool of loans, a group of loans, and loans acquired in a purchase business combination.

Effective date

This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. Early adoption is encouraged.

SEC issues

Certain issues arising from the AICPA’s December 6-8, 2004 SEC & PCAOB conference

The following summarizes two high-level issues discussed at the conference.

Structured transactions

The SEC staff explained their view that highly "structured" transactions (which were characterized as those designed to skirt the requirements of an existing standard) is an example of a compliance mindset that impairs the quality of financial reporting. Financial products designed specifically to avoid liability treatment under FAS 150 were cited as an example. They also mentioned that in certain cases, the SEC’s Division of Enforcement has been involved in the analysis of such transactions. However, in other cases, the structuring effort may clearly comply with accounting literature and according to the staff, even in those cases, "employing them is not in the best interest of investors, does not promote transparency, and is evidence of the fact that the focus on compliance undermines quality financial reporting." The SEC staff will be seeking clear disclosures about accountingmotivated transactions (i.e., when registrants seek to structure transactions for financial reporting purposes) even if the transaction accomplishes its financial reporting objective.

Modifications of conversion options in convertible debt structures

The SEC staff acknowledged that in response to EITF 04-8, many companies are modifying the terms of their issued convertible debt in order to minimize the effect on diluted earnings per share. Diverse views exist as to how modifications to the conversion terms of convertible debt instruments should be incorporated into the discounted cash flow analysis, required under EITF 96-19, Debtor’s Accounting for a Modification or Exchange of Debt Instruments, that is used to determine whether the debt modification should be accounted for as a debt extinguishment. The SEC staff indicated that investor behavior demonstrates that conversion features have value because "there is a direct correlation between the fair value of a conversion option and the yield demanded on a convertible security." Therefore, changes to the fair value of a conversion option as a result of a modification should be incorporated into the discounted cash flow comparison, even though the change literally may not impact the cash flows on the debt. Therefore, the analysis under EITF 96-19 should compare the fair value (not just the intrinsic value) of the conversion option immediately before and after the modification. Any difference identified is included in the analysis in the same way as if the amount represented a current period cash flow.

Current accounting and disclosure issues in the SEC division of corporation finance dated November 30, 2004

The following summarizes some of the issues addressed by the Division of Corporate Finance.

Certain disclosures in management’ discussion and analysis about off-balance sheet arrangements and aggregate contractual obligations

On January 22, 2003, the Commission adopted rule amendments to implement section 401 of the Sarbanes-Oxley Act. The amendments, which are effective, require a registrant to provide an explanation of its off-balance sheet arrangements in a separately captioned subsection of the Management’ Discussion and Analysis (MD&A) section in its disclosure documents. The amendments also require registrants (other than small business issuers) to provide an overview of certain known contractual obligations in a tabular format.

The amendments include a definition of off-balance sheet arrangements that primarily targets the means through which registrants typically structure off-balance sheet transactions or otherwise incur risks of loss that are not fully transparent to investors. The definition of off-balance sheet arrangements employs concepts in accounting literature in order to define the categories of arrangements with precision. Generally, the definition will include the following categories of contractual arrangements:

  • certain guarantee contracts;
  • retained or contingent interests in assets transferred to an unconsolidated entity;
  • derivative instruments that are classified as equity; or
  • material variable interests in unconsolidated entities that conduct certain activities.

The amendments require disclosure of off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the registrant’ financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. That disclosure threshold is consistent with the existing disclosure threshold under which information that could have a material effect on financial condition, changes in financial condition or results of operations must be included in MD&A.

The amendments require disclosure of the following specified information to the extent necessary to an understanding of off-balance sheet arrangements and their material effects:

  • the nature and business purpose of the registrant’ off-balance sheet arrangements;
  • the importance to the registrant for liquidity, capital resources, market risk or credit risk support or other benefits;
  • the financial impact and exposure to risk; and
  • known events, demands, commitments, trends or uncertainties that implicate the registrant’ ability to benefit from its off-balance sheet arrangements.

FIN 46 and deconsolidation

The FASB issued FIN 46 in January 2003 and revised it with FIN 46R in December 2003. The purpose of FIN 46 is to provide guidance on consolidation of certain kinds of entities. Although FIN 46 resulted in consolidation of many previously off-balance sheet structures, it also resulted in deconsolidation of certain subsidiary trusts that issue trust preferred securities. This deconsolidation has in turn raised the question of whether issuers of trust preferred securities may continue to provide the modified financial information permitted by Rule 3-10 of Regulation S-X, which presumes that consolidation is the basis for the 100% owned requirement in that rule. The staff believes that FIN 46 will not affect the ability of finance subsidiaries issuing trust preferred securities to avail themselves of Rule 3-10(b) of Regulation S-X and Exchange Act Rule 12h-5 if the finance subsidiaries meet the conditions of that paragraph and provide the following footnote disclosure:

  • an explanation of the transaction between the parent and the subsidiary that resulted in debt appearing on the books of the subsidiary;
  • a statement of whether the finance subsidiary is consolidated. If the finance subsidiary is not consolidated, an explanation as to why not; and
  • if a deconsolidated finance subsidiary was previously consolidated, and explanation of the effect that deconsolidation had on the financial statements.

However, registrants should remember that consolidation is a requirement for entities that seek to avail themselves of the modified reporting provided by paragraphs (c) through (f) of Rule 3-10.

Market risk disclosures

Item 305 of Regulation S-K prescribes disclosures about derivatives and market risks inherent in derivatives and other financial instruments. Registrants should clearly explain how they manage their primary market risk exposures, including describing the objectives, general strategies and instruments used to manage each exposure. In the discussion of how the registrant manages risk exposure, registrants should separately discuss business decisions that result in natural (or economic) hedges and decisions to use derivative instrument positions to hedge exposures. Changes in the strategies or tools used to manage exposures during the year in comparison to the prior year should be clearly disclosed, as well as any known or expected changes in the future. Registrants should be specific in explanations of the intended result of the application of these policies (e.g., percentage of production intended to be hedged) and furnish any other information that would assist investors in understanding your particular position. To assure balance and usefulness, disclosures about commodity derivatives should be related to the registrant’ exposures in the underlying commodity.

Allowance for loan losses

The determination of the allowance for loan losses requires significant judgment. Allowances for loan losses should be based on past events and current economic conditions. Disclosures that explain the allowance in terms of potential, possible, or future losses, rather than probable losses, suggest a lack of compliance with GAAP and are not appropriate.

APB Opinion 22, Disclosure of Accounting Policies sets forth the general requirements for accounting policy disclosures in the financial statements. Industry Guide 3 specifies additional detail that should be provided in explanation of loss allowances within the Description of Business. Viewed together, these disclosures should describe in a comprehensive and clear manner the registrant’ accounting policies for determining the amount of the allowance in a level of detail sufficient to explain and describe the systematic analysis and procedural discipline applied. Registrants commonly develop different elements in their allowances to estimate (1) losses based upon specific evaluations of known loss on individual loans, (2) estimated unidentified losses on various pools of loans and/or groups of graded loans, and (3) other elements of estimated probable losses based on other facts and circumstances. The disclosures should describe and quantify each element of the allowance, and explain briefly how the registrant’s procedural discipline was applied in determining the amount, and not simply the "adequacy," of each specific element. If loans are grouped by pool or by grading within type to estimate unidentified probable losses, the basis for those groupings and the methods for determining loss factors to be applied to those groupings should be described. The basis for estimating the impact of environmental factors, such as local and national economic conditions and trends in delinquencies and losses, whether through modifying loss factors or through a separate allowance element, should be disclosed. Changes in methodology and their impact should be disclosed in accordance with APB Opinion 20, Accounting Changes.

MD&A should explain the period-to-period changes in specific elements of the allowance. It also should discuss the extent to which actual experience has differed from original estimates. The reasons for changes in management’s estimates should indicate what evidence management relied upon to determine that the revised estimates were more appropriate and how those revised estimates were determined. A registrant following a procedural discipline should be recording provisions for loan losses that reflect the changes in asset quality as measured in the registrant’s periodic loan reviews. MD&A should discuss the reasons for the changes in assets quality and explain how those changes have affected the allowance and provision for loan losses. If historical loss experience appears low or high relative to the level of the allowance at the latest balance sheet date, a reconciling explanation should be provided. If a registrant changes its methodology, the basis for changing its methodology and the effects of the change should be explained.

IAS Plus website

The International Accounting Standards Board recently revised several pronouncements, such as IAS 1, 2, 3, 8, 10, 16, 17, 24, 28, 32, 33, 39 and 40. Deloitte’s IAS Plus website discusses these revisions as well as other current and future developments in the International Financial Reporting Standards (IFRS) environment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.