The adoption of the International Financial Reporting Standards (IFRSs) is far from over. Substantial amendments are continuing to be made and it will sometime before the process could be completed. The unease is not only affecting all areas of business , especially taxation and prudential supervision. In Australia, prudential supervision of banks, insurers and superannuation funds is carried out by the Australian Prudential Regulation Authority (APRA), a Federal Government statutory body.
In its discussion paper titled " Adoption of International Financial Reporting Standards: Prudential Approach-Fair Value and other issues" released in February 2005, APRA declared that its approach to prudential supervision in the new accounting environment was to align its prudential and reporting standards with Australian accounting standards and principles to the extent practicable. The paper also stated that the existing framework will be maintained until APRA has considered the prudential implications of IFRSs and clarified its prudential approach.
According to the discussion paper the new prudential framework was to take effect from 1 January 2006. Substantial work needs to done to implement the new framework and it appears unlikely that the deadline will be kept, at least for another 6 months.
Solvency of entities depends on the identification of their assets, liabilities, debts and equity and attribution of values to them. Accounting standards play a major role in this.
The most important standard in the context of prudential supervision would be IAS 39 (Financial Instruments: Recognition and Measurement). In the case of insurers, IFRS 4 (Insurance Contracts) will also be relevant.
In the Discussion Paper APRA lists the following issues are relevant to prudential supervision:
- Fair value measurement;
- Non-accrual loan an d deferred acquisition costs;
- Available for sale assets;
- Property;
- Excess of market value over net assets;
- Loan loss provisioning; and
- Employer sponsored superannuation plans.
Fair value measurement under IAS 39 is a major issue in prudential supervision. The option to value financial instruments at fair value was available to almost every entity until amendments were made to the Standard in June 2005. The option is now available only in limited circumstances. It allows an entity to designate, at inception, any financial asset or financial liability, to be measured at fair value through profit or loss.
APRA is reluctant to recognise fair value measurement in instances where there is a lack of active markets for the relevant financial assets and liabilities.
The following pointers to APRA’s future approach to the new accounting standards emerge from the Discussion paper:
- Recognise loans and receivables at amortised costs;
- Disallow fair value option to illiquid financial assets and liabilities; and
- Eliminate gains or losses arsing from changes in the creditworthiness of entities, from regulatory capital.
In May this year, APRA released 3 more discussions papers:
- Prudential Supervision of general insurers-Risk and financial management;
- Prudential Supervision of corporate groups involving authorised general insurers; and
- Governance for APRA-regulated institutions.
More time is needed for consultation with the industry and finalisation of prudential supervision standards.
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