APRA outlines its implementation of new reporting standards

By Trevor Robinson.

Key Points:
Implementation of IFRS will be slow and cautious - and might not lead to any prudential changes in some areas.

Since all Australian reporting entities must adopt the International Financial Reporting Standards (IFRS) for reporting periods beginning on or after 1 January 2005, the issue of implementation has been pressing. Now that the Australian Accounting Standards Board has made Australian equivalents to the IFRS, APRA has outlined its approach to their implementation - slow and cautious.

The implementation will mean revision of prudential standards and statistical requirements for ADIs, life insurers and general insurers. APRA however has said that the earliest date for these changes will be 1 July 2005, to allow for industry consultation. Discussion papers on the main implications of IFRS for the prudential framework in Australia will be released as part of this process. Current prudential standards will remain in place and will need to be complied with until APRA has consulted with industry.

First things first

APRA's priorities in its review of its prudential approaches will be:

• the treatment of innovative capital instruments for capital adequacy purposes;
• the treatment of superannuation fund surpluses and deficits; and
• the treatment of Excess of Market Value over Net Assets for life insurance subsidiaries.

Deferred changes

APRA will not be immediately reviewing its prudential approach in some areas where the accounting principle underlying the IFRS treatment is not settled or the IFRS' economic impact is not clear or the regulatory approach needs global consistency. These areas include:

Accounting for hedges and derivatives: APRA's treatment will be reviewed once there is a clear international regulatory approach.

Securitisation: APRA expects at some stage to de-link the transfer of credit risk from the accounting tests of consolidation and continuing involvement.

Classification and valuation of financial instruments: Under IFRS, the fair value of a financial instrument is determined using a fair value measurement hierarchy. Until one is developed, APRA-regulated institutions must ensure their systems capture the necessary information.

General provisions: APRA intends to retain its current approach in allowing general provisions to be recognised and included in Tier 2 capital.

Life insurers: APRA and the LIASB will examine the appropriate treatment of contracts that no longer can be defined as "insurance contracts", the measurement and treatment of deferred acquisition costs, and discounting of tax assets and liabilities.

No change expected

At this stage, APRA does not expect it will need to revise its standards relating to share based payments, impairment of assets, business combinations, joint ventures and intangible assets. It will however still be monitoring the impact of IFRS upon these areas.