Guidance Note: Impact of International Financial Reporting Standards (IFRS) on Banking Prudential Reporting

Summary

This is a Jersey Financial Services Commission guidance note explaining how deposit-taking banks should adjust their prudential returns to accommodate the introduction of International Financial Reporting Standards (IFRS), while preserving consistency with Basel Accord capital requirements. It sets out specific regulatory adjustments in four areas where IFRS measurement differs from prudential treatment.

• Cash flow hedges (IAS 39): Banks must eliminate from regulatory capital all fair value gains and losses on derivatives that have been accumulated in equity.
• Available-for-sale assets (IAS 39): Equities classified as available-for-sale should be reported at fair value, but available-for-sale debt instruments should be written back to cost or amortised cost for regulatory reporting.
• Fair value option on own liabilities: IAS 39 rules on the fair value option for a bank's own liabilities must be strictly followed; unrealised gains or losses relating to the bank's own credit risk must be eliminated from regulatory capital, leaving only revaluation for benchmark interest rate movements.
• Defined benefit pension schemes: A bank may eliminate the accounting actuarial deficit for regulatory purposes only if it replaces it with an actuarial best estimate of additional funding needed over the next five years; any actuarial surplus must be eliminated for regulatory purposes.
• Off balance sheet items: On-balance-sheet assets arising from fair valuation of off balance sheet transactions should be assigned a zero risk weight (reported in line 42), with corresponding liabilities shown in line 65 (Creditors and Accrued Interest), to avoid double counting.

The JFSC will accept quarterly prudential returns measured under IFRS but expects these specific modified treatments to apply. Banks encountering other material prudential issues arising from IFRS reporting that are not addressed here should consult the JFSC directly.

Key obligations

• Eliminate from regulatory capital all fair value gains and losses on cash flow hedge derivatives accumulated in equity
• Report available-for-sale equities at fair value but write back available-for-sale debt instruments to cost or amortised cost
• Strictly adhere to IAS 39 fair value option rules for own liabilities and eliminate unrealised gains or losses relating to own credit risk from regulatory capital
• If eliminating actuarial pension deficit for regulatory purposes, replace it with an actuarial best estimate of additional funding needed over the next five years
• Eliminate any actuarial pension surplus for regulatory purposes
• Assign a zero risk weight to on-balance-sheet assets arising from fair valuation of off balance sheet transactions and report them in line 42, with corresponding liabilities in line 65
• Consult the JFSC where a material prudential issue arises from IFRS reporting that is not covered by this guidance

Applies to

deposit takers, banks