Capital treatment of certain items under IFRS

Further to its press release of 8 June 2004, the Basel Committee on Banking Supervision (the Committee) has been considering other issues related to the potential impact on regulatory capital of the implementation of certain International Financial Reporting Standards (IFRS).

For the time being, the Committee does not plan to encourage national supervisors to make adjustments to the existing capital adequacy framework, including the definition of capital, in the following areas in response to the implementation of certain IFRS:

• Definition of the trading book for purposes of the Market Risk Amendment
• Equity/liability classification
• Intangible assets, including goodwill
• Deferred tax assets
• Pension costs
• Stock option costs, and
• Leasing

The implications of a national supervisor not adjusting capital regulations related to the first two items would be that, for the time being, its regulatory definition of the trading book and capital, respectively, would be maintained.

For the next two items, the implication is that the current regulatory capital treatment would continue. The Committee notes that some national supervisors have instituted regulatory treatments that are more prudent than required under the 1988 Accord. Other supervisors may wish to consider appropriate prudential treatments for these items.

The result of not making regulatory capital adjustments with regard to the last three items would be the reflection in regulatory capital of their impact on profit and loss following the adoption of the applicable IFRS.

National supervisors should consider the need for any transitional/other arrangements for the first time adoption of these standards, or to accommodate particular national circumstances.

The Committee will continue its consideration of the potential effects of the implementation of IFRS, including the use of the fair value option and other items that remain under study, as well as the need for coordinating any transitional arrangements across jurisdictions. As an initial measure, the Committee encourages national supervisors in jurisdictions implementing IFRS to consider requiring their banks to track and report, at an appropriate level for supervisory purposes, the impact on the carrying value of financial instruments and the unrealised gains and losses accumulated in retained earnings related to any use of the fair value option that may be available.

The Committee's intention to carry out a review of the definition of regulatory capital at a later stage is explained in paragraph 17 of the International Convergence of Capital Measurement and Capital Standards: a Revised Framework published on 26 June 2004.