Accounting standards

We have agreed that the accounting standard setters should improve standards for the valuation of financial instruments based on their liquidity and investors’ holding horizons, while reaffirming the framework of fair value accounting.

We also welcome the FSF recommendations on procyclicality that address accounting issues. We have agreed that accounting standard setters should take action by the end of 2009 to:

• reduce the complexity of accounting standards for financial instruments;
• strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information;
• improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty;
• achieve clarity and consistency in the application of valuation standards internationally, working with supervisors;
• make significant progress towards a single set of high quality global accounting standards; and,
• within the framework of the independent accounting standard setting process, improve involvement of stakeholders, including prudential regulators and emerging markets, through the IASB’s constitutional review.

Credit Rating Agencies

We have agreed on more effective oversight of the activities of Credit Rating Agencies as they are essential market participants. In particular, we have agreed that:

• all Credit Rating Agencies whose ratings are used for regulatory purposes should be subject to a regulatory oversight regime that includes registration. The regulatory oversight regime should be established by end 2009 and should be consistent with the IOSCO Code of Conduct Fundamentals. IOSCO should coordinate full compliance;
• national authorities will enforce compliance and require changes to a rating agency’s practices and procedures for managing conflicts of interest and assuring the transparency and quality of the rating process. In particular, Credit Rating Agencies should differentiate ratings for structured products and provide full disclosure of their ratings track record and the information and assumptions that underpin the ratings process. The oversight framework should be consistent across jurisdictions with appropriate sharing of information between national authorities, including through IOSCO; and,
• the Basel Committee should take forward its review on the role of external ratings in prudential regulation and determine whether there are any adverse incentives that need to be addressed.

Next Steps

We instruct our Finance Ministers to complete the implementation of these decisions and the attached action plan. We have asked the FSB and the IMF to monitor progress, working with the FATF and the Global Forum, and to provide a report to the next meeting of our Finance Ministers and Central Bank Governors.

(www.londonsummit.gov.uk, April 3, 2009)