18 June 2008

CEBS report on valuation of complex and illiquid financial instruments

The report puts forward a set of issues that should be addressed by institutions and accounting and auditing standard setters to improve the reliability of the values ascribed to these instruments.

The report puts forward a set of issues that should be addressed by institutions and accounting and auditing standard setters in order to improve the reliability of the values ascribed to these instruments.

 

The major findings can be summarised as follows:

On valuation challenges:

- accounting standard setters should consider the need for further guidance on measuring fair values when there is little market activity in the instruments concerned (or other instruments relevant to pricing).

 

- institutions should:

• enhance their practices and governance surrounding the use of modelling techniques;
• ensure that all appropriate risk factors are considered when determining a fair value; and
• improve risk management practices to ensure adequate risk assessment of transactions and appropriate management of exposures;

 

- institutions and standard setters should consider wider valuation-related issues, including:

• classification issues;
• importance of timely impairment and possible changes to impairment rules for assets available for sale;
• treatment of Day one profits and related reserves; and
• impact and management of the own credit risk.

 

2. On transparency aspects:

- institutions should enhance their disclosures on fair values and on valuation techniques; and

- accounting standard setters should review the disclosure requirements to enhance the information to be disclosed on fair values and valuation techniques.

 

3. On auditing aspects:

-auditing standard setters should pursue their efforts to enhance the guidance for the audit of fair value estimates.

 

Press release

Report

© CEBS - Committee of European Banking Supervisors