23rd January 2006

A technical note on the status of the BBA’s Statements of Recommended Accounting Practice (SORPs)

Introduction
1. This statement provides notification of the outcome of the BBA’s member consultation on the future status of its industry-specific accounting guidance. Consultation was undertaken via our Financial Reporting Advisory Panel and our Small Banks Advisory Panel. Following this, the BBA obtained the approval of the Accounting Standards Board for its proposed approach.

2. In essence, the BBA has concluded that for banks following International Financial Reporting Statements its SORPs have been superseded.

3. The position of non-listed entities that have not elected to report under IFRS is less straightforward. For these, the BBA has taken the view that its four financial instruments SORPs are superseded on the adoption of FRS 26 ‘Financial Instruments: Measurement’. Wording has been added to these four SORPs to establish that upon the adoption of FRS 26 the SORP non-compliance statement required under FRS 18 on accounting policies no longer applies.

4. The BBA’s SORP on segmental reporting remains in place for non-listed entities reporting under UK accounting standards.

Background

5. The BBA is authorised by the UK Accounting Standards Board to produce statements of recommended accounting practice (SORPs) in respect of issues concerning the banking industry. There are five BBA SORPs currently in existence, covering: advances; securities; derivatives; commitments & contingent liabilities; and segmental reporting. Such statements are voluntary, but under the terms of FRS 18 on accounting policies, non-compliance needs to be disclosed.

6. Listed companies in Europe, including banks, began reporting under International Financial Reporting Standards from 1 January 2005. For these institutions, the accounting standards issued by the UK Accounting Standards Board no longer apply. Listed banks are obliged to apply IAS 39 on Financial Instruments in respect of financial periods beginning on or after 1 January 2005. This contains detailed and prescriptive requirements.

7. The BBA’s statements continue to apply to non-listed entities unless they have voluntarily adopted IFRS as permitted within the terms of the IAS Regulation. The UK ASB intends to retain the practice of enabling specific industry and regulatory bodies of developing more specific rules within the framework of UK standards.

8. The difference between requirements placed on listed companies and requirements on non-listed companies is expected to prove temporary as the ASB has announced its intention of converging UK standards with international standards in the short to medium term. It has already determined that many of the rules on financial instruments will apply to non-listed companies under UK FRS 26. This, however, can be applied from 2005 or 2006.

Basis of the BBA consultation

9. The BBA put the following questions to members:

  • Should the four financial instruments SORPs be withdrawn?
  • Should the segmental reporting SORP be withdrawn?
  • Should the BBA retain its status as a SORP-issuing body?
Outcome of the BBA consultation

10. On the first of these questions, the BBA regarded the four financial instruments SORPs as being superseded on the application of IFRS or FRS 26. On applying the international standards, therefore, institutions would become exempt from the SORPs and the need to provide an FRS 18 statement – in other words, they would not need to explain in their financial reports that they were not following the SORPs.

11. The same, however, is not true for institutions following UK standards. For these, it is necessary for the SORPs themselves to include a statement explaining that the SORPs are superseded on the adoption of FRS 26 and that on its adoption banks are freed from the obligation to make an FRS 18 statement in their respect. The BBA has therefore added the requisite statement to the four SORPs and confirms that the SORPs will be formally withdrawn on 31 December 2006. (See, for example, new paragraphs 6 and 55 of the SORP on Advances – the link below.)

12. The position on the segmental reporting SORP seemed less clear. Under IAS 14, banks are required to give segmental information on the basis of total assets. Under the equivalent UK standard, SSAP 25, however, banks are required to give segmental information based on net assets, ie after an allocation of liabilities and capital to geographical areas and classes of business. As the former is considered industry best practice, the BBA SORP requires disclosures based on both total and net assets. With the mandatory application of international standards from 1 January 2005, it automatically becomes the case that listed companies should provide information based on total assets. Without the BBA SORP, however, a similar requirement would not exist for non-listed banks. As our position on this has not changed, the conclusion drawn is that this SORP should be retained until such time as UK and international standards converge.

13. The BBA has also considered whether it should plan to stand down as a SORP-setting body. This would not have any bearing on the BBA’s ability to write occasional guidance – for example in July 2004 we issued a paper on the application of the detailed rules in IFRS on the calculation of effective interest rates. As the SORPs cannot be withdrawn completely until 31 December 2006, however, we have concluded that we could defer a decision on whether the BBA should retain its SORPs status.

British Bankers’ Association
January 2006

Related Links

BBA Statements of Recommended Accounting Practice (SORPS) (Internal Link)