The International Valuation Standards Council has begun a project with the goal of bringing greater consistency to how financial derivatives should be valued, even as the International Accounting Standards Board and the Financial Accounting Standards Board continue to tinker with their financial instruments accounting standards project.
The IVSC said Monday that its objective is to provide greater transparency around the valuation process to assist management, investors and other stakeholders in understanding the valuations.
“Our role as a standard-setter is primarily investor protection,” said IVSC technical director Chris Thorne in a statement. “Investors and others who rely on valuations do not need to understand how the highly technical methods used for valuing complex financial products work, but they do need to have sufficient understanding of the fundamental criteria on which they are based so that they are not taken by surprise when there is a change in those criteria.”
The IVSC Standards Board has formed an expert working group comprising representatives of several major banks, including UBS, Deutsche Bank and HSBC, along with independent consultants and buy-side investors to advise it on the project. Chiu-Wang (Leo) Chan of the Securities and Exchange Commission is also part of the working group.
The SEC has urged FASB to tackle the accounting standards hedging and other derivatives in the aftermath of the financial crisis, but FASB has emphasized the need to finalize the larger financial instruments standards first. The IASB recently decided to re-open its IFRS 9 standards for financial instruments and delay their effective date to achieve better convergence with U.S. GAAP.
The IVSC said it planned to issue an exposure draft for public comment in the autumn of 2012. However, the exposure draft is not expected to include accounting standards, but mostly valuation standards. The project is being led by Ana Castañeda, a member of the IVSC Standards Board and CEO of Intermoney Valora Consulting in Madrid.
“There are many academic texts available on the mathematical models used for valuing derivative instruments, all of which involve complex maths,” she said in a statement. “The IVSC’s role is not to endorse or explain these methods in detail, but to produce a high-level overview of the principles on which they are based, the key inputs and the sensitivity of different types of models to those inputs.”
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