05 May 2015

IASB/Issue 3 of the Essentials: Sizing Up the Balance Sheet

The Essentials aims to increase investors’ awareness of IFRS and to enhance the insights they obtain when analysing information produced by IFRS financial statements. Each issue aims to provide an overview of how a specific accounting Standard is relevant to financial statement analysis.

Comparing the financial statements of banks across the globe can be a tricky exercise, because the size of the balance sheets can differ significantly depending on whether they are prepared under IFRS or US GAAP. One of the primary reasons for this is that IFRS and US GAAP have different offsetting requirements. This usually results in IFRS balance sheets for banks ‘appearing’ to be larger (all else being equal). Fortunately, this comparability problem is mitigated by similar disclosure requirements under IFRS and US GAAP that the IASB thinks many investors will find helpful.

In this issue of The Essentials, the IASB explains the reason for this difference and how required note disclosures can give investors the information they need to:

(a) make better comparisons between the balance sheets of the global banks; and

(b) analyse a firm’s risk management as it relates to counterparty credit risk and liquidity risk.

These useful disclosures are available regardless of whether the bank’s financial statements are prepared in accordance with IFRS or US GAAP.

The IASB also touches on how these disclosures are linked to the developments in banking regulation— in particular the Basel III framework.

The accounting Standard that addresses offsetting, IAS 32 Financial Instruments: Presentation, uses a different treatment for some offsetting arrangements than is used under US GAAP. This can result in significant differences between the size of balance sheets reported in accordance with IFRS compared to those reported in accordance with US GAAP.

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