Catherine Murphy (Kildare North, Social Democrats)
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187. To ask the Minister for Finance his views on whether, when regulation 1606 of 2002 was signed into law, the concept of prudence never allowed banks to record loans above the amounts the bank expected to recover; if this concept remains the same now as it did in 2002; and if he will make a statement on the matter. [6000/17]

Michael Noonan (Limerick City, Fine Gael)
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Regulation (EC) No. 1606/2002 of the European Parliament (the Regulation) requires all listed European companies to prepare their consolidated financial accounts in accordance with EU adopted International Financial Reporting Standards (IFRS) - formerly known as International Accounting Standards (IAS) -  for accounting periods commencing on or after 1 January 2005.

The Regulation was given full effect in Ireland by S.I. No. 116 of 2005 European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005.

An IFRS adopted in the EU must result in the presentation of a true and fair view of the financial position. Recital 9 of the Regulation states "To adopt an international accounting standard for application in the Community, it is necessary firstly that it meets the basic requirement of the aforementioned Council Directives, that is to say that its application results in a true and fair view of the financial position and performance of an enterprise this principle being considered in the light of the said Council Directives without implying a strict conformity with each and every provision of those Directives; secondly that, in accordance with the conclusions of the Council of 17 July 2000, it is conducive to the European public good and lastly that it meets basic criteria as to the quality of information required for financial statements to be useful to users."

Article 3(2) of the Regulation and paragraph 17 of IAS 1 (adopted for use in EU) states that for financial statements to be fairly presented they must be relevant, reliable, comparable and understandable. IAS 1 paragraph 19 references the 2001 Framework (as opposed to the Conceptual Framework) which includes a section on prudence. The Framework states that "uncertainties are recognised by the disclosure of their nature and extent and by the exercise of prudence in the preparation of the financial statements. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated."

IAS 39 (adopted for use in EU) requires loans to be measured at amortised cost using the effective interest method. It also requires the use of an incurred loss approach for the calculation of impairment provisions on loans resulting in impairment provisions being recognised only when losses are incurred and not before then. Under the incurred loss approach an entity assesses at the end of each reporting period whether there is objective evidence that a loan or group of loans is impaired. IAS 39 states that a loan is impaired and impairment losses are incurred if there is "objective evidence" of impairment as a result of one or more events that occurred after the exposure was created ("the loss event") and that the loss event has an impact on the estimated future cash flows of the loans and these cash flows can be reliably estimated.

In April 2009, the G20 leaders called on "the accounting standard setters to work urgently with supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high-quality global accounting standards".  In this regard the International Accounting Standards Board (IASB) issued a new accounting standard for Financial Instruments, IFRS 9, which will replace IAS 39. IFRS 9 introduces a new regime for impairment provisioning and imposes an Expected Credit Loss approach to provisioning as opposed to the incurred loss approach that is currently required by IAS 39. IFRS 9 is applicable for accounting periods starting on or after 1 January 2018.

The Irish Auditing and Accounting Supervisory Authority (IAASA) is the independent body responsible for the examination and enforcement of certain listed entities' (entities whose securities have been admitted to trading on a regulated market situated, or operating, within the EU) periodic financial reporting.