Friday, October 14, 2011


Antonio Rosas Cervantes
February 2006

"...Taking as given the inverse relationship between independence and inflation and bearing in mind that the organic and functional factors measuring the degree of independence have already been extensively analysed, this paper focuses on the effects that accounting standards may have on central bank financial independence. More specifically, it analyses to what extent application of International Accounting Standards, along with the central bank’s legal framework in respect of profit distribution and/or capitalisation capacity, may impair its financial independence and hamper fulfilment of the objective that justifies its existence. What is the thrust behind the application of International Accounting Standards to central banks?
For the purposes of this paper, references to international accounting standards will invariably be to those issued by the International Accounting Standards Board (IASB), whether they are called International Accounting Standards (IASs) or International Financial Reporting Standards (IFRSs)..."

"The application of these universal and general standards has been propelled during the last few years by two main factors:

a) As a result of globalisation, a broad consensus has arisen across doctrines, institutions, markets, etc. on the pressing need for a harmonised accounting framework to be applied by companies. Accordingly, IASs/IFRSs have thus been prescribed from 2005 onwards by the EU for the consolidated financial statements of listed companies, with some exceptions in the banking field. Likewise, governments, regulators, accounting practitioners, etc. from many different countries are addressing this requirement and analysing how to reduce differences between IFRSs and local accounting standards.

b) For different reasons, including the numerous scandals surrounding the application of so called "creative accounting" or accounting manipulation, investors, regulators, markets, the media and the public in general have become much more interested in companies' financial reporting, particularly in order to establish quality comparisons among financial statements..."


The general reasons outlined and those that might be added seek to highlight that the basic conception of IASs/IFRSs is far removed from the nature and objectives of central banks, and  that their application to these institutions can only be made by means of overstretched interpretations. Set out below are the IASs/IFRSs that pose more marked problems for these institutions. The standards representing considerable difficulties in respect of application for central banks are, essentially, numbers 21 “The Effects of Changes in Foreign Exchange Rates”, 39 “Financial Instruments: Recognition and Measurement” and 37 “Provisions, Contingent Liabilities and Contingent Assets”.

The first of these (IAS 21) is problematic because it states that unrealised exchange rate gains and losses which are realised following their marking to market should be recorded in the income statement for the year. Central banks with no legal power to segregate this effect when it comes to distributing their profits may, as will be seen later, incur certain problems.

The same occurs in IAS 39 as in IAS 21 for the so-called trading securities portfolios, but in this case regarding the market price of the financial instruments included therein.

IAS 37 establishes, inter alia, the criteria for recognising provisions for risks. It prohibits recognising provisions for future risks (exchange rate and interest rate risks, for instance) as it stipulates as a basic requirement for their recognition that possible future losses should depend on a past event. If, along with this accounting prohibition, a central bank has no legal power to  set up reserves, the outcome will be that this institution will have no coverage against the risks it will no doubt be facing.

Irrespective of the fact that the three above-mentioned standards are the most problematic ones, there are still other standards whose application by central banks would not serve thepurpose for which the related IAS was established. There are also situations particular to central banks to which no specific accounting standard can be applied. An example of the first instance is IAS 1 on the “Presentation of financial statements”. This prescribes, inter alia, the preparation of a cash flow statement to provide users with a basis to “assess the ability of the entity to generate cash and cash equivalents”, which is not of great use to a central bank19. Furthermore, a paradigmatic case of the absence of applicable IASs/IFRSs in respect of central banks is monetary gold. For central banks, monetary gold is a financial asset and it would not therefore be possible to apply IAS 2 on “Inventories” which, as far as gold is concerned, considers it to be a commodity. Nor could IAS 39 on financial instruments be applied, as it establishes a definition of such instruments that excludes monetary gold..."


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