Taiwan rewrites fair value rules
Fair value and mark-to-market rules have been blamed for exacerbating the credit crunch. Now the island may follow the IASBÆs plan to relax asset classifications.
The principles of fair value and mark-to-market have not been embraced by insurance CIOs since they were introduced to asset valuation rules in Taiwan. Indeed, they sound like oxymoron terms in retrospect, considering the rules may have actually exacerbated the asset sell-off and may have drained liquidity from markets in the credit crisis.
On Tuesday, the International Accounting Standards Board announced a sudden rule change that will allow financial institutions to reclassify assets under ætrading purposesÆ to assets æheld to maturityÆ or æassets for saleÆ, where losses on revaluation do not have to be reflected on a companyÆs profit and loss account.
The rules will directly enhance capital adequacy for investment operations among insurance and pension companies. It will help avoid the unfortunate technical insolvency that led to the sudden demise of Japan's Yamato Life last Sunday.
Thomas Chang, director at the Insurance Bureau of the Financial Supervisory Commission (FSC) in Taiwan, says the bureau is already working on adopting the rules for Taiwan insurers. However, he notes the new rules might be overly abstract and it can take some time for the bureau to iron out details before the new accounting standards come into effect.
While the new rules will help ease the path for Taiwanese financial institutions through the current crisis, critics are already voicing concerns that there are loopholes in the wording of the revised accounting standards that financial institutions may use to take profit.
Lee Shayn Yuan, a former commissioner at the FSC and now a lecturer at the National Taiwan University, estimates TaiwanÆs financial institutions have written off close to $150 billion in the subprime turmoil.
Chang notes that despite the noted losses on foreign exchange and structured products, TaiwanÆs insurance industry is fundamentally sound and is not under any form of immediate financial duress.
Over the past 12 months, the FSC has already pushed forward rules for deregulation of derivative use, offshore investments and the opening up of alternative assets, such as private equity, hedge funds and infrastructure investments.
The FSCÆs current moves to liberalise its markets are in contrast to actions in the US and other western markets where supervisory oversight is being increased.
Although the timing of the liberalisation has unfortunately coincided with a global financial crisis, Chang adds that the FSC is not about to slow down or cast doubt on its work on the financial reforms. Taiwan has a long history of protectionism and the market reforms are well overdue.
On Tuesday, the International Accounting Standards Board announced a sudden rule change that will allow financial institutions to reclassify assets under ætrading purposesÆ to assets æheld to maturityÆ or æassets for saleÆ, where losses on revaluation do not have to be reflected on a companyÆs profit and loss account.
The rules will directly enhance capital adequacy for investment operations among insurance and pension companies. It will help avoid the unfortunate technical insolvency that led to the sudden demise of Japan's Yamato Life last Sunday.
Thomas Chang, director at the Insurance Bureau of the Financial Supervisory Commission (FSC) in Taiwan, says the bureau is already working on adopting the rules for Taiwan insurers. However, he notes the new rules might be overly abstract and it can take some time for the bureau to iron out details before the new accounting standards come into effect.
While the new rules will help ease the path for Taiwanese financial institutions through the current crisis, critics are already voicing concerns that there are loopholes in the wording of the revised accounting standards that financial institutions may use to take profit.
Lee Shayn Yuan, a former commissioner at the FSC and now a lecturer at the National Taiwan University, estimates TaiwanÆs financial institutions have written off close to $150 billion in the subprime turmoil.
Chang notes that despite the noted losses on foreign exchange and structured products, TaiwanÆs insurance industry is fundamentally sound and is not under any form of immediate financial duress.
Over the past 12 months, the FSC has already pushed forward rules for deregulation of derivative use, offshore investments and the opening up of alternative assets, such as private equity, hedge funds and infrastructure investments.
The FSCÆs current moves to liberalise its markets are in contrast to actions in the US and other western markets where supervisory oversight is being increased.
Although the timing of the liberalisation has unfortunately coincided with a global financial crisis, Chang adds that the FSC is not about to slow down or cast doubt on its work on the financial reforms. Taiwan has a long history of protectionism and the market reforms are well overdue.
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