SEC advisory letter on PAS 39

 

The Securities and Exchange Commission (SEC) has recently released an advisory letter to provide further guidelines to companies that are required to submit quarterly or interim reports to the Commission (e.g., entities with listed securities, public companies, financing companies, pre-need companies, investment houses, brokers and dealers of securities and universal banks registered as underwriters of securities) (hereinafter referred to as “covered companies”) for transitioning to PAS 39, Financial Instruments: Recognition and Measurement. PAS 39 is one of the new accounting standards issued by the Accounting Standards Council that became effective on January 1, 2005, and which were previously approved by the SEC as part of its rules and regulations under the SEC Memorandum Circular No. 19, Series of 2004.

In their quarterly or interim reports due for submission in 2005, covered companies need not yet reflect compliance with the new standards, including PAS 39. However, with respect to PAS 39, which is one of the more complex among the accounting standards, the SEC Memorandum Circular No. 19 requires covered companies to discuss in their 2005 quarterly or interim reports the status of their conversion plan.

In its advisory letter, the SEC has provided additional guidelines on the information that should be included by covered companies in their quarterly reports for the quarters ending June 30 and September 30, 2005 or their interim reports beginning June 30, 2005. The information required includes the following:

1. Classification of the covered companies’ financial instruments as to the following categories (the classification shall be consistently observed):

  • Loans and receivables,
  • Held-to-maturity securities,
  • Available-for-sale securites,
  • Financial assets at fair value through profit and loss, and
  • Financial liabilities at fair value through profit and loss.

2. Discussion of the conversion plan which shall include a description of the following procedures:

  • Review of all contracts to identify any embedded derivatives,
  • Evaluation of financial risk exposures relative to the adoption of the standard and the manner of managing the risks,
  • Development of fair valuation capabilities,
  • Assessment of the impact on financial ratios and loan covenants,
  • For large entities, whether there is a need to establish a transition team, and
  • Communication of information to interested or affected parties.

3. For companies that do not have financial instruments, an indication of such fact.

A copy of the complete SEC advisory letter is attached.

The SEC encourages the covered companies to work early on with their external auditors on the issues involving PAS 39 and the other new accounting standards to allow for a timely resolution of those issues and ensure proper application of the standards.