31 October 2003

Dear Sir / Madam,

Impact of International Accounting Standard 39 and 32

You may be aware that consideration has been given for some time to the introduction in Hong Kong of two International Accounting Standards (IAS), namely IAS 39 Financial Instruments: Recognition and Measurement and IAS 32 Financial Instruments: Disclosure and Presentation, which have been somewhat controversial. The two standards will introduce, among others, greater use of fair values in accounting for financial instruments, more stringent requirements for the use of hedge accounting and the use of expected cash flow discounting for provisioning.

Well before the two standards were to be introduced in Hong Kong, the International Accounting Standards Board (IASB) embarked on a project to improve on the implementation of IAS 39 and 32 in an attempt to address the various controversial areas. The revised standards are targeted to be finalised in the first quarter of 2004. The HKSA has yet to decide on the effective date of operation in Hong Kong of the standards as revised by the IASB. It is nonetheless expected that various segments of the international community will be adopting the revised standards for annual financial statements for periods beginning on or after 1 January 2005. If Hong Kong were to adopt the same timing, the 2004 comparatives might need to be facilitated, unless transitional arrangements allow otherwise.

Mindful of the time constraints and the complexity of IAS 39 and 32 which may have a significant impact on banks' financial results, policies, system enhancements and resource allocations, it is considered helpful for banks to commence an early study of the impact arising from the implementation of the related exposure drafts in Hong Kong¹, if they have not already done so. In this regard, the HKMA has drawn up a survey to be completed by banks on a best effort basis. This survey has been designed to help us understand the level of awareness of banks on the standards, the extent to which the standards will affect the banks' profitability, policies on hedging and provisioning, and resource allocations. While we acknowledge that some requirements under IAS 39 and 32 are still under review and are yet to be finalised by the IASB, we are proposing that institutions compile the survey on the basis of the exposure drafts as they currently stand.

We would be grateful if your institution could compile and return the survey attached to the HKMA on or before 31 December 2003. If you have any question, please feel free to contact Ms　Tess　Leung at 2878-8279 or Ms Kennis Hui at 2878-8228.

Yours faithfully,

Michelle Quek
Head, Banking Policy

1. The exposure drafts are accessible in the HKSA website: http://www.hksa.org.hk