It is proposed that all ADIs convert to the new prudential treatment for quarterly prudential reporting periods commencing from 1 July 2004. The changes must be reflected in first quarterly prudential return to be submitted after the implementation, which is in September 2004.

Mr Greg Brunner, APRAs General Manager  Policy, Research and Consulting, said the regulator had been monitoring the capitalisation of expenses as assets and the rate of growth in the value of these types of assets relative to regulatory capital for a number of years.

As a result of that exercise, we came to the view that it was necessary to clarify the prudential definition of intangible assets to achieve better consistency in the reporting and application of the capital adequacy framework.

The regulator distributed a survey to 243 Australian ADIs in September 2002 for the purpose of examining and quantifying the nature, materiality and consistency of capitalised expenses and intangible assets recognised by ADIs for financial and regulatory reporting purposes. The survey results highlighted that the exposure to capitalised expenses at the industry level is modest, representing about 5 per cent of industry regulatory capital.

What we also found, however, were several ADIs whose exposure to capitalised expenses comprised a material proportion of the regulatory capital base, he said. In addition, there was inconsistency in the financial accounting, prudential reporting and prudential treatment of certain capitalised expenses.

He added: The proposed prudential treatment for these items harmonises the capital adequacy treatment across the industry irrespective of accounting policy adopted by individual entities and is consistent with the regulatory accounting treatment for similar assets recognised by APRA regulated general insurers.

The proposed prudential accounting treatment is open to industry consultation for a period of three months, ending 30 September 2003.

The results and analysis from APRAs survey and the proposed regulatory accounting treatment for capitalised expenses can be downloaded from http://www.apra.gov.au/adi/ADI-Publications.cfm and  http://www.apra.gov.au/adi/Other-Information-for-ADIs.cfm.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry.  It currently regulates $1.5 trillion in assets for 20 million Australians.