3rd June 2010:

The balancing act of convergence

FASB, the US standard setter, has issued its long awaited exposure draft of proposals to change the accounting requirements for financial instruments.  Whilst there is considerable detail in its 214 pages, the headline is that the proposals would require almost all financial instruments to be measured at fair value, with changes in the fair value of some instruments being recorded in profit or loss in their entirety and other changes being split between profit or loss, and Other Comprehensive Income.  While this is what we expected, it is disappointing that the FASB has not moved closer to the IASB’s approach set out in IFRS 9 although some encouragement can be drawn from a statement in the exposure draft that the IASB and FASB have ‘jointly committed to continue attempting to reduce differences in the accounting for financial instruments under US GAAP and IFRS’.

IFRS 9 has what I believe to be a well judged balance between measurement at fair value and amortised cost, with the requirement to look at both an entity’s business model and the characteristics of each financial instrument leading to an appropriate split between the two measurement categories.  This means that, for example, a standard interest bearing loan which is held for the collection of contractual cash flows is measured at amortised cost, while all derivatives are measured at fair value.  It is debatable whether the FASB’s proposed approach is a better one; I have my doubts, and it will be interesting to see the comment letters.

While it is right for the FASB to seek to develop accounting standards that represent an improvement to US financial reporting, it is particularly disappointing to see a comment on page 2 of the document that ‘…what may be considered an improvement in jurisdictions with less developed financial reporting systems applying International Financial Reporting Standards (IFRS) may not be considered an improvement in the United States.’  This statement seems ill judged in the context of the significant number of mature and developed financial markets that require companies to report in accordance with IFRS, and is unnecessarily inflammatory at a time when there is such political sensitivity around accounting standard setting.  It also seems inconsistent, given that foreign registrants are permitted to report under IFRS for the purposes of their US financial reporting.

Meanwhile, reports are emerging of an interview with Bob Herz, the FASB Chairman, in which he has indicated that the 30 June 2011 deadline for the IASB/FASB convergence projects to be completed may be revisited, with the two boards working on a revised work plan.  It would seem that, as I suggested might need to happen in my blog of 16 April, a ‘Plan B’ has been developed. The approach that the standard setters will take remains to be seen but, whatever this ultimately entails, it is to be hoped that the SEC will make a clear statement that this will not affect its decision about whether US domestic companies should be required to adopt IFRS.

 Global Accounting  Standards & Regulators  2 Comments June 3rd, 2010