Financial instruments accounting: IASB close to a standard

19 Aug 2013

We are now entering what many people hope will be the final phase of the IASB’s major project to reform accounting for financial instruments. But are the International Accounting Standards Board (IASB) and the US Financial Standards Board (FASB) any closer to convergence?

The joint project started in earnest in 2008, post-financial crisis. The IASB took the G20’s call for aspects of financial instruments accounting to be improved as an opportunity for wholesale reform of IAS 39, Financial instruments: Recognition and measurement, which was perceived to be a difficult and unwieldy standard. The project was also added to the IASB’s agenda for convergence with the FASB, adding an additional layer of complexity to what was already an ambitious project.

Full convergence, meaning identical standards, will not be the outcome. For example, derecognition requirements remain different, and the FASB has not even begun to deliberate the IASB’s hedging proposals. But how close are we to convergence in the two major areas – classification and measurement of assets, and impairment?

Classification and measurement

The IASB has started to discuss comments on an exposure draft of limited changes to the classification and measurement chapters of IFRS 9, its new financial instruments standard. The existing chapters of IFRS 9 propose that financial assets are classified at either amortised cost or at fair value based on their cash flows and the holding entity’s business model (a hold-to-collect business model and principal plus interest cash flows would lead to amortised cost measurement). One of the main changes proposed to the existing guidance is a new category for debt instruments held in a collect-and-sell business model: fair value through other comprehensive income.

Similar proposals are being exposed in the US. If passed by both the IASB and the FASB, US GA AP and IFRS will be very close in this area.

Impairment

Both boards also have proposals out on impairment. The good news is that both proposals are ‘expected’ rather than ‘incurred’ loss models, trying to address the ‘too little too late’ criticism of existing requirements. But there is one key difference. The FASB proposes full lifetime expected losses on ‘day 1’ whereas the IASB model is based on credit deterioration. At the beginning, a 12-month expected loss is provided, with full lifetime expected losses not being recognised until there is a significant increase in credit risk.

While both boards recognise the pressure from parties such as the G20 and the Financial Stability Board for a single solution, given the strength of feeling on both sides of the debate, it may be difficult to fully converge.