IASB Chairman Outlines Approach for Reconciling IASB and FASB

International Accounting Standards Board Chairman Sir David Tweedie on Tuesday outlined a possible approach for reconciling the divergent IASB and FASB models for financial instruments accounting. With FASB’s comprehensive exposure draft on financial instruments expected any day, Tweedie said during a JofA exclusive interview at the AICPA Council meeting in San Diego that public comments on the boards’ proposals will play a key role in getting their two approaches closer together.

Speaking later to the AICPA Governing Council, Tweedie thanked the AICPA for its longstanding support of the IASB even before international standards were popular. To understand Tweedie’s approach to fixing the financial instruments problem requires some background on where the standards setters diverged. As a result of the subprime mortgage collapse, accounting for loans and securities derived from loans was widely criticized. When the financial crisis started in 2008, this project was already on the active agendas of both standard setters, but the crisis put enormous political pressure on the IASB and FASB to improve their standards as soon as possible.

In a move that was not followed by FASB, the IASB split its project to replace IAS 39, Financial Instruments: Recognition and Measurement, into three parts to deal separately with classification and measurement; impairment; and hedging. FASB decided to deal with all three aspects of financial instruments in a single project and plans to issue its comprehensive exposure draft by the end of this month. Despite intense joint deliberations, FASB and the IASB were unable to agree on a common approach for classification and measurement. The IASB published its approach on Nov. 12, 2009, with the release of IFRS 9, Financial Instruments. IFRS 9 may be adopted early but is not effective until Jan. 1, 2013.

Under what is expected to be the proposed FASB model:

•  Most instruments would be measured on the statement of financial position at fair value with changes in  fair value reflected in net income, or net income and other comprehensive income;
• A limited amortized cost option would be available for financial liabilities; and  
• No reclassification would be permitted between categories.

Under the IASB model (IFRS 9):

•       The scope of the standard is limited to assets only;
•       Amortized cost is used when it matches the entity’s business model and cash flow characteristics    of the asset;
•       Fair value is used for equity instruments, most derivatives and some hybrid instruments; and
•       Bifurcation of embedded derivatives is not permitted.

To read the complete coverage please visit http://www.journalofaccountancy.com/Web/20102960.htm

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