Those of you who attended the Financial Executive International’s 28th annual Conference on Current Financial Reporting Issues (CFRI) in New York City on Monday and Tuesday got a glimpse of what is holding up clear guidance on accounting standards for financial instruments and fair value measurement. Those of you who didn’t have the opportunity to make it to the Marriott Marquis, you may want to read on.
It was evident during Monday’s Financial Accounting Standards Board/International Accounting Standards Board update (featuring Robert Herz, FASB chair, Patrick Finnegan, IASB board member, Russell Golden, FASB technical director) that there is a lot more to do. That’s despite some recent actions by the IASB as well as a joint meeting between the two standard setters. It has been more than a year after the height of the financial crisis triggered by mortgage-backed securities brought down banks worldwide causing governmental bailouts, and yet still there is no clear guidance on fair value measurement of financial instruments.
While the FASB and IASB are being asked to come up with such guidance in a timely manner, the two standard setters are still trying to reconcile the many differences between existing standards. It’s the rules-based standards of FASB vs. the principles-based standards of the IASB. At the same time, a new Securities and Exchange Commission (SEC) is thinking about next steps for adopting International Financial Reporting Standards (IFRS). So it should be no surprise that both boards don’t expect to have final standards on both financial instruments and fair value measurement until late 2010.
“[SEC Chair] Mary Schapiro said, ‘I’m new, I’m not bound by the past SEC’s IFRS Roadmap,’” FASB Chair Robert Herz said at Monday’s CIFRA session. “Unfortunately, that was misinterpreted by some as pouring cold water on the whole thing. Both she and Jim Kroeker [SEC deputy chief accountant] say they are going to make clear by the end of the fall where they are going with IFRS. So I would expect an answer by 9 a.m. on Dec. 21.”
Regarding financial instruments (specifically mortgage- and asset-backed securities, collateralized debt obligations and derivatives), the IASB jumped ahead of the FASB by announcing Nov. 12 (read press release) it has approved a new standard, IFRS 9 Financial Instruments. Mandatory adoption of the standard would take effect Jan. 1, 2013, although early adoption is permitted for the 2009 year-end financial statements. The FASB expects to produce an exposure draft that addresses the classification and measurement, impairment technology and hedge accounting financial reporting requirements by the first quarter of 2010. Both boards plan to publish final standards by the fourth quarter of 2010.
In a joint statement Nov. 5 on their original memorandum of understanding, both boards wrote that they were “concerned that the difference in timetables is creating a risk that they will develop different requirements for some financial instruments. Such an outcome is inconsistent with the goal of providing investors with information that is both of high quality and comparable irrespective of whether the entity reporting is applying IFRS or US GAAP.”
On fair value, while the FASB has been looking to update FAS 157 Fair Value Measurements, the IASB published its first exposure draft on an IFRS for fair value measurement in May. In October 2009, both boards agreed in a joint meeting that their objective to ensure fair value has the same meaning in US GAAP and IFRS.
“We agreed to come together on hedging,” Russell Golden, FASB technical director, said at Monday’s session. “We are creating a joint operational panel in the next two weeks. …We plan to reconcile FAS 157 to IASB guidance.”
The IASB will continue to hold roundtables on fair value measurement in Asia, Europe and North America in conjunction with FASB, IASB plans to publish its final standard on fair value measurement and FASB will make amendments, if any, to US GAAP.
When all is said and done, urgent guidance action by the world’s two most influential accounting standard setters would have taken nearly two years to produce. In the meantime, what are all the public companies affected by such financial instruments to do.
To learn more about the specifics of FAS 157 and IFRS 9 by going to the FASB and IASB websites. To check more about CIFRA, go to the FEI blog.