Our glorious G20 leaders have charged the IASB with two tasks in relation to financial instruments accounting: reduce the complexity of accounting standards for financial instruments; and strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information.
In a 9 November update to the G20 leaders, the IASB explains: “In 2009, the IASB accelerated its work to replace IAS 39, its existing financial instruments accounting standard, with an entirely new standard, IFRS 9 Financial Instruments.”
By 15 November, IASB member Jan Engstrom was offering a different insight: “So far, all our discussions have been very frustrating, in my mind. We have totally failed on offsetting, we have totally failed on impairment. We have no discussion [with FASB] over hedging, and if we open up [IFRS 9] now.… I am afraid this will just move on. We must set a time schedule for 2015 where we manage all these four areas, classification and measurement, hedging, impairment, and offsetting, including macro hedging.”
Nor was Engstrom convinced that the IASB will achieve a converged solution with the FASB in the US on financial instruments: “If we have the slightest feeling that we are not tied in with FASB, I will vote that we go ahead and do this, because I think it is almost scandalous if we sit here after three, four, five, six, seven years without coming to a conclusion on this in the environment in which we are living.”
And how about this from Stephen Cooper: “[FASB has] a significantly different model [with] bifurcation, fair value [through] OCI, differences in equities, differences in classification criteria, there is a long list of differences.”
As for whether the two boards would be able to arrive at a converged model, try squaring what he said with the mood of the G20 update: “Of course, when they did their debating, they had the benefit of listening to us, they had the benefit of IFRS 9 being out there, IFRS 9 having been applied, a lot of work [having] been done developing how IFRS 9 would be applied, and they still came to a very different answer. So I still think it is an open question as to what extent we would be able to converge and the issue of consistency versus targeted improvements.”
The problem is institutional. Addressing the a February 2011 meeting of the IFRS Foundation Trustees in Tokyo, then IASB chairman David Tweedie said: “We have four [projects] left on the programme, four big issues, which are financial instruments, insurance, revenue recognition and leasing, and we are trying to finish these by the date we originally scheduled, which is the end of June.” June 2011, that is.
He went on: “We have had people asking us about that. Well, the staff have been working overtime, they have really been terrific in this to help us get it through. We have set up new databases where we can analyse responses much more quickly.
“We have increased the number of board meetings. There’s two sessions of board sessions each month, and we do have ad hoc days. That is quite difficult for us to do, having these ad hoc days, but we are still trying to do that. We are doing a lot of field testing. The outreach teams are out on impairment, they have been out on insurance, and they are out there on hedging. We feel that the June date is important for many reasons.”
And here is why it was important: “As far as the EU is concerned, we have to finish impairment. One of the worst things that could happen is having some other financial disaster, you know, some financial institution going bust, and we have still got the old rules in place. We have to get the new impairment rules in… We have spent over a year now testing these things and now we are really just writing them up to put them out to see what people’s reactions will be.”
Since then, Fortis Bank has collapsed. Beyond any one institution, the euro in its current form is heading in a similar direction. So too might the EU. Meanwhile, the IASB voted on 15 November to re-open IFRS 9 in order to address an accounting mismatch that arises with the proposed insurance accounting standards. The new impairment proposals have yet to see the light of day. The G20 needs an update on the update.
This article first appeared in the January issue of IPE magazine.