In September this year, the International Accounting Standards Board (IASB) finally issued the Review Draft for Hedge Accounting, phase three of the replacement project for IAS 39 (under the banner of IFRS 9). Although this is not the final draft of the standard, the IASB do not expect any changes between now and the final standard to be issued in December 2012, bar any ‘fatal flaws’ identified over the next ninety days. The standard becomes mandatory in 2015 and early adoption is permitted.
The general feedback from the International Financial Reporting Standards (IFRS) community is that this standard represents a significant improvement on the existing, rules-based approach of IAS 39 – and it should. It was constructed after an unprecedented outreach programme across the IFRS constituency. The only issue is, a significant chunk of the global financial reporting community may never get to apply it.
Why? First, it seems that the IASB and the Financial Accounting Standards Board (FASB) simply cannot work together on the hedge accounting issues. IFRS 9 represents a significant departure from anything the FASB have in their current rules or with their proposed exposure draft that came out a couple of years ago. The FASB did expose the IFRS 9 Hedge Accounting Exposure Draft to their constituency for feedback, but they have made no commitments to incorporate these rules into their own FAS 133 / ASC 815 replacement project. It seems they can work together on impairment and classification and measurement, but hedge accounting is just in the “too hard” basket.
The IASB has not helped in this area with some of the guidance they have come up with. Take their treatment of hedge accounting for options for example. Most IFRS reporters under IAS 39 have looked on with envy at their US counterparts, for which the US GAAP treatment of options has resulted in significantly less P&L volatility than experienced under IAS 39, in most instances. Having heard these complaints of anti-option bias within IAS 39, you would think the easiest route for the IASB would be to adopt the US approach for option treatment and, in particular, the popular DIG 20 interpretation. This would address most of the concerns from their outreach programme and achieve convergence on this particular issue.
Alas it wasn’t to be. The IASB, in their wisdom, identified yet another alternative for option treatment, very different from IAS 39 and US GAAP. The new methodology embodied in the IFRS 9 Review Draft admittedly achieves the accounting outcomes most people felt were appropriate, yet it places another hurdle in the way of the FASB on their own path to convergence. It means existing processes and systems that work under IAS 39 and FAS 133 must be replaced with something new. To me, this is a classic example of principle overcoming pragmatism, which ultimately puts the convergence dream at risk.
And it’s not just the US we have to worry about. The EU has put off endorsing each element of IFRS 9 until the entire standard is available to assess, and this means that they must wait until the new impairment rules are finalized. Now, they may love the hedge accounting piece, but if the EU does not feel comfortable ratifying the new impairment guidance, the whole standard will not be passed for adoption within the EU. As such, EU countries will continue to work under their current version of IAS 39.
Where would this leave us? Well by 2015, we could be in a situation where three large chunks of the financial reporting community are working under different GAAP for their hedge accounting – specifically, the US, Europe and the rest of the IFRS community (including large parts of Asia Pacific and Canada). The compliance burden on global multinationals could be particularly significant in such an environment , let alone the lost comparability.
Hardly the dream of convergence set out in the Memorandum of Understanding jointly issued by the IASB and FASB and revised in 2008.