On the Convergence Road Again: Will IAS 39 Wait for FAS 133?

The IASB was proceeding at an aggressive pace to overhaul IAS 39 and had announced its first two phases of the simplification project addressing classification and measurement and impairment methodology, but it fell behind with Phase III, which was going to tackle the simplification of hedge accounting.   With the overhaul originally planned for Q3, then moved to Q4, it appears now that the IASB is going to wait for FASB to catch up, and the two will work together on changes to IAS 39.

According to a Wall Street Journal article, which cites a reference to IASB Chairman Sir David Tweedie as the “ayatollah of accounting,” the IASB and FASB have redoubled their efforts to follow the commitment made by the G20 in September of 2009, which was to set a date of convergence for June 2011.  Meetings have now become monthly rather than three times a year, according to the article, and adoption won’t actually have to take place until 2013, giving companies more time to prepare for the costly re-implementation of the standard.

In fact, notes of the January 18th -20th joint meeting between the IASB and FASB have a goal of each producing its own exposure draft on hedge accounting for financial instruments by March of 2010 with promises to discuss other hedge accounting issues (non-financial hedged items, portfolio hedge accounting) by the end of the first half of 2010.  However, the webcast shows some concern of meeting that deadline and an inconclusive 90 minute debate on the actual objective of hedge accounting with respect to the risk components.

Meanwhile, at the Economic Forum at Davos, some expressed doubt about likely convergence.  According to a Reuters report, U.S. Chairman at PricewaterhouseCoopers Bob Moritz said, “I don’t think you are going to rush to a global set of standards that everybody has bought into anytime soon.” The article goes on to suggest a 2020 date is more likely.

One thing is certain: Change, in whatever shape it comes in, will come at a cost in the form of new systems and process implementation and a review of hedging strategies.  Some hedging strategies that were not friendly under FAS 133 or IAS 39 may work better and some hedging strategies, especially those under short-cut and critical terms match, may end up creating more P&L volatility, assuming those FAS 133 rules-based methods go with convergence.  Stay tuned to this blog for more updates!