When Opposites Distract – FASB and IASB

The FASB and the IASB started talking about the convergence of accounting standards back in 2006. In June 2008, FASB member George Batavick stated that there was “some urgency to converge.”  With a completion date for 2011, the road map was pretty optimistic. In September 2009, the G20 members reaffirmed their commitment to global convergence in accounting standards calling on ‘international accounting bodies to redouble their efforts to achieve a single set of high-quality, global accounting standards within the context of their independent standard-setting process, and complete their convergence project by June 2011.

With a strong commitment from both governing bodies, the hurdle of bringing the gap between the IASB’s principles based accounting system and the FASB’s rules based system seemed plausible.  However, somewhere along the line cracks started to appear.  After a series of regular meetings, the standard-setters identified chief stumbling blocks and drew the road map to address them.

From a financial instruments perspective, one would have hoped this would bring a focussed effort to reconcile the differences between IAS 39 and FAS 133. This was not to be the case.  Enter the global financial crisis and the G20 task force, which resulted in both governing bodies deferring their respective exposure drafts on financial instruments and hedging. Unfortunately, when the FASB released Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities on 26 May an even bigger wedge was driven between the standardisation of hedge accounting under both standards, and was therefore at odds with the convergence concept.

The difference in the classification categories would result in measuring loans at fair value under the proposed FASB guidance (with amortized cost also being presented) and measuring most loans at amortized cost under IFRS 9, if the qualifying criteria are met (with fair value information disclosed in the notes to the financial statements).

The impact on hedge accounting by relaxing of the rules around effectiveness testing and removing the “highly effective” criteria to “reasonably effective” seems plausible until you consider the audit implications.  Without further guidance on what “reasonable” means, an entirely different can of worms is opened.

Simultaneously, the third phase of IASB’s exposure draft for the IAS 39 replacement project is due.  Although its publication date has slipped over the last few months, it seems that its intention is to re-write the rules on hedge accounting rather than just tweak them. If this is the case, then the path to convergence is clearly widened further.  No doubt its exposure draft issuance will coincide with the holiday period with comments due by September, so don’t forgot your laptop when your pack your suitcase.