US financial instruments proposals vary
unfavourably from IFRS in the areas of classification and
measurement, and impairment, according to Tony Clifford.
But the Ernst & Young (E&Y) UK partner
said the US has offered some attractive hedge accounting
The US Financial Accounting Standards Board
(FASB) released a draft financial instruments standard late last
The project was originally intended to move in
tandem with the International Accounting Standards Board (IASB).
But when the IASB split its project into three phases so it could
deliver quick solutions to the more pressing problems, the FASB
decided to continue to tackle its project as a whole.
The IASB completed its first phase when it
delivered a financial instruments classification and measurement
standard, IFRS 9, late last year. The board is now nearing the end
of a consultation period on impairment and is due to release a
hedge accounting exposure draft in the next few months.
The FASB proposals for classification
and measurement vary significantly from IFRS 9 because they
introduce far more fair value.
IFRS 9 uses a mixed measurement model where the
business model dictates whether financial instruments are measured
at fair value or amortised cost. The only time the FASB proposals
allow amortised cost as the method of accounting that drives the
profit number is for certain kinds of own debt instrument. All
assets are at fair value.
The FASB has proposed that preparers should
record on the balance sheet what the amortised cost equivalent
would be for the numbers that are at fair value, but Clifford
warned this may “clutter up the balance sheet”.
“Having the amortised cost information for each
item at fair value on the face of the balance sheet without it
totalling to anything means you may have lots of information that
you can’t really make much of,” Clifford said.
“The only way that it is going to mean anything
to a reader is for them to take that information and create their
own balance sheet, to work out what it would look like on an
amortised cost basis. It would help if you had an amortised cost
column, but I do not think that is what the FASB is currently
Clifford said it would be more helpful to give
primacy to the amortised cost numbers and have the fair value
information put in the notes to the accounts.
The FASB proposals on impairment also
vary from the IASB proposals.
Clifford said this is concerning because it
would be desirable to achieve the same profit and loss under IFRS
and US GAAP even if the FASB goes for a fair value treatment of
loans while the IASB lets them be recorded at amortised cost.
The IASB has proposed an expected cash flow
approach where you calculate what you think the cash flows will be
and accrue expected impairment losses over the life of the loan by
deferring income. Catch-up adjustments are made as estimates
The FASB has proposed that you don’t defer
income, but rather make provision for cash flows that you don’t
expect to receive based on current conditions.
Clifford said this seems to suggest that on a
portfolio basis, if you believe you won’t collect all the cash
flows (which is always the case) you make a provision for those
losses at the outset.
“This is strange because it ignores the fact
that the bank expects to collect a credit premium from the loans
that don’t default to subsidise the losses on the loans that do
default,” Clifford explained.
Clifford said the FASB has some
attractive proposals on hedge accounting.
“At the moment to achieve hedge accounting, a
hedge must be ‘highly effective’ and you have to demonstrate this
with a quantitative assessment,” Clifford said. “The FASB has
proposed that there need only be a qualitative assessment and a
hedge will only be required to be ‘reasonably effective’. This will
get rid of some of the bureaucracy of hedge accounting, making it
an easier process.”
There are a number of hedge accounting
proposals that Clifford predicts will be less popular, for example
the idea that you cannot turn hedge accounting on and off.
One thing that is clear is the IASB and FASB
proposals are nowhere near converged – a concern to most of the
accounting profession. Both boards will be paying attention to
comments received on all the exposure drafts so the more comments
received, the better.
The deadline for comments on the FASB
proposals is 30 September.