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June 14, 2008

Financial instruments continue to challenge IASB

Financial instruments, clarifying the distinction between liabilities and equity, and dealing with issues arising from the credit crunch are the three toughest projects the International Accounting Standards Board (IASB) is working on at present, according to IASB chair David Tweedie.

The chief standard setter told a recent conference in Amsterdam that these areas have no immediately obvious solution.

The current IAS 39 – Financial Instruments is a complex standard with a number of measurement methods, depending on circumstance.

Speaking to The Accountant, Tweedie hypothesised: “Do we need four [or more methods of measurement]? Can we get it to two or one? Then there’s the complexity about hedging. There are lots of complicated rules, which mean that hedge accounting allows you to hold back gains and losses.”

The fair value measurement option continued to stimulate debate at the conference. IASB member Jim Leisenring said he would vote for an exposure draft to have all financial instruments at full fair value immediately but the issue was moving at a “glacial” speed because of opposition from the US Financial Accounting Standards Board.

Tweedie said fair value is always a controversial issue. “If you asked people ‘do you think the balance sheet should be solely at cost’ the answer would most certainly be no because a derivative is a contract where you agree, for example, to swap $1 million at today’s dollar-to-euro exchange rate. Well, as it moves, one of us wins, another loses, so we measure it by the gain or loss on the instrument.”

The question is whether everything should go to fair value, Tweedie added. “There’s no doubt about it, a lot of the accounting problems would disappear if everything was valued at fair value,” he said.

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