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February 24, 2010

German profession at odds over IFRS 9

The EC’s decision to not fast track the endorsement of IFRS 9 was supported by some parts of the German Accounting profession and opposed by others.

The German Ministry of Justice representative who attends EC Accounting Regulatory Committee meetings, Christoph Ernst, voted against fast-tracking IFRS 9 endorsement. However, this contradicted advice Ernst received from the German Accounting Standards Board (GASB).

Of the seven GASB members, just one was distinctly against endorsing IFRS 9, and one was hesitant. GASB president Liesel Knorr says the other five thought endorsing the standard would send an important signal that Europe wants a mixed measurement model.

Knorr says Europe must not wait until the International Accounting Standards Board (IASB) finishes its financial instruments project.

“We need to discuss now what the no-go areas are, what we want, and where we see room for manoeuvre,” she says. “If we wait and see, we are not any better off; we may be worse off.”

The IASB fast-tracked the release of its new financial instruments classification and measurement standard in part because of pressure from the EU. But when the standard was released last November, the EC decided not to fast track the endorsement.

While the GASB supported the IFRS 9 endorsement, Ernst wanted more fair value and supported the delayed endorsement.

Likewise, German professional accountancy body Institut der Wirtschaftsprüferin Deutschland (IDW) supported the delayed endorsement of IFRS 9.

IDW chief executive Klaus-Peter Naumann says that although the IDW mostly supports the concept within IFRS 9 that the measurement attribute of financial assets is based on the entity’s business model for managing the financial assets, the institute thinks the standard has some weaknesses.

“Although IFRS 9 acknowledges that an entity might not have a single business model for managing all its financial assets, it remains unclear how to determine at what level this condition should be applied. In our view, management’s intention for an individual financial instrument constitutes the decisive factor in determining the appropriate value of a financial asset. Therefore, management’s intention for an individual instrument should be decisive rather than the business model(s) of the reporting entity,” Naumann says.

The IDW has suggested a number of changes to IFRS 9, including allowing reclassification when management’s intention in respect of individual financial instruments changes as a consequence of altered market conditions and to avoid unjustified loss recognition.

“We have argued that reclassifications should apply from the date of change in management’s intention,” Naumann says.

Knorr says some financial reporting stakeholders have the impression that IFRS 9 is a done deal, whereas others see the standard as essentially an exposure draft, with “everything still up for grabs”. She thinks it is somewhere in between.

The GASB must provide the ministry with advice, but other stakeholders and lobbyists must also put their views forward.

Knorr notes that with the next G20 meeting coming up, the GASB will make sure it keeps in close discussions with the ministry.

“We will very much make sure that we give him advice, which is so convincing that he can’t go off it,” Knorr says.

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