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'A terrible disappointment' - IASB fumes as US
rejects common approach
Author: Lukas Becker
Source: Risk magazine | 28 Feb 2014
Categories: Risk Management
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Hoogervorst says work on classication and measurement "has been done for nothing"
Efforts by European and US accounting standard-setters to agree a common treatment of nancial instruments
are in peril after the US Financial Accounting Standards Board (FASB) decided elements of the work on
classication and measurement the second section of the three-part project to hit problems were too complex.
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Reacting to that decision at a stormy February 20 meeting of the International Accounting Standards Board
(IASB), chairman Hans Hoogervorst said: "A lot of work has been done for nothing." Fellow board members
described the failure of the project as a "terrible disappointment" to investors and suggested the IASB might
have been better off sticking with the current International Accounting Standard (IAS) 39, rather than embarking
on the marathon that is International Financial Reporting Standard (IFRS) 9.
Banks have also reacted angrily. "It's disappointing to take six years of negotiation and another four years of
implementation to end up less converged than when you started," says an accounting source at a European bank.
It's disappointing to take six years of negotiation and another four years of implementation to end up less
converged than when you started
The same complaint is made in a February 19 letter to the IASB from the International Swaps and Derivatives
Association, which references a pre-meeting agenda paper that revealed the FASB's decision. The letter given
to Risk by a third party goes on to request that the IASB consider what steps can be taken to "ensure that the
boards' original convergence objective is not completely lost".
This may be difcult despite the FASB's decision to effectively abandon the convergence project, the IASB
voted to proceed with IFRS 9 anyway. A spokesperson for the IASB says it's not yet clear how different the two
models will be because the FASB's deliberations are ongoing.
More forthright views were expressed at the February 20 meeting, a recording of which is available online.
When asked if the board had any questions about the US standard-setter's decision, IASB chairman Hans
Hoogervorst said: "What is it that we can say? A lot of work has been done for nothing, it seems."
Board member Patrick Finnegan expressed similar frustrations. "I joined this board with the full expectation that
there were great aspirations for global convergence in three or four major areas, and obviously that has not come
to fruition. It's a terrible disappointment, in my opinion, for global investors," said Finnegan.
Given that a key goal of IFRS 9 was to achieve convergence with US accounting, another board member, Jan
Engstrm, said the standard-setter may as well have kept its current approach: "We started this off with some
sort of theme of reduced complexity, and we took some ghting for going with IFRS 9... I think we should have
really considered if it was just as good to keep what we had."
Problems with classication and measurement follow a decision by the two standard-setters to halt work on
impairment which denes the treatment of non-performing loans and tells lenders when they can build reserves
and is another blow to the broader nancial instrument convergence project, set in train by the Group of 20
nations in 2009.
Classication and measurement standards determine how nancial instruments are categorised, with the various
classes having implications for the reporting of prots and losses changes in the value of assets held at
amortised cost, for example, do not appear in income statements. IFRS 9 introduces a new category, fair value
through other comprehensive income (FVOCI), which is similar to the available-for-sale category (AFS) used in
US generally accepted accounting principles (Gaap).
This category is vitally important for banks, because the Basel III framework requires them to recognise in
capital the unrealised gains and losses on securities that fall into it typically long-maturity instruments used to
hedge the deposit book and high-quality liquid assets held for liquidity purposes. Banks fear this will take a huge
bite out of their capital numbers when rates start to rise. One response is to book assets at amortised cost instead,
but the standard-setters worried this could be used to conceal trading assets, so drew up two tests as part of the
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amortised cost supervisors require that assets held in these buffers be sold from time to time in order to prove
they are liquid, which might make it look like they were not being held to collect contractual cashows. In
Europe, these concerns led the European Banking Authority to write to the IASB in March 2013 warning the
tests should not be too strict.
The IASB agenda paper says the FASB decided at a December meeting that it would be too complex to work out
whether an instrument would meet the SPPI standard. "The FASB expressed concern that the condition was
arguably just as complex as current US Gaap requirements and in many cases would result in similar
classication outcomes," says the paper. In January, the FASB also decided not to use the business model test.
The IASB staff paper conrms the FASB's decision, but does not give a reason for the rejection.
In addition, the two standard-setters had agreed a common approach to instruments with embedded derivatives,
such as structured notes the two items would have been combined and accounted for as a single instrument,
reversing years of practice in which they had been accounted for separately. FASB will now abandon the
converged policy and return to bifurcated accounting one of the problems with the SPPI, in the US standard-
setter's eyes, was the results it produced for combined assets. The IASB staff paper says the FASB will analyse
alternative approaches at a future meeting.
Accounting sources believe the FASB's decision was the result of a concerted lobbying effort by the US banks.
"It's responding to the US banks and other stakeholders who lobbied hard for the FASB not to go down the route
of the IASB. It's a popular decision among the US banks, but a bit of a disappointment for the IFRS banks as
they wanted a converged solution," says a European accounting expert.
The European bank accounting source says the converged approach to embedded derivatives had been unpopular
with US banks because products that had previously been held at amortised cost would have failed the SPPI test,
resulting in more earnings volatility: "US banks would say the new standard doesn't work as well, because there
would be more at fair value. They don't want to move a lot of securitisation structures and positions in bonds that
they are holding as trading instruments out of amortised cost to fair value because they don't want the volatility,"
he says.
Topics: International Financial Reporting Standards (IFRS), Generally Accepted Accounting Principles (GAAP),
International Accounting Standards Board (IASB), Financial Accounting Standards Board (FASB), Liquidity,
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