Recent developments/current issues
Convergence between IFRS and US reporting standards
There are significant differences between IFRS, set by the IASB, and US accounting standards, set by the US Financial Accounting Standards Board (FASB), especially in their treatment of financial instruments. The international financial crisis has led to increased pressure from international financial regulators and investors for convergence between the two sets of reporting standards in order to make the financial statements produced by banks and other financial institutions more comparable. This pressure has been reflected at the political level, with successive G20 summits calling for greater convergence between the two sets of standards. The G20 summit in Seoul in November 2010 called on the IASB and the FASB to complete their “convergence project” by the end of 2011 (see paragraph 38 of the Summit document). There has recently been some progress in reducing the main differences between the two bodies but significant gaps remain.
Fair value accounting and amortized cost
The financial crisis reignited the long-running debate over how bank and other financial institutions should value financial assets – whether at “fair value” (the value that would be placed on the asset by an outside investor in normally functioning market conditions) or at amortized cost (the discounted value of the cash flows due from the asset). It is argued by some that the amortized cost treatment allowed banks to present a misleadingly optimistic picture of their balance sheets during the financial crisis, while others argue that the fair value approach introduces excessive volatility into the valuation of banks, and, as a result, makes the banking system less stable.
This issue has been one of the main stumbling blocks standing in the way of agreement between the IASB, whose standards (IAS 39 and the proposed IFRS 9) retain a significant role for amortized cost as a means of valuing conventional loans, and the US Financial Accounting Standards Board (FASB), which has generally put more emphasis on “fair value” accounting methods. However, in January 2011, the FASB Board modified its previous position and decided to recommend that amortized cost be used for “financial assets that an entity manages for the collection of contractual cash flows through a lending or customer financing facility”, with fair value continuing to be used for other assets. If endorsed by the US accountancy profession, this recommendation will significantly reduce the differences between IFRS and US acccounting standards.
The development of IFRS 9 – the new IASB standard on financial instruments
The International Accounting Standards Board (IASB) is currently drawing up a new reporting standard on the valuation of financial instruments (IFRS 9) to replace the present standard (IAS 39). Work on the new standard has been divided into three main parts:
- The classification and measurement of assets and liabilities
- Impairment methodology
- Hedge accounting
The IASB effectively completed work on the first element of the standard (on the classification and measurement of assets and liabilities) in October 2010, when it approved the new standards’s treatment of liabilities.
The IASB issued an exposure draft (ED) on “Financial instruments: amortised cost and impairment” in November 2009. This provoked a lengthy debate, with attention being focused on the treatment of loan losses and, in particular, whether the draft standard would lead to loan losses being recognized too late, leading to a reduction in confidence in the reliability of bank financial statements. In response, the IASB and the US Financial Accounting Standards Board (FASB) jointly published a supplementary ED on impairment accounting on 31 January 2011, with a deadline for comments of 1 April 2011.
An ED of the section of the standard on hedge accounting was published in December 2010, with a deadline for comments of 9 March 2011.
In addition, the IASB surveyed users’ views on how the “netting” of derivatives and other financial instruments should be treated – one of the other remaining differences between IFRS and US accounting standards - in August 2010. Following this survey and further discussions between the IASB and the FASB, the two bodies published a joint ED on "netting" on 28 January 2011.
The IASB originally aimed to to complete work on IFRS 9 by the second quarter of 2011, with at least the first part of the new standard becoming effective in January 2013. However, parts of the proposed standard have proved controversial and the need to consider the comments received on the various exposuire drafts and to secure greater agreement with the FASB has led to delay. In August 2011, the IASB proposed that IFRS 9 would have a mandatory effective date of 1 January 2015, two years later than originally planned.
In addition, the new standard will have to be endorsed by the EU before it can be used by entities based in the EU. The European Commission decided in November 2009 not to push the first section of IFRS 9 on classification and measurement through an accelerated endorsement process. In the meantime, EU-based entities will continue to use the EU-endorsed version of IAS 39.
Revision of FINREP guidelines
The FINREP guidelines on prudential reporting by European banks set by CEBS and its successor body, the European Banking Authority (EBA). CEBS announced in December 2010 that revised FINREP guidelines (FINREP rev3) would be issued by the end of 2011, with an application date of 1 January 2013. These new guidelines would take into account the new IFRS 9, in as far as it had then been endorsed by the EU. In the meantime, countries should use FINREP rev2.
Although the EBA has not yet made any formal announcement, the slower than expected progress in developing IFRS 9 may lead to delays in the issue of FINREP rev3.