The Financial Accounting Standards Board and the International Accounting Standards Board said Friday they would work together on seeking to reduce the differences in their classification and measurement models for financial instruments.

Leslie Seidman

The discussions between the two standard-setters will be part of FASB’s ongoing re-deliberation of a proposed Accounting Standards Update on financial instruments that was originally issued in May 2010 (see FASB and IASB Re-deliberate Standards).

The financial instruments standard has been one of their priority projects, along with revenue recognition, leasing and insurance contracts from a memorandum of understanding on convergence the two boards signed in 2002. But difference over the impairment and classification of financial instruments standard have proven to be among the thornier areas for the two boards to resolve. The two boards recently agreed to use an “expected losses” model instead of an “incurred losses” model for financial instrument impairment (see FASB Awaits Decision on Private Company Accounting Changes).

They have been under pressure from regulators such as the Securities and Exchange Commission and the European Commission, as well as the G-20, to harmonize the differences between U.S. GAAP and International Financial Reporting Standards. The SEC recently delayed its decision on whether to approve the incorporation of IFRS into the U.S. financial reporting system.

“The boards have been urged to converge their standards on financial instruments,” said FASB chair Leslie F. Seidman in a statement. “Today's decision to work together on key differences—which represent the most significant remaining differences between the decisions reached to date—is responsive to stakeholders in the U.S. and abroad. The boards will share the feedback they have received on their respective decisions and strive to develop a more closely converged approach that addresses those concerns. The boards will continue to develop a common approach on impairment of financial assets, which is being handled as a separate work stream. As part of their project on financial instruments, the FASB is proposing enhanced disclosures about interest rate risk and liquidity, which under IFRS are covered by IFRS 7, Financial Instruments: Disclosures.”

The boards said they would work together with the objective of more closely aligning the key aspects of their classification and measurement models. They will also explore these key aspects jointly, and then decide whether to issue proposed amendments to IFRS 9 and U.S. GAAP.

The IASB said it plans to consider these discussions as part of its project to undertake limited-scope changes to IFRS 9, Financial Instruments (see FASB, IASB Make Progress on Netting, Leasing and Impairment Standards). The IASB originally issued IFRS 9 in November 2009 as a replacement to IAS 39. It amended the standard in October 2010, as a result of its ongoing work to develop a new standard on insurance contracts and the feedback received on application of IFRS 9 to particular instruments.

“When IFRS 9 was introduced in 2009 we said that further amendments might be required once the direction of travel on insurance contracts became clear,” said IASB Chairman Hans Hoogervorst.  “We are now at that point. At the same time, this limited-scope review now presents an ideal opportunity to align IFRS and U.S. GAAP more closely, in this important area of financial reporting. We will proceed with caution, recognizing the investment that many jurisdictions have made in preparing for the introduction of IFRS 9 in 2015.”

FASB and the IASB plan to hold a joint webcast introducing IFRS 13 and FASB’s Accounting Standards Update. They said further details will be published on both boards’ Web sites shortly.