FASB Gets Pushback on Financial Instruments Accounting Changes from AICPA and ICAEW

The American Institute of CPAs and the Institute of Chartered Accountants in England and Wales are urging the Financial Accounting Standards Board to reconsider two separate elements of FASB’s financial instruments convergence project with the International Accounting Standards Board.

The AICPA’s Financial Reporting Executive Committee, or FinREC for short, sent a letter Tuesday to FASB outlining its concerns with the proposed accounting standards update for Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). FinREC said it supported the efforts of FASB and the IASB to more closely align U.S. GAAP with International Financial Reporting Standards, but cautioned that “high-quality accounting standards should not be sacrificed for the sake of convergence.” The letter cited several positive aspects that FinREC agreed with, such as requiring all entities to report fluctuations in instrument-specific credit risk (own credit) in other comprehensive income (OCI) rather than net income for liabilities under the fair value option election. The AICPA committee said it also supported FASB’s position on changes in fair value of equity securities being recorded through net income, as well as the elimination of the tainting provisions for sales from the hold-to-collect category.

However, it said FASB fell short in reaching its objective of establishing an improved financial reporting model for the recognition, measurement and presentation of financial instruments for several reasons: “Complexities will be encountered with the solely payments of principal and interest model. Amortized cost sales provisions are too restrictive. Hedge accounting of interest rate risk for securities held at amortized cost is precluded while it is permitted for loans carried at amortized cost. Bifurcation and the fair value option of financial assets should be allowed to achieve parallel treatment to that permitted for financial liabilities. Reclassification provisions are too restrictive and not clear enough. Nonrecourse liabilities should have parallel treatment to the related financial assets. Parenthetical disclosure on the balance sheet of amortized cost and fair value should instead be required in the footnotes. Limiting the availability of the fair value option is not appropriate. Disclosures place an undue financial reporting burden on smaller financial institutions and nonfinancial entities.”

The ICAEW letter concerns the credit losses proposal in the financial instruments project and urges FASB to go “back to the drawing board” while favoring the IASB’s approach. “We are very concerned about what the FASB is proposing,” said ICAEW Financial Reporting Faculty head Dr. Nigel Sleigh-Johnson in a statement. “There is a danger that the proposed model could have serious unintended commercial and broader economic consequences, as it could change the incentives of lending and encourage more short-term loans and commitments. It is also questionable whether the FASB’s suggestion that all expected credit losses be recognized on the day a loan agreement is signed meets the objectives of financial reporting. Such an approach does not in our view reflect commercial lending practice and could result in information that is of questionable use to users of financial statements. We hope that the FASB will reconsider its position and bring it more in line with the proposals issued by the International Accounting Standard Board.”

The ICAEW noted that it does not normally respond to consultations about proposed changes to U.S. accounting standards. However, the U.K.-based accountancy body considered FASB’s proposals when preparing comments on the IASB’s differing standard proposal (the consultation on which closes July 5) and decided that it was important to flag its concerns. According to the ICAEW, a future standard for expected credit losses must balance having a sound conceptual basis with being practical to apply. It should also be suitable for all types of businesses, not just those in the financial sector; treat performing and non-performing loans differently; incorporate a broad range of credit information; and be consistent with the initial recognition of financial assets at fair value.

“Overall, the IASB’s impairment proposal, whilst not perfect, meets these criteria and offers a solution that is both operationally viable and a potential improvement to existing loan loss recognition practice,” said Sleigh-Johnson. “The IASB should finalize its standard as quickly as possible, as this is a critically important international financial reporting issue. Any further delay would be very hard to justify.”

The Credit Union National Association, a trade group representing credit unions, has also weighed in with objections to FASB’s proposal on expected credit unions, while preferring the IASB’s approach (see Credit Unions Object to FASB Loan Loss Proposal). A recent academic study co-authored by FASB board member Thomas Linsmeier questioned the exposure draft on Recognition and Measurement of Financial Assets and Financial Liabilities after he dissented with it (see Study Co-authored by FASB Member Rebuts FASB’s Proposed Changes in Fair Value Accounting Standards).