The Texas Society of CPAs pointed to what it sees as several problems in the Financial Accounting Standards Board’s proposed standards for financial instruments in a stinging letter addressed to the board.

Kathryn Kapka

Changes in the financial instruments standards are among the most controversial that FASB has been hashing out with the International Accounting Standards Board. In a comment letter on FASB’s exposure draft, Kathryn W. Kapka, chair of the TSCPA’s Professional Standards Committee, noted that her committee is concerned that certain issues addressed in the draft go “significantly beyond” the objective of accounting for financial instruments. She said her committee believes that FASB’s approach of asking more than 70 questions “tends to obscure the significance of the issues,” rather than clarifying them.

Kapka wrote that the substantive changes in the recognition of credit impairment include removing the existing “probable” threshold for recognizing impairments on loans, which has been used and interpreted in practice for many years.

“If it is going to be changed, we believe this should be the subject of a separate project, not wrapped into an extremely broad ED on financial instruments,” she wrote. Similarly, she argued with paragraphs outlining changes in the equity method of accounting, saying, “A document dealing with accounting for financial instruments is an inappropriate place to address such an issue.”

Kapka also criticized the changes in comprehensive income, saying the approach was “difficult to justify conceptually.”

“We recommend the board take a step back and ask the threshold question of what information should be in GAAP-based financial statements,” she wrote. “This is not the same question as ‘what information would be useful to users.’”

Kapka added that her committee believed the exposure draft would “serve to increase divergence, rather than enhance convergence between GAAP and IFRS.” Pointing to the expansion of the reporting of financial liabilities at fair value, she noted a company could actually report gains as it marks down the fair value of its debt in response to its deteriorating financial position.

“Under IFRS, such accounting is only an option,” she wrote. “But according to this ED, the accounting guidance would become the ‘default’ standard, applicable unless an entity could qualify for different accounting treatment.”

Kapka added that she found the 218-page exposure draft difficult to read and analyze because of the lack of a table of contents and index.