The International Accounting Standards Board announced its intention Monday to create a transition resource group that will focus on the upcoming new requirements for impairment of financial instruments under International Financial Reporting Standards.
The IASB and the U.S. Financial Accounting Standards Board have been unable to reach an agreement on how to handle the impairment of financial instruments such as bank loans. Next month, the IASB plans to release IFRS 9, its financial instruments standard, which continues to differ in key respects from the current U.S. GAAP standards.
In a speech Monday at the IFRS Foundation Conference in London, IASB vice-chairman Ian Mackintosh expressed the IASB’s growing frustration at not reaching a consensus with FASB on this and other convergence issues.
“Despite our best efforts, we were unable to reach agreement with the FASB on impairment,” he said. “We consulted the Financial Stability Board (FSB) and others about whether to go back to the drawing board with the FASB in a final attempt to achieve convergence. However, it was decided that doing so would add several years to the project and the advice from the FSB and others was that it was more important to get the standard issued.”
Unlike the converged revenue recognition standard, which FASB and the IASB jointly issued last month and set up a joint transition resource group to help implement, the IASB is setting up a transition resource group of its own for its new impairment standard (see FASB and IASB Form Joint Transition Group for Rev Rec).
Mackintosh noted that the IASB is also facing challenges in reaching a converged standard on leasing. He cited a 2005 report from the Securities and Exchange Commission noting that lease structuring based on the existing accounting guidance had become so prevalent that there was likely to be strong resistance to significant changes.
“Following the SEC’s warning, we have not been surprised by the stiff opposition we have faced,” he said. “At the same time, the changes need to be kept in context.”
He cited IASB research showing that across the industrialized world, roughly 50 percent of listed companies report material operating leases, meaning the other half will not be affected at all by the upcoming standard. The use of operating leases is also highly concentrated, Mackintosh pointed out. Out of the total of 12,000 entities that the IASB analyzed, 1,000 companies, or less than 10 percent, accounted for 80 percent of all the operating leases. Inclusion of the lease liability would lead to an increase of the long-term debt-to-equity ratio from 13 percentage points in Europe to 20 percentage points in Asia. Even among airlines, there are some that now carry leases for most of their fleet on the balance sheet and would not be affected by the new standard.
Mackintosh noted that as the convergence projects are coming to an end, the IASB has moved from a largely bilateral working relationship with FASB to a more multilateral approach to working with standard-setters around the world, including FASB.
“The primary vehicle for this interaction is what we call the Accounting Standards Advisory Forum, or ASAF,” he said. “The ASAF provides an excellent forum for representatives of regional and national bodies with an interest in standard-setting to exchange views with the IASB about the future development of IFRS. We find the ASAF meetings incredibly useful because any ASAF member can present his or her views, but those views are then subject to peer review by others. For example, ideas about the development of IFRS presented by colleagues at the FASB are debated with colleagues from Europe, Africa, Asia and South America as well as the IASB itself. This aids the understanding of issues by all concerned.”
Mackintosh criticized recent statements by FASB officials signaling that they would place more priority on improving U.S. GAAP than on converging with IFRS. “I find it interesting to note that in recent speeches, various members of the FASB have begun to present a vision of international standard-setting that is remarkably similar to the old IASC [International Accounting Standards Committee, the predecessor to the IASB] approach,” he said. “This is an approach whereby major economies maintain their own accounting standards, using IFRS as the international benchmark and seeking to reduce their differences. The problem is that in this view, differences between accounting standards would persist.”
He pointed to statements from FASB vice chairman Jim Kroeker on how differences in standards would “persist because of legal, regulatory and cultural differences among different jurisdictions” and the 2013 FAF Annual Report, which put more emphasis on FASB’s mission of improving U.S. GAAP and converging “if possible” with IFRS.
“If divergences are more or less accepted as inevitable, it can be no surprise they become the norm rather than the exception,” said Mackintosh. “If all IASB constituents were to insist on the primacy of national preferences, obviously the goal of a single set of global standards would come to naught. That was the old IASC approach. We tried it for 25 years and it failed.”
Moving ahead on transitioning to its new financial instruments standard, the IASB said it is seeking suitable candidates for membership of the IFRS Transition Resource Group for Impairment of Financial Instruments (ITG) and has issued a call for nominations.
The ITG will provide a discussion forum to support stakeholders on implementation issues that may arise as a result of the new impairment requirements under IFRS 9 Financial Instruments (2014), which will be issued in 2014.
The new expected credit loss model for the impairment of financial instruments under IFRS 9 will represent a fundamental change to current practice, the IASB noted. The changes will have significant implications from an implementation as well as a systems perspective, particularly in the financial services sector.
In view of the magnitude of these changes, the IASB said it believes that having a discussion forum, such as the ITG, to provide support for stakeholders post publication will enhance robust and consistent implementation.
The ITG will solicit, analyze and discuss common stakeholder issues arising from implementation of the new requirements that could possibly create diversity in practice. The ITG will also provide information that will help the IASB determine what, if any, action will be needed to resolve such diversity. The ITG itself will not issue guidance.
The IASB is seeking nominations to form a group to consist of 14-18 specialists representing financial statement preparers, auditors and related groups from a wide spectrum of geographical locations. The ITG will meet periodically (about 2-3 times a year) in public and will be chaired by an IASB member.
Candidates should be capable of making a positive contribution to the ITG by having expertise, skills or practical knowledge relating to expected credit loss model for impairment of financial assets as well as knowledge about accounting for financial instruments under IFRS. Candidates should be open-minded towards different perspectives and have the ability to participate in a free exchange of ideas.
The deadline for applications for membership of the ITG is July 14, 2014. For further information, click here.