The Institute of Chartered Accountants in England and Wales has told the U.S. Financial Accounting Standards Board that FASBs proposed rules for financial instruments accounting would make financial statements harder to understand and complicate the convergence process.
Thursday is the deadline for submitting comments to FASB on its financial instruments proposal. Many comments have taken issue with FASBs plans to account for bank loans and deposits at fair value on the balance sheet, unlike the International Accounting Standards Boards proposal to treat long-term assets at amortized cost and short-term assets at fair value on the balance sheet.
The ICAEW said that FASB and the International Accounting Standards Board have taken very different approaches to financial instruments classification and measurement, leading to serious questions about whether the two boards can agree on a final standard. The group noted that agreement on the final standard was critical if convergence between the two leading sets of global accounting standards is to stay on track.
The ICAEW said it believes strongly that the IASBs new mixed measurement model, which results in financial instruments being stated at either amortized cost or fair value in the primary financial statements (with fair values for all financial instruments disclosed in the notes), provides more relevant and understandable information to users of financial statements. The ICAEW also argued that it provides a much better platform for convergence between the two accounting standard-setters rulebooks.
The FASB proposes to include both amortized cost and fair value information in the balance sheet. In our view this will only serve to make statements harder to read and information more difficult to understand for investors, said Dr. Nigel Sleigh-Johnson, head of the ICAEWs Financial Reporting Faculty. It will also be more costly for businesses. Simplification of the standards for financial instruments accounting is a key priority, and is an objective endorsed by the G20 governments. FASBs proposals are surely pulling in the wrong direction.
Sleigh-Johnson noted that the ICAEW is a longstanding supporter of the aim of developing a single set of accounting standards for use globally. But the focus of the IASB must remain very firmly on high-quality financial reporting and cost/benefit considerations, he added. Achieving convergence, whether between IFRS and U.S. GAAP, or IFRS and any other GAAP, should play second fiddle in the standard-setting process.
The ICAEW is also taking issue with FASBs proposed standards on hedge accounting. In its formal submission to FASB, the ICAEW will note that hedge accounting is the most complex area of accounting for financial instruments, and suggest that the current rules are so detailed and specific that hedging strategies are difficult to achieve, explain and understand.
FASBs proposed approach to hedge accounting introduces some simplifications, but retains many of the rules about what is eligible for hedge accounting, according to the group. The ICAEW said it will be looking carefully at the IASBs proposals in this area, which are due out for consultation later this year, to see whether they meet the objective of simplifying the requirements for the benefit of both business and users of financial reports.
Many commentators are focused on concerns about FASBs approach to classification and measurement, said Sondra Tarshis, a director at Mazars in London who chaired the Financial Instruments Working Party responsible for developing the ICAEWs submission to FASB. She believes that impairment and hedge accounting should not be overlooked in this context, and these are important areas where the IASB is continuing its work.
In addition, both FASB and the IASB are considering the so-called netting rules, which are important for ensuring consistent presentation and leverage ratios between banks using IFRS and U.S. GAAP, she said. There is clearly much to be resolved before a final financial instrument standard is completed, and not much time left before the 2011 deadline.
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