The Financial Accounting Standards Board and its global counterpart, the International Accounting Standards Board, hope to stay in lockstep on standards, but oftentimes it’s not so easy.

At FASB’s meeting last week, one of the topics of discussion was fair value accounting, always a perennial favorite — that is, when it’s not the bane of the board members’ existence.

The board spent time discussing whether the IASB’s proposal on fair value measurement was all that close to U.S. GAAP. “One of the conclusions was that even though the fair value definition was the same, some of the underlying wording is different enough that there could be a divergence in the results,” said David Larsen, a managing director of Duff & Phelps and a member of FASB’s Valuation Resource Group. He believes that both FASB and the IASB need to monitor the progress of the IASB’s exposure draft on fair value, on which the comments were due this past Monday, and make sure the two standards don’t wind up too far apart.

“They could end up with something that diverges rather than converges,” he said.
That also seems to be a concern on the other side of the Atlantic. IASB Chairman Sir David Tweedie told the European Parliament’s Economic and Monetary Affairs Committee on Monday that the IASB “recognizes the importance of concerns raised primarily in Europe, particularly regarding the possibility of an unlevel playing field for U.S. and European financial institutions.”

Tweedie emphasized that the IASB has directly incorporated the relevant FASB guidance on fair value measurement in its own exposure draft on the subject in order to provide consistency and a level playing field. However, the two standards boards do not necessarily see eye to eye on fair value measurement for loans and impairment. “The IASB is not proposing that the loan book of banks should be held at fair value,” said Tweedie. “As a result, we expect that banks primarily engaged in the traditional activities of deposit-taking and making basic loans are likely to make less use of fair value. Those involved in trading, or who make use of more complex financial instruments such as derivatives, may see a greater use of market pricing, which most investors feel is appropriate.”

Tweedie said that approach would be superior to one that would merely adopt the FASB staff position on impairment and would respond better to the concerns of European institutions. There also will likely be divergence on the two boards’ financial instrument standards. Tweedie noted that some have suggested that the IASB take more time to develop its new financial instruments standard and in the interim adopt the U.S. standard. However, he rejected that suggestion, noting, “Stakeholders in the European Union have warned against blindly adopting U.S. standards.”

Larsen believes the two boards clearly have some issues that need to be sorted out. “I think that both FASB and the IASB have stated that it is of great benefit to have convergence,” he said. “That being said, as they work through issues, the two boards at times have differences of opinion and I think they’re still working through that.”

With the financial instruments project, he believes the two boards are close, except for assets that have loan features and are managed on a hold-to-maturity basis. “While FASB does not have a proposal on the table now because they are still studying and debating, their public discussions are different from the IASB,” he said. “That’s an example where there potentially might not be exact convergence and we have to see where that goes.”

Whatever happens, the two boards are proceeding cautiously, issuing proposals, holding public discussions, publishing exposure drafts, and sifting through the comments they receive. The last thing they want is to be hauled again in front of a group of politicians demanding that they make immediate changes or face repercussions.

A critical question will be whether the SEC approves the roadmap to International Financial Reporting Standards. If it does, the convergence process will need to move ahead more definitively with a date in mind, and the certainty that international standards will eventually become national standards too.

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