Financial Instruments — Way Forward
The Boards discussed the best way forward in further developing the financial instruments models, and particularly eliminating differences and the mixed attribute model. Staff suggested the following alternative methods of proceeding:
- Proceed with a project to introduce a full fair value model
- Proceed with a project using a full fair value model with certain exemptions based on the cash flows of each instrument
- Identify and deal with discrete areas of financial instruments accounting
- Undertake a project to deal with 'small' issues which would eliminate reconciling items between US GAAP and IFRS.
It was noted that prior to making a final decision as to the agenda, the FASB would be likely to be required to discuss this with the Financial Accounting Standards Advisory Committee (FASAC). There was a brief discussion on the role of the Financial Instruments Working Group. It was noted that this group is purely advisory and is not a decision making body.
The Boards expressed a view that the full fair value model is the ultimate goal. FASB members noted that in issuing FAS 133 the FASB stated that they were moving toward a fair value model subject to the resolution of certain practical difficulties. It was noted that the technical project to produce a full fair value option document will not take as long as the time needed to convince constituents of the value of this method. The existing fair value alternatives will need to be in operation for some time to enable constituents to better understand the benefits of such an approach before it will be possible to undertake a project to make fair value mandatory for all financial instruments.
The Boards noted that a project on de-recognition was also required, but that such a project should extend beyond only financial instruments. They briefly discussed whether it was possible to comply with IAS 39 and FAS 140. It was agreed that in some scenarios the outcomes might be the same, but in many a reconciling item would be required. The Boards noted that the justification for a project on derecognition was possibly more persuasive than that for further consideration of the fair value options as the magnitude of the differences between IFRS and US GAAP is much greater, and there is continuing public concern about off balance sheet financial transactions. The Boards agreed with the staff suggestion that this should, for the time being, be a research project rather than an agenda project, and acknowledged that it is unlikely to be in a form ready for discussion for some time.
The Boards noted that of the alternatives presented to them in respect of fair value neither alternative (3) nor alternative (4) appeared to be viable alternatives as they would consume hours of staff and agenda time for little improvement. The Boards agreed that they needed to consider the proposed timetable for each of the remaining approaches - alternative (2) should only be considered if it was likely to be completed in a shorter time frame and would then go another step in the direction of full fair value. Some members noted that alternative (2) may actually take longer due to the difficulties in crafting the appropriate exemptions for instruments for which the amortised cost model would be permitted. It was noted that if this approach was adopted the Boards should ensure that constituents understand this is considered to be an incremental step in the direction of a full fair value model.
The staff drew to the Boards' attention the fact that even if the full fair value options were implemented there would still be significant difficulties to be resolved in respect of cash flow hedging. The Boards agreed that simplification of cash flow hedging is desirable.
Staff noted that there appear to be three main issues:
- Scope (consistency and appropriateness of the definition of a financial instrument);
- Disaggregation of gains and losses in the income statement; and
The IASB acknowledged that while the FASB has a well-advanced project on the definition of fair value, the IASB do not. Accordingly before the project could proceed far the Boards would need to agree on the meaning of fair value, and the IASB agreed this would be a key part of their process to be followed. The Boards agreed a project should be added to the agenda to resolve the full fair value option, and that the first steps toward this should be for the staff to prepare a plan on how to address this topic. The plan would particularly address the first of the two issues above, but would be designed to ensure the overall objective (an eventual move to a full fair value model) is kept at the forefront of any developments. The plan will be developed by the joint project team and presented to each Board at its own meeting.