Financial Instruments - Comprehensive project to replace IAS 39
Russ Golden, FASB Technical Director, outlined the FASB's tentative conclusions on its project on improvements to financial instruments recognition and measurement. He explained that the FASB agreed to propose a model to improve financial reporting for financial instruments. So far, the FASB's tentative decisions were as follows:
- All financial instruments would be presented on the statement of financial position at fair value, with changes in value recognised in net income or other comprehensive income with an optional exception for own debt in certain circumstances, which would be measured at amortised cost. For those financial instruments whose change in value was recognised in other comprehensive income, amortised cost would be displayed on the statement of financial position in addition to a fair value adjustment to arrive at fair value.
- Changes in an instrument's value may be recognised in other comprehensive income on the basis of qualifying criteria related to an entity's business model and the cash flow variability of the instrument. The FASB would provide additional guidance on how to apply those qualifying criteria. FASB will also propose that changes in value of three types of instruments should be recognised in net profit or loss: derivatives, equity securities, and hybrid instruments containing embedded derivatives requiring bifurcation under FASB Statement 133 Accounting for Derivative Instruments and Hedging Activities. In addition, for all financial instruments, interest and dividends would continue to be recognised in net profit or loss. Credit impairments, as well as realised gains and losses from sale and settlement, also will be recognised in net profit or loss. The classification of instruments would be determined at initial recognition of the instrument and would not be subsequently changed (no reclassifications would be permitted).
- One statement of financial performance, with subtotals for net income and other comprehensive income, would be required. The FASB will propose to continue to require earnings per share for net income only.
Mr Golden noted that the FASB's deliberations were less advanced than the IASB's and that certain issues, such as the treatment of demand deposit liabilities and impairment, still needed to be addressed by the FASB.
During the discussion that followed, FASB members and staff clarified and amplified certain points. For example, an IASB member noted that, for a bank, the amortised cost option would almost never apply, since most of the bank's financial assets would be at fair value.
It was noted that what was eligible for the 'amortised cost' category was similar between the IASB and the FASB, but that the treatment was different - especially the measurement in the statement of financial position and the treatment in the statement of comprehensive income. This would be raised with constituents with the view to converging to a common solution.
The FASB Chairman noted that the IASB and the FASB shared a common goal: to deliver a common, high-quality financial reporting standard. The FASB needed more time to complete its deliberations, but acknowledged the pressures on the IASB and the reasons it was pursuing the project in the way it was. The FASB would make its proposed model available in advance of a formal exposure draft - it would probably be available on the FASB's Website by late August 2009. Detailed discussions would be held at the October 2009 joint IASB-FASB meeting and, if necessary, in November.
The IASB Chairman said IASB still had to address impairment and the expected loss model. It is also likely that the IASB would propose a single statement of comprehensive income, so that the financial statement presentation was also aligned between IFRSs and US GAAP.
The FASB and IASB will hold joint roundtable discussions as part of the outreach activities on this common project. These will be held in early September 2009 (before the comment period for the IASB exposure draft on classification and measurement closes) in London, New York (Norwalk?), and Tokyo.
It is likely that a condition of participating in the roundtable would be that a comment letter would have been submitted - or at least a summary comment letter. Board members wanted to be able to engage constituents and discuss their views, rather than help them to identify issues for their comment letters.