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Financial Instruments

Date recorded:

The staff prefaced the discussion by reminding the Board that the forthcoming Financial Instruments Due Process Document (the Document) was in two parts:

  • the main components of the fair value model for financial instruments, and
  • how the IASB and FASB might move to this model.

The staff advanced three possible approaches to advancing work on the project after consideration of comments on the Document.

The approaches advanced by the staff were:

  • Move directly to a comprehensive exposure draft of the fair value model for financial instruments;
  • Develop one or more interim steps that advance the use of the fair value model for financial instruments. Such an approach might seek to limit existing exceptions to the general principles in IASs 32 and 39 and, where possible, achieve convergence with US GAAP;
  • Take a 'wait and see' approach.

Board members did not think the 'wait and see' approach was a viable alternative; it achieved nothing other than the status quo. The Board would continue to be in 'reactive' mode, making small changes to the standards, and IFRIC would continue to be faced with requests for interpretations. In addition, this approach would be contrary to the demands from constituents to remove complexity from the standards. This was unacceptable to many Board members.

Board members seemed to agree that the fair value model for financial instruments was the goal, but they disagreed about how best to get there. Some wanted to adopt the interim steps approach, seeing it as realistic and pragmatic. Others thought that the next step should be to develop an exposure draft, because that would force the Board to define what it means by the 'fair value model for financial instruments' and the accounting it thinks necessary to put that model into effect. Only then would constituents be able to evaluate the Board's position 'rationally and unemotionally.'

Several Board members thought it important to be clear about what the Board means by 'reducing complexity' and what alternatives that might appear to meet the objective of reducing complexity would not be candidates, because they would not advance the intention of the Board to move towards a fair value model. (Thus, introducing more options to measure financial instruments at cost would not be considered by the Board, even though it might reduce complexity.) This idea was termed 'directional consistency.'

The Board moved on to discuss the parameters (or constraints) that might determine the next step(s). Board members had differing views about the relative priority of the staff's suggestions, but the following were generally seen as ways to move towards the fair value model for financial instruments.'

  • More financial instruments should be measured at fair value.
  • The complexity of the standards should be reduced
  • Accounting alternatives should be reduced and the role of management intent eliminated.

The Board agreed that short-term convergence with US GAAP was desirable but should not be a constraint, since the two Boards were starting from different positions. Thus, it would be acceptable to 'leap frog' each other. Also, Board members stressed that 'convergence with US GAAP' implied long-term convergence, not that the IASB would move to FAS 133. Some Board members noted that surrounding this approach was the issue of presentation. Constituents might accept the move to the fair value model for financial instruments provided that not all value changes were reported in operating income. The staff concluded the discussion by saying that they would return at a later Board meeting with examples of approaches that met the Board's objectives.