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FSB seeks simplified global financial instruments accounting

28 Sep 2009

The Financial Stability Board (FSB) has urged the IASB and FASB to simplify, improve, and converge their accounting standards for financial instruments "in a manner that does not expand the use of fair value in relation to the lending activities (involving loans and investments in debt instruments) of financial intermediaries".

The FSB was established to coordinate the policies by which countries regulate and supervise financial institutions. Click for FSB Statement (PDF 56k).

Here is an excerpt:

At present, the IASB and the US Financial Accounting Standards Board (FASB) are considering a variety of approaches which could possibly lead to divergences between IASB and FASB standards with respect to:

  • improving and simplifying financial instruments accounting, where FASB is considering an approach that is based on fair value measurement for most financial instruments, which would be proposed by early 2010, while the IASB has proposed a mixed model of historical cost and fair value, to be available for use in 2009 year-end financial statements;
  • provisioning and impairment, where the IASB plans to propose a standard using an expected loss or expected cash flow approach to loan loss provisioning in October 2009, which would generally recognise credit losses earlier and mitigate procyclicality,1 whereas the FASB continues to consider changes to impairment recognition, including an approach based on fair value with plans to issue its proposal by early 2010;
  • off-balance sheet standards, where the IASB's proposal on derecognition, which is now subject to consultation, would require repurchase agreements to be treated as sales and forward contracts in certain situations (thus leading to off-balance sheet treatment), instead of as financing transactions on the balance sheet as under current IASB and FASB standards.

Moreover, continuing differences in accounting requirements of the IASB and FASB for netting/offsetting of assets and liabilities also result in significant differences in banks' total assets, posing problems for framing an international leverage ratio.

Therefore, additional work in the areas above is urgently needed in order to meet the important objectives of convergence, transparency and the mitigation of procyclicality, as standard setters continue their efforts to improve the quality of their standards and reduce the complexity of their standards on financial instruments.