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IASB chairman discusses progress on financial instruments

  • Speech — dark green Image

Dec 03, 2013

Hans Hoogervorst, chairman of the IASB, spoke at the joint ICAEW and IFRS Foundation Financial Institutions IFRS Conference in London today. In his speech, he observed that the inherent complexities of the topic — and the fact that the financial industry is extremely sensitive to changes in accounting rules — have made it very difficult for the IASB (and the FASB) to come to the right solution regarding the accounting for financial instruments, but that IFRS 9 will be finished very soon.

Mr. Hoogervorst opened his speech by admitting that the work on replacing IAS 39 has taken a long time as financial instruments are such difficult terrain but he also added that "IFRS 9 will get done and it will get done soon."

In explaining why the financial industry is a case apart from other sectors of the economy when it comes to accounting, Mr. Hoogervorst contrasted nonfinancial entities, banks, and insurance companies with respect to the focus on the balance sheet and current value. He pointed at the fact that banks and insurance companies have huge balance sheets where even relatively small changes can have an enormous impact on earnings, and future cash flows depend very much on the financial instruments on the balance sheets.

Mr. Hoogervorst then walked his audience through the different phases of the project aimed at replacing IAS 39, showing how the IASB had dealt with the special accounting needs of the financial sector.

  • He explained how the claim that fair value accounting strengthened pro-cyclicality and created artificial volatility during the financial crisis was unfounded, and that one instance where fair value accounting could lead to counterintuitive results (the issue of "own credit risk") had been fixed in IFRS 9 and made available as part of the general hedge accounting changes.
  • The current impairment model — which was shown by the financial crisis not to work well — will be replaced with an expected loss model, making masking of inevitable shortfalls in future cash flows much more difficult. Finalized requirements on impairment are currently expected in the first or second quarter of 2014.
  • The IASB is continuing with a mixed-measurement approach, but in the context of the limited reconsideration of IFRS 9 it has tried to put the criteria for classification and measurement on a more objective footing and has also introduced a "fair value through other comprehensive income" measurement category for particular financial assets.
  • Because the existing hedge accounting requirements deal with some hedge relationships but not others (on the basis of rather arbitrary criteria), and as current hedge accounting is not capable of properly reflecting the management of net positions in open portfolios, the IASB has begun developing a Discussion Paper on a new macro hedging model as part of its project on macro hedge accounting.

Thus, Mr. Hoogervorst noted that with the exception of the proposals on macro hedge accounting (which were separated out from the general financial instruments project because they will take significant time to finalize) the major phases of developing IFRS 9 are finished or will be finished soon and will address the special needs and characteristics of the financial sector. Mr. Hoogervorst concluded:

"IFRS 9 is practically finished and will soon be ready to be endorsed. Because of the significant improvements that IFRS 9 makes in classification and measurement, and also in general hedging and impairment, I have no doubt that it will be endorsed around the world."

The full text of the speech is available on the IASB's Web site.

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