Discussion of responses to the report of the Joint Working Group of Standard Setters

Date recorded:

The International Accounting Standards Board (IASB) discussed an analysis of the responses to the Joint Working Group (JWG) of International Standard Setters on Financial Instruments proposals.  Below is a summary of points discussed.


The mandate of the JWG was to develop a draft comprehensive standard on accounting for financial instruments at fair value. 284 responses were received. Two thirds of these were from preparers, the remainder from a wide variety of groups, but responses from users were few in number.

About 75% of respondents were opposed to the proposals in the paper. Of the 25% for the proposals, the vast majority of these were non-preparers. Of the objections, there were 2 main types: problems of principle, and practical problems.

The problems of principle included:

  • the role of management intentions (i.e. intention shouldn't affect measurement);
  • the need for the immediate recognition of changes in fair value; and
  • financial instruments being measured at fair value and non-financial instruments being measured at cost.

Practical problems included:

  • volatility (especially of fair values of instruments for which there is no active market);
  • cost benefits (especially for banks);
  • the risk of major adverse effects from subjectivity; and
  • transitional concerns.

There were no new views offered. The only peculiarity of the responses is that views are not changing. There was high level agreement that much more work (field-testing) is needed. Also, many of the concerns were similar to objections raised in response to IAS 39 and putting derivatives on the balance sheet. Most banks felt that users both didn't want and wouldn't understand financial statements prepared with all financial instruments at fair value.

Overall, preparers were against the proposals, users for them and regulators split. Also, there was a general feeling that there was too much material to comment on it all in any great detail.


In general, using exit prices was accepted, although it was felt that more work is needed and more explanation as to why it was chosen (as opposed to for example entry price or some other current value) is needed. There was concern over the treatment of large block holdings and over situations with large bid/offer spreads.

Several respondents felt that the hierarchy given was the major contribution of the paper. Others felt that increased flexibility is required, especially in the area of using a price for a similar instrument versus using a valuation technique. Many felt that it would be preferable to use valuation techniques rather than take the price of a similar instrument and then adjust it, especially as this is what they currently do.

On policies, procedures and controls in place, most agreed with the proposals in the paper and felt that these are essential for any fair value model. However, they felt that it was perhaps not the role of the standard setter to set these.

On fair valuing loans, lenders in general rejected the proposals to use valuation techniques based on internal data as being too subjective and also pointed out that many do not have the systems in place to implement this. Investment banks in general thought the proposals were feasible and acceptable. All agreed that loan loss provisioning needed to be re-examined.

With regard to values not attributable to financial instruments (e.g. credit card intangibles), opinion was very strongly divided, but no new views were offered.

With regard to including own credit worthiness in valuing own debt, there was a hardening of views against this proposal on the grounds of the counter intuitive income statement result, but again, no new views were offered.

It was agreed that more work must be done, by way of field testing, by speaking to entities that currently use fair values. Also, regard needed to be given to other projects that are also looking at this area (e.g. the insurance project) to ensure consistency.

In general, 80% of respondents felt that it would be difficult to fair value all financial instruments and half of those felt that it would be difficult when there was no liquid market.

Income statement

There was significant opposition for the proposal to recognise all gains and losses, with a wide range of suggestions for exclusions. The main areas of opposition were:

  • volatility;
  • users not understanding the financial statements;
  • the consequences for tax, dividends and covenants; and
  • unfamiliarity.

Many did not address with issue of whether the financial reporting project will tackle any of these concerns. Very few addressed the issue of disaggregating the income statement, but those who did pointed out that combining fair values with historical cost interest would produce very strange results and also that they were unsure of what fair value interest is. It was noted that the Joint Working Group had their time working on the income statement curtailed, so were not fully able to address all issues in the time they had.


85% of respondents disagreed with the proposals and wanted some sort of hedge accounting allowed. Very few accepted there being no hedge accounting for future transactions. It was pointed out that if you disaggregate the hedging instrument from the future transaction, then there will be increased volatility shown in the financial statements, but the underlying volatility will have decreased.

Again this was an area where no new arguments were given, but there was a general lack of support for the proposals. With hindsight, this area was poorly written as it says that no hedging is allowed, whereas in fact most fair value hedges are still recognised. Additionally, there was insufficient explanation as to the decisions made.

It was pointed out that the hedge accounting that most respondents wanted was for forecasted transactions, and they don't get that under IAS 39 either.

Recognition and derecognition

This area accounted for approximately one third of the paper. The main area that these sections did not address was consolidation, but this is on the IASB's agenda. This area was developed by looking at the IASC framework and it was decided that a components-based approach was best. Recognition and derecognition criteria concentrate on contractual rights and obligations and on who controls these.

There was a reasonable favourable response, although some respondents were unclear on what was meant by components and/or contractual rights and obligations. There was worry that concentrating on components would result in missing the overall effect of a transaction, and that the approach adopted was overly mechanical.

The main areas of discussion were:

  • legal isolation. Some respondents wanted more, some less;
  • continuing involvement. There was agreement that if there is no continuing involvement, then the instrument should be derecognised and accounted for as a sale, but more explanation was needed of what constituted continuing involvement; and
  • there was general disagreement of the treatment where the transferor has continuing obligations or a call option as it was felt that too many liabilities would be recognised and that the measurement of the liability at its maximum amount is too high. 75% of respondents didn't like that the test was by the transferor only, and not the transferee, so there was not mirror accounting.


There was general agreement with the disclosures required. Most agreed with the proposition that risk sensitivity be encouraged but not required. The most notable exception was the AIMR who felt that this should be required. This was the only area of the paper that they did not agree with.

Only a few respondents addressed the issue of balance sheet disclosure, and they were evenly divided. Some agreed with the proposals, and some felt that it was not useful to separately classify impaired loans.

On scope and definitions, cost/benefit for smaller entities was an issue. Also, it was felt that insurance business and financial instruments should be accounted for on a consistent basis.

Most ignored the question of implementation and transitional requirements. There was very little support for supplementary accounts as they would be overly onerous. Most felt more field testing is required before proceeding further, and that this should commence sooner rather than later to prevent the project from grinding to a halt.

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