The next item discussed was the standard-setters' response to the credit crisis.

Note: We have recently created a Credit Crunch Page on IAS Plus.

The FASB Chairman encouraged both Boards to share information on the key issues that emerged during the credit crunch and discuss on the measures to be taken. He said that the three key areas of concern from an accounting perspective are:

• Derecognition (especially in the context of securitisations)
• Consolidation
• Fair value measurement

He continued that the US Senate is interested in some of the accounting issues. He also said that some problems are more compliance issues than problems with the standasrds, and that the reason for the crisis is mainly that the business models employed were flawed.

Derecognition and consolidation

On the issue of derecognition and consolidation, the FASB Chairman explained that the relevant US GAAP guidance (SFAS 140 and FIN 46R) will be revised to abandon the exemption from consolidation for qualifying special purpose entities (QSPE) - they would be consolidated in the sponsor's financial statements. He noted that the QSPE concept worked until the credit crunch, but with hindsight they have been ticking time bombs. FASB expects to publish changes to the US GAAP guidance by the end of 2008.

On the IASB side, a derecognition team has been formed to start with a clean sheet approach, and issues have been identified. The project team recognises the time pressure and will bring the issue back to the next Joint Board meeting in October 2008.

The IASB Chairman said that all three projects mentioned above have be prioritised and accelerated. The FASB Chairman supported approaching these projects jointly as far as possible, but that there were different time constraints.

One IASB member noted that IFRS 7 could be used at a starting point for enhanced disclosures. Assessments based on the first full year of application (2007) could be used. One FASB member expressed concerns over the ability to have a converged consolidation standard but thought it should be possible to have a converged disclosures standard.

The FASB Chairman then continued to elaborate on liquidity risk. He noted that many models didn't include liquidity risk and that many FIN 46R calculations did not either. He said that qualitative evaluation of facts and circumstances has to be improved and that the evaluation of whether an entity must be consolidated must be reassessed on an ongoing basis. In response to a question about the timing for the changes to US GAAP, he answered that an exposure draft (ED) is planned before end of June with the final amendments to be released at the end of the year.

On the IASB consolidation project, the project manager reported that the project has been accelerated and that the models in IAS 27 (control model) and SIC 12 (risk and rewards model) are currently being aligned, with improved disclosure. The IASB plans to publish an ED in summer 2008 with the goal of having the single source of guidance on consolidation.

A FASB member noted that it would probably be easier to disclose risky items then to find the right model for consolidation.

Fair value measurement

On fair value measurement the FASB Chairman said that both Boards have received a request from the IIF (Institute of International Finance) to address two issues (see related IIF Report on our 'Credit Crunch Page'):

• Allowing management to switch from mark-to-market to mark-to-model in certain situations where market values are not representative.
• Facilitate transfers from the trading book to the bank book for financial institutions.

The IASB Chairman underlined that the Financial Stability Forum (FSF) and the Basel Committee support the IASB's and the FASB's approach to use market values, as markets would be more confused by some sort of arbitrary measurement attribute. He also noted that the fair value measurement project will have a focus on accounting responses to illiquid and contracted markets.

The FASB Chairman informed the Boards that the US Securities Exchange Commission have issued a Paper Advising Registrants to Further Explain Fair Value in their management discussion and analysis.

One IASB member noted that a move from fair value would increase uncertainty in the markets.

The FASB Chairman closed this session with an appeal to share information and align any efforts as far as possible.