Meeting of Financial Crisis Advisory Group

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16 Dec 2009

The Financial Crisis Advisory Group (FCAG) was established by the IASB and US FASB in response to the recent global financial crisis. Its purpose is to advise both Boards about the role of accounting during the crisis and potential changes.

In July 2009, the FCAG published a Comprehensive Report (PDF 377k) with its recommendations related to accounting standard-setting activities and other changes to the international regulatory environment. The FCAG held its sixth meeting in London on 15 December 2009 to review progress made on its recommendations. Presented below are the preliminary and unofficial notes taken by a Deloitte observer at the meeting. For related information please see our Credit Crunch Page.

IASB-FASB Financial Crisis Advisory Group Meeting - 15 December 2009

The Financial Crisis Advisory Group was established by the IASB and FASB in response to the recent global financial crisis. Its purpose is to advise both Boards about the role of accounting during the crisis and potential changes.

Both co-chairs of FCAG reminded participants in their introductory remarks about the recent developments that gained so much attention, particularly the publication of IFRS 9, failure to endorse IFRS 9 by the European Union through the fast-track procedure, as well as the Joint statement of the IASB and the FASB reaffirming their commitment to convergence. Both co-chairs were highly appreciative of the IASB and the FASB as well as the opportunity for convergence that was created. Nonetheless, both noted that they saw 'dark clouds' both in the U.S. as well as in Europe regarding external pressure on the Boards and their independence.

The IASB Chairman summarised the developments in the IASB crisis-related agenda in 2009, including the publication of IFRS 9, an exposure draft on the expected cash flow model, various outreach activities, and the creation of the Expert Advisory Panel on Impairment. He explained that as soon as the FASB publishes its complete financial instruments proposal (expected in Q1 2010) the IASB would expose the document for comments. Based on the comments, the Boards will strive for a converged solution. Sir David also noted that the Boards would, to the extent possible, try to remove differences in the Fair Value Measurement, Consolidation, and Derecognition Standards. He also noted the decision of the EU to 'delay' endorsement of IFRS 9 and expressed his belief that IFRS 9 would be endorsed in Europe in 2010 as part of the normal endorsement process.

The FASB Chairman reinforced the message that convergence is a priority, explaining that the Boards have introduced monthly joint meetings (they plan to have six face to face meetings in 2010, five of them in London and the remaining by videoconference). In his words, the Boards try to avoid leapfrogging and to align their timelines for projects. To reinforce this message the Boards will issue public quarterly progress reports.

Nonetheless, the FASB Chairman also reiterated that the feedback they received from the U.S. constituents was more positive about a comprehensive project (rather than a phase approach) and about a fair value model. Therefore, the FASB will try to have a converged solution, or a solution that would ensure broad comparability of the financial statements if full convergence on the specific issue of fair value and amortised cost proved impossible (as many think that a fully converged solution would have to lead to identical equity). He stressed that the Boards were very close in the dividing line between what goes into earnings and 'the other category' but some differences remain. He underlined that the main aim of Boards was at least to have a fully converged income statement but that the Boards appreciated that both amortised cost and fair value was important information. On impairment, he cited reluctance amongst U.S. regulators about the viability of through-the-cycle-provisioning. He noted that both Boards aimed at a forward-looking model. While the FASB is concerned about the rigour and auditability of the expected-loss model, FASB has pledged full participation in the Expert Advisory Panel.

On independence of the standard setter, the FASB Chairman noted that an amendment authorising a Systemic Risk Council to override a Standard without a due process was defeated in the U.S. House of Representatives. The FCAG Co-chair noted that the Council was one of the 'dark clouds' he mentioned earlier.

Many members noted that the timing of the comprehensive financial instruments review was crucial as there was a 'window of opportunity for convergence' created by the delay of endorsement of IFRS 9 in the EU. The FASB chairman noted that the comprehensive project should be published for comments in February or March 2010 to allow the Boards time for discussions on convergence.

Many members discussed the EU decision not to endorse IFRS 9 speedily. One FCAG member was particularly concerned about the impact of that decision on the rest of the world and whether IFRS 9 was implemented as written. Some members saw the EU failure to endorse IFRS 9 in the fast track procedure as a positive development as it took pressure from the IASB that should not be there in the first place and re-instated a due process in the EU endorsement mechanism. Other members were more sceptical and saw a hidden agenda of interference that may endanger the independence of the Board. In response, the IASB Chairman noted that the actions of Europe raised concerns in other countries. He mentioned that a newly formed group of Asian standard setters might help to counteract the pressure from the U.S. and Europe. He noted that the IASB is a global standard setter that is not bound by agenda solely in Europe.

The FASB chairman noted in response to a question that the biggest risk to convergence was 'that the Boards come to different answers' and reiterated that the IFRS solution on financial instruments was not popular in the U.S. He also stated that the amortised cost model omitted very important information from the balance sheet.

On the issue of an extended role for banking regulators, most members agreed that a common solution should be found in a way that facilitates common inputs but that differences would still exist as the purpose of financial reporting and prudential regulation is different.

The Basel Committee representative clarified that the EU did not delay the endorsement of IFRS 9 but that it just decided not to accelerate it – which, in her opinion, was a fundamental difference. She also noted that the European Commission had not asked for IFRS 9 and the decision not to invoke fast-track needed to be read in that context. IASB Chairman responded that the complete overhaul of IAS 39 was required to ensure a level playing field, short of adopting the U.S. Standards. The Basel Committee representative acknowledged progress of IFRS 9 but cited some arguments raising concerns (for example, the treatment of uncertainty, no recycling for equity instruments at fair value through other comprehensive income, increased usage of fair value in particular as fair value for loans has no economic substance in continental Europe as there is no active secondary market). She also pledged the willingness of the Basel Committee to participate on the EAP discussion but raised concerns about how operational the proposed expected-loss model would be for the banking industry.

The CESR representative praised the IASB for IFRS 9 and noted that in CESR's opinion IFRS 9 was an improvement to IAS 39. On endorsement, he noted that the endorsement process was a normal part of the 'politics of the EU' and should be not taken as 'the end of the world'.

Concluding remarks

On balance, FCAG members reached a consensus that the Boards were responsive to FCAG's recommendations and appreciated the work done by the Boards. As the next step, the FCAG members would like to discuss and address the progress of convergence. Consequently, the FCAG decided to have an additional meeting in October 2010 in New York to assess the progress on convergence and the financial instruments project. At that meeting the FCAG will prepare a letter to G20 (meeting scheduled for November 2010) on the progress to achieve a global set of high-quality accounting standards.

This summary is based on notes taken by observers at the FCAG meeting and should not be regarded as an official or final summary.

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