Accounting for Financial Instruments: Post-Crisis Changes, Part 2: As the IASB and the FASB Over-Haul Their Accounting Standards for Financial Instruments, Observers Wonder Whether IFRS and U.S. GAAP Will Converge or Diverge in This Area
Pounder, Bruce, Strategic Finance
This column is the second of two that describe recent and forthcoming changes to financialinstrument accounting standards--changes that carry significant implications for preparers, auditors, and users of financial statements. Last month, I focused on how the International Accounting Standards Board (IASB) is changing International Financial Reporting Standards (IFRS). This month, I'll focus on how the U.S. Financial Accounting Standards Board (FASB) is changing U.S. Generally Accepted Accounting Principles (GAAP).
Different Approaches, Different Timetables
In contrast to the IASB's threephase approach to replacing International Accounting Standard (IAS) 39, "Financial Instruments: Recognition and Measurement," the FASB is taking a "one-shot" approach to revising Accounting Standards Codification (ASC) Topics 825, Financial Instruments, and 815, Derivatives and Hedging. And while the IASB has already issued the first part of its revised financial-instruments standard as well as an exposure draft (ED) of an additional revision, the FASB hasn't issued any final or proposed Accounting Standards Updates (ASUs) in conjunction with the financial-instruments project. But the FASB hasn't been idle and is quickly catching up to the IASB.
In the first quarter of this year, the FASB will issue an ED of a proposed ASU that will include all changes the FASB believes should be made to its financialinstruments accounting standards. The single ED will cover every aspect of financial-instruments accounting that the IASB will eventually cover, including recognition, measurement, impairment, and hedge accounting. Both Boards expect to complete their work on financial-instruments standards by the end of 2010.
Focus on Fair Value
Although the FASB hasn't yet issued its ED on financialinstruments accounting, the Board has been very open regarding its deliberations on the issues involved. As a result of these deliberations, the FASB has made and disclosed several tentative decisions, only some of which are aligned with the final and proposed guidance that the IASB has issued.
For example, both Boards agree that some financial instruments should be measured at fair value and others should be measured at amortized cost. But they haven't yet reached agreement on criteria for determining which of those two measurement attributes a reporting entity should apply to a particular financial instrument.
For its part, the FASB has tentatively decided that nearly all financial instruments should be measured at fair value. Amortized cost could be used as a measurement attribute only in limited circumstances and only if an entity's management elects to use it instead of fair value. One situation in which management would have the option to use amortized cost is in measuring a liability arising from the reporting entity's "own debt"--i.e., debt instruments that the entity has issued for financing purposes.
Recognition of Changes in Fair Value
Both the FASB and the IASB agree that, for financial instruments measured at fair value, in some cases changes in fair value should be recognized in Net Income (NI), while, in other cases, changes in fair value should be recognized in Other Comprehensive Income (OCI). But, again, the Boards currently diverge in their thinking on the criteria for applying one treatment vs. the other.
The FASB has tentatively decided that changes in the fair value of financial instruments measured at fair value should be recognized in NI by default; changes in fair value would be recognized in OCI only in limited circumstances. …