Son of IAS 39 - or several sons?

One of the conclusions reached by the G20 leaders at their summits in Washington DC last November and in London at the beginning of April was that the accounting standards for financial instruments are too complicated. They called for the standard setters to take action by the end of 2009 to reduce that complexity.

This shouldn’t come as too much of a surprise to any of us. IAS 39, ‘Financial instruments: Recognition and measurement’, has been subject to criticism since before it was issued. While the IASB did issue a discussion paper ‘Reducing complexity in reporting financial instruments’ last year, we have seen it accelerate its programme rapidly over the past few months.
 
In March, the IASB and FASB reaffirmed their commitment to a joint approach to the financial crisis and to the goal of seeking convergence between IFRS and US GAAP. The IASB also decided to prioritise development of a new financial instruments standard rather than making further amendments to existing requirements. Then, a couple of weeks ago, it decided to accelerate this project further, splitting it into separate work-streams with the aim of publishing a series of proposals, one after the other, on the following themes:

• Classification and measurement. The current premise is that a new standard should contain two measurement categories – fair value and amortised cost. As a starting point, the IASB is considering a classification approach similar to that in the forthcoming IFRS for small and medium-sized entities (SMEs), which distinguishes between basic financial instruments that are measured at amortised cost and other financial instruments that are measured at fair value. The IASB says that its goal is to publish an exposure draft on classification and measurement by the end of next month and to publish a final standard in November, which will provide the option of implementation in time for 2009 year-end financial statements.

• Impairment of financial assets. An impairment model will need to be determined if some financial assets are to be measured at amortised cost. Possible models under consideration are the incurred loss model currently in IAS 39, an expected loss model or fair value. The IASB’s plan is to request views from interested stakeholders in July, possibly to be followed by an exposure draft in October.

• Hedge accounting. The thinking about hedge accounting is not as advanced, but the IASB still intends to issue an exposure draft perhaps by the end of 2009 or in 2010.
 
There is undeniably a need and political pressure to address this area. But it is a huge undertaking to overhaul and simplify such a complex subject and to ensure in so doing that the learning points from the extreme stress-testing encountered through the financial crisis are addressed.

Some questions spring to mind: Can the standard-setters meet such an ambitious timetable? Are the issues too contentious for such a short comment period? Would it be better to have a shorter term solution and allow time for FASB and IASB to have a proper debate? Is their approach likely to see global convergence penalised to achieve a quick answer?

As always, I would be very interested in your views, either by email or by commenting here.

Comments

[LYF]

I think that time table is a little too ambitions as well.

What are you thoughts on IFRS for SME's? Do you think it's a good idea? Do you think it will create a divide between accountants?

[Muhammad Ali]

Dear Richard,

It is really commendable that IASB has accelerated on most contentious standard in IFRS literature i.e. Financial Instrument. I am afraid with such short span of time can IASB produce standard that at present is full of exceptions and complexity with "if and but" spread through out the standard. Nevertheless we should hope for best and expect that final standard, as iterated by the chairman of IASB, is far simplified and address all the issues with less exception and full embed principle.

[Mohd Shajahan]

There should be a starting point to achive most relevant and reliable IFRS. This 2009 and 2010 timetable may not need to be conclusive point for the achievement of understandable and less complicated financial instruments reporting. I believe the developments are continuos and end of 2009 could be the first milestone of the development.

[dofus kamas]

I always trust that IASB will improve what they should do.less "if and but" would be be beneficial to more people

[Umair]

It's good to see IFRS FOR SME. SME don't have to go through whole IFRS PROCEDURE. It will be clear as the time goes on probably much more simplified by the IASB. The standards will change with the point of view of better reporting. The developments are continuos, but hope not too continuos.