FASB change of view – a positive sign for convergence or still no meeting of minds?
Some of the comments coming out of the US at the end of 2010 implied that convergence of IFRS and US GAAP was still a long way off. But on 25 January, the FASB tentatively decided to allow certain financial instruments to be measured at amortised cost. Following the decision in December to go for a common approach to impairment (more on that in a future blog), this looks like progress.
However, the tentative decision certainly doesn’t lead to full convergence on financial instruments– for one thing, the FASB has suggested three business strategies, while IFRS 9 uses a ‘mixed measurement’ model with only two categories of financial assets. This difference is a fundamental one; so, although on the face of it it looks like a step towards convergence, in reality there is still no meeting of minds between the two boards. It does, however, show that standard setters do listen. Leslie Seidman said that the FASB received ‘overwhelming feedback’ that preparers, auditors and others prefer loans held for collection to be carried at amortised cost.
Personally I like to think that the PwC survey of investors and analysts issued last summer What investment professionals say about financial instrument reporting also had some bearing on the decision.
Following the tentative decision, US GAAP companies will be permitted to use amortised cost for assets that are managed with the intention of collecting the contractual cashflows. This will have most impact in the banking industry for bank loans issued to individuals and entities in the ordinary course of business. Unsurprisingly, the American Bankers’ Association welcomed the move, describing it as a ‘turn in the right direction’, although there was still more work to be done.
Other financial assets held as part of the entity’s investing or trading activity would still be held at fair value, with movements either through other comprehensive income or in net income. For more details on the tentative decision, see the recently issued Straight away 'FASB changes course on financial asset classification and measurement'.
In my previous post on the response to the revenue recognition standard, I commented on how many letters had been received by the IASB on that publication. This FASB decision shows that it is worth making your view heard. You can shape the future of financial reporting.
On the matter of financial asset classification and measurement, I am pleased to see a mixed-measurement approach being suggested, as I think this is more practical for many entities, but it remains disappointing that fundamental differences in approach remain between the boards.
I would be interested in your thoughts. Is this good news? Should we still be concentrating on convergence? Do you think the US will ever move to IFRS and, if not, what impact might that have on other transitioning territories?