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The AAO Weblog covers accounting issues and current events as they relate the practice of investment analysis.

 
 
Sep 14

Written by: Jack Ciesielski
9/14/2009 10:31 AM 

In response to the financial crisis, the IASB has speed-balled a proposal to rejigger the accounting for financial instruments. Issued in July, with the comment period ending today, the proposed accounting would give investors a new prism through they can view financial statements. Only two kinds of accounting would exist for financial instruments: amortized cost or fair value. But they can't look at the same financial instruments both ways - a batch of financial instruments would be classed one way or the other. You wouldn't see financial instruments reported at amortized cost, with a fair value for thesame holding reported at fair value.

It's a cloudy prism for investors. And the criteria for determining what gets amortized cost treatment and what gets fair value treatment is a dog's breakfast of rules and management intentions - something prone to require constant guidanceand interpretation in practice, as companies seek to maximize the amount of assets in the amortized cost category.

I've written a comment letter regarding the proposal, which is not yet on the IASB's website - but you can see it here.

This project may seem like an exercise in hair-splitting, but it isn't. Everyone wonders about the fate of IFRS convergence; this project may be pivotal in that quest.

The FASB has also undertaken a project to improve financial instrument reporting but has a much more investor-favorable approach, yet one that is fair to all. So far, it calls for the inclusion of fair values and amortized cost on a firm's balance sheet - at the same time. All of the information that any party would want is displayed right from the start. Changes in fair values of financial instruments that are currently carried at amortized cost would be shunted through the burial grounds known as "other comprehensive income." One major improvement, however: the other comprehensive income statement would have to be displayed on the same page as the income statement. It couldn't just be a basement for hiding ugly economic activity: the statement of OCI would havenew prominence.

This is a very different path from where the IASB is heading, and a much better one, I think. It's possible the two standard setters will go their separate routes. If they do, convergence - in the short term, at least - will be stopped in its tracks. It's possible that the IASB will come around to the FASB's thinking, though there's no indication it's imminent. It's also possible FASB will be coerced into coming around to the IASB's thinking: the G-20 meeting will be taking place in less than two weeks and you never know if the US delegates will use US accounting convergence as a means to getting something they want from the EU. Let's hope not. The FASB's idea is too good to waste. More in the next Analyst's Accounting Observer.

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