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

Sep 24

Written by: Jack Ciesielski
9/24/2009 7:14 AM 

September 14 was the deadline for comments on the IASB's exposure draft in its "classification and measurements phase" of its three-part project for replacing its financial instruments standard, IAS 39. That document will receive a lot of attention at the Pittsburgh G-20 summit, I suspect.

I certainly hope not. I was not a fan of the proposal, as you can see in my comment letter. In short, there was nothing in it that even remotely appeared to be advantageous to investors. The proposal preserved the economic fiction of amortized cost accounting for financial instruments, with all its attendant needs for an impairment model and stilted hedge accounting.

In perhaps the most best example of accounting double-speak, the proposed accounting was positioned as a "simplification move" because it eliminated several categories of financial instrument classifications, leaving only two possible classifications: amortized cost and fair value. Yet by preserving the amortized cost category, or at least giving it in prominent classification home, they've simplified nothing. They concocted a stilted method of determining which financial instruments should get amortized cost treatment, depending on the way a firm's managers use the instruments, which will be malleable to management intent and require plenty of future interpretation by the IASB and the IFRIC. And they've still got the problems of getting managers to recognize impairments on a timely basis, unless they come up with a toothless impairment model like we have in GAAP.

Had they required full fair value, the only major problem would be measurement. And if accountants and managers applied themselves to that problem with as much determination as they have to preserve amortized cost, well, I think that the problems could be overcome.

The IASB seems to be trying to show leadership by getting their proposal out the door quickly in response to G-20 prods for improving financial instrument reporting. And there's a competitive edge to it, too: it puts the FASB into the position of having to follow their lead or reject it, making them look like they're anti-convergent ugly Americans -even if they have a better idea. (They DO have a better idea, and I've addressed it in my most recent Accounting Observer report. Sorry - subscribers only.)

 But being first isn't always leading - and certainly this is not leading. It's capitulation to those who want to preserve the status quo. Real leadership from the IASB would have been requiring financial reporting that benefits investors, not insurance companies or bankers. Going against the grain and giving fair value reporting the prominence itdeserves would have been real leadership.

Enough of that. One overlooked part of the exposure draft was an alternative view posited by IASB member James Leisenring - and it's much better, investor-wise and in terms of complexity-cutting, than what the rest of the board supported. His approach: require all financial assets and financial liabilities be recorded at fair value through earnings except originated loans retained by the originator, trade receivables and accounts payable.

Not as good as full fair value, but it would get much closer to it than the Rube Goldberg accounting proposed by his fellow board members. No new systems work for preparers, no convoluted classification decisions to be made requiring consultation with auditors, no constant amending of standard for guidance on the same.Just fair value for all financial instruments except loans, trade receivables and accounts payable. Now that's real complexity reduction.

And maybe even real leadership.

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