Are IASB and FASB Converging on Derivatives?

Although everybody involved in contemporary discussions of accounting standards claims to want convergence, and the idea of a single universal set of standards for accounting for hedge funds and derivatives use has an obvious appeal, the reality is more complicated, as a controversy among the ranks of Europe's accountants illustrates.

The International Accounting Standards Board, based in London, has proposed a rule that would bring the international accounting treatment of derivatives and hedging activities into line with the reforms recently enacted in the United States by the Financial Accounting Standards Board. There has been opposition to this proposal from European banks, and last week IASB representatives met with senior executives of British, French and German banks, according to a story in the Financial Times.

The opposition to the IASB's draft has been quite general, going to the premise of the rule that derivatives should in general be marked to market on balance sheets. Other more specific objections concern the practice of “macro hedging,” by which banks use derivatives to cover a net risk exposure that results from the combination of assets and liabilities. They want major changes to protect this practice.

The draft also requires basis adjustments for forecast transactions that result in the recognition of an asset or liability, which has provoked a lot of comment. Furthermore, the draft prohibits reversals of impairment on available-for-sale financial assets. Most of the responses the IASB has received on this issue disagreed with that proposal. In a statement issued prior to the April 28 meeting, the IASB said that the problem “posed by the issue is how to distinguish increases in fair value that represent reversals of impairment from other increases in fair value (below cost).”

Paul Cherry, the head of Canada's major standard setter, the Accounting Standards Board, has expressed his own belief that the IASB should not compromise with the European banks on these points. He said recently that his country's banks have failed to find an effective macro hedging model, and he would rather the IASB not take any action that would encourage them to re-open the issue.

The AcSB has announced recently its own new standards for accounting for derivatives. As Mr. Cherry said in a statement March 31, “The new standards are in line with what FASB has already done and match to where the IASB is moving. What we are doing is attempting to bring about more transparent financial reporting and at the same time closing a gap in [Generally Accepted Accounting Principles]. The AcSB has developed standards that we believe alleviate any conflict with U.S. GAAP, address unique Canadian circumstances and incorporate how the standards will interact with other aspects of Canadian GAAP.”

The only agreement to come out of the April 28 meeting was that the discussions would continue. Specifically, the IASB staff will work up a new paper on options for changes to the existing draft. IASB members will consider the paper at a meeting later this month, and, if they reach agreement, they will embark upon another round of public consultation.

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