11 January 2012

FASB January update including update on international convergence activities

Regarding international convergence activities, the FASB informed that last month the SEC staff released two documents describing the remaining differences between US GAAP and IFRS, and examining the variations in the way IFRS was applied by various foreign companies whose financial statements had been filed with the SEC. The SEC is expected to make a decision on whether or not to incorporate IFRS into the US financial reporting system sometime in the next several months. The FAF recently issued a comment letter on this issue.

Joint discussions continue on a number of projects, including:

Leases—The Boards’ views on a number of topics have changed during redeliberations. Leases with less than a one-year term will not be capitalised. Variable (contingent) rentals will only be included in the lease liability when they are index-based or in-substance fixed, and renewal options will be included in the lease liability only if there is significant economic incentive that the renewal would be exercised. Leases with greater than a one-year term will be accounted for as a finance lease with interest related to leases and lease amortisation separately reported each period.

Financial Instruments—The FASB and IASB have been working jointly on how to calculate credit losses in an impairment model. The approach has not yet been fully developed, but is intended to be applicable to all debt instruments (including both loans and securities). Based on the most recent decisions, impairment for financial assets that are debt instruments would follow a “three-bucket” approach based on deterioration in credit quality. All originated and purchased financial assets would initially start in Bucket 1 and would move into Bucket 2 and Bucket 3 as credit quality deteriorates. The allowance for instruments in Bucket 1 would include losses expected to materialise in the next 12 months). The allowance for instruments in Buckets 2 and 3 would be an estimate of remaining lifetime expected losses.

The FASB and IASB finalised their proposals on balance sheet offsetting. This will mostly result in enhanced disclosures that will provide users both net and gross information for certain derivative instru­ments and financial instruments. The objective of the disclosures is to facilitate comparison between those entities that prepare their financial statements on the basis of US GAAP and those entities that prepare their financial statements on the basis of IFRS. The disclosures will also provide information about the impact of collateral on offsetting arrangements and other amounts subject to a master netting agreement that are not offset on balance sheet. The new rules will be effective in 2013.

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