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In 2006, the IASB and the FASB (the boards) agreed on a Memorandum of Understanding (MoU) that identified the short-term and longer-term convergence projects that would bring the most significant improvements to IFRSs and US GAAP. The MoU was updated in 2008.
The boards are close to completing the MoU programme:
In the previous report it was indicated that neither board would issue a new standard until it had first considered: whether re-exposure was necessary; secondly, that it had considered the feedback on the proposed final standard; and thirdly, that it was satisfied that the standards were operational. In mid-2011, the boards jointly announced that they had decided to re-expose both the revenue recognition and leases proposals. This decision was made in response to feedback from a broad range of global constituents who raised concerns about the significant impact these standards would have on financial reporting. While formal decisions have not been made by the boards on classification and measurement and impairment of financial instruments, taking into consideration the significance of the changes that these projects propose, it is expected that they will also be re-exposed.
The IASB and the FASB are continuing to work expeditiously on reaching converged solutions on financial instruments, leases and insurance projects. However, that work is being undertaken at a pace that enables thorough consultation to be undertaken with a particular focus on ensuring that potential solutions are operational. The boards expect that they will begin redeliberations of their joint project on revenue in the second quarter of 2012, and that they will re-expose their projects on classification and measurement, impairment, leases and insurance in the second half of 2012. They expect to issue final standards on these projects by mid- 2013.
Delays in completing these much-needed improvements to financial reporting are unfortunate, but necessary to ensure that any changes are operational and will bring about an improvement to financial reporting in these important areas. It is incumbent on the boards to ensure that changes made to accounting requirements are appropriate, that stakeholders have had the opportunity to participate fully in the process, and that the boards have been responsive in considering stakeholder feedback in the process. Re-exposure, in this case, is part of that process.
Classification and measurement of financial instruments
IASB
The IASB completed the classification and measurement chapters of IFRS 9 'Financial Instruments' in 2009 for financial assets and in 2010 for financial liabilities. IFRS 9 has resulted in simplifying the classification and measurement model for financial assets to two categories (amortised cost and fair value) with a single impairment model. Tainting rules are eliminated and embedded derivatives are no longer required to be separated from their financial asset host contract.
The volatility in profit or loss resulting from fair value measurement of a company’s own debt is addressed by requiring such gains and losses to be recorded within Other Comprehensive Income (OCI).
In December 2011, consistent with its commitment to ensure that entities are able to apply all phases of IFRS 9 simultaneously, the IASB deferred the mandatory date of IFRS 9 from 2013 to 2015. Early adoption is still permitted.
FASB
In 2010, the FASB published an exposure draft addressing the classification and measurement of financial instruments, impairment accounting and hedge accounting. The FASB’s exposure draft proposed a much greater use of fair value measurement than does IFRS 9, with almost all financial instruments on the balance sheet at fair value. The proposal included an amortised cost option for certain financial liabilities.
Responding to the feedback received on the exposure draft, the FASB tentatively decided that at least some assets should qualify for amortised cost accounting, based on the business activity the entity uses to manage those financial assets.
The FASB has tentatively decided that three different business strategies are relevant to the classification of financial assets and have tentatively decided that bifurcation of financial instruments should be retained. The FASB also tentatively decided that financial liabilities would be measured at amortised cost unless the business strategy for the financial liability at acquisition, issuance or inception is to transact subsequently at fair value, or to sell in a short sale. Those financial liabilities would be classified at fair value through net income.
Next steps in financial instruments
As noted above, the boards have reached different answers on matters such as the number of classification categories, which assets should be measured at fair value, where fair value changes should be recognised, and the bifurcation of embedded derivatives. In addition, there are important legacy differences, such as whether items measured through other comprehensive income should be recycled to net income when they are sold.
The IASB and the FASB have consistently received feedback from stakeholders to the effect that every effort should be made to make their respective financial instruments accounting standards converge. In November 2011, the IASB agreed to consider modifying IFRS 9, particularly in view of convergence and the insurance contracts project. The IASB noted that any changes should be made in a manner that minimises disruption for those who have already started to apply or were close to applying IFRS 9.
At the January 2012 joint meeting, the IASB and the FASB agreed jointly to consider ways in which their models could be better aligned. The boards are planning to discuss key areas of differences over a series of public board meetings through the second quarter 2012.
The boards will focus on discussing: which instruments are eligible for amortised cost (i.e. contractual cash flow characteristics and business model criteria); the need for bifurcation of financial assets, and, if pursued, the basis for bifurcation; the basis for and scope of a possible third classification category (debt instruments measured at fair value through other comprehensive income); and any knock-on effects (for example, disclosures or the model for financial liabilities given the financial asset decisions).
At the February 2012 meeting the boards tentatively agreed to the same contractual cash flows test, which removed a significant difference between their models.