International reporting: April 2014

Peter Walton considers the rollout plan for IFRS 9, Financial Instruments, as the International Accounting Standards Board (IASB) debates the finer details

In February the IASB tentatively agreed that the final version of IFRS 9, Financial Instruments, should have a mandatory implementation date of 1 January 2018 (with earlier adoption allowed). However, just as the IASB is amending its original classification and measurement model to converge with the Financial Accounting Standards Board (FASB), the US standard-setter has decided to drop that model as too complicated and improve its existing rules.

The IASB has been issuing parts of IFRS 9 since 2009, and gradually replacing IAS 39, Financial Instruments. Impairment has proved to be the most difficult area. The IASB believes it has worked out a compromise that banks think is feasible and should result in credit losses being recognised earlier. However, this is at a cost of delay, and finally, without finding a common solution that satisfies the US.

Notwithstanding, the IASB has tried to converge its basic classification and recognition model by moving from the original two classes of financial asset (originally agreed with the FASB but subsequently abandoned by them) to three classes, as in the FASB’s more recent proposals. This amendment and the impairment requirements have now been finalised, and should be put to the ballot with the final standard issued around the middle of 2014.

However, the mandatory effective date has been set at 1 January 2018. The board had promised a long lead time to allow time for endorsement at individual country level and for banks to make the necessary systems changes. A number of board members preferred to go for 2017, urging that the standard, the main response to the financial crisis, was long overdue.

The counter argument is that aside from banks, the main industry sector affected is insurance, which will also be impacted by the IASB’s insurance contracts standard. The insurance industry has stressed that if there is to be a complete change in its asset accounting under IFRS 9, and eventually in its insurance liability accounting, it would like to make both changes at the same time. On balance, the IASB preferred to give the extra year in the hope that the insurance standard would also have been issued by that time.

ARC refuses to endorse IFRS 9

For European companies, the picture is complicated by the fact that the EU Accounting Regulatory Committee (ARC) has refused to endorse for use in the EU any parts of IFRS 9 so far issued. EU countries are still using IAS 39. While IFRS 9 is much more bank-friendly than IAS 39, there is no guarantee that some interests will not take advantage of the elaborate EU endorsement mechanism to oppose it, as happened with IAS 39.

The European Commission is intending to add to the endorsement process by formally considering political and economic issues related to standards. It is quite possible that IFRS 9 could be one of the first standards to go through the new and untried procedure. The extra year may well be needed.

Constituent discontent

On the wider front, the FASB has been enduring a winter of discontent. Apart from heavy amounts of snow being dumped regularly on its Connecticut base this winter, it has faced much constituent pushback on convergence.

This is not new: the joint impairment proposals were sunk in the US by constituents and the revenue recognition standard has been held up for months for the same reason. This time it is financial instruments and insurance which have been rejected.

The first to go was the financial instrument classification and measurement model. Initially, FASB decided that the contractual cashflows’ method of classification was too complex and should be abandoned, and then that the business model should go too. The FASB has tentatively decided to look at ‘targeted improvements’ to its existing rules.

The FASB started the financial crisis with a four-mode system, decided with the IASB that it preferred two, then moved to three, and looks to be headed back to four now.

The second crash this year has been insurance. The FASB has decided its short-term contract model does not need changing and that for life insurance it will improve its existing model instead of going to a variant of the international standard.

Outside the US, insurers are likely to cheer because there is now a much better chance of the IASB standard being finalised sooner rather than later. Inside the US, some think they will have to catch up eventually to the standard the rest of the world’s insurers will be using. In both cases, a lot of standard-setting resource has been wasted.

Peter Walton PhD FCCA is an Emeritus professor at the Open University Business School


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