Tweedie’s third way could help bridge the rules gap

Sir David Tweedie

The bridge between US and international fair value rules may lie in a third proposal, which could offer account users a convenient means to reconcile the two divergent accounting standards.

The International Accounting Standards Board (IASB) and its US counterpart the Financial Accounting Standards Board (FASB) have taken differing approaches to classification and measurement of bank assets; an issue at the centre of accounting issues highlighted by the crisis.

The IASB released a mixed-measurement approach in November. This divided banks’ assets into those intended to be traded, measured at their fair value; and those which are held to maturity, measured at amortised cost. The FASB proposal, released on 26 May, values all assets at fair value, but discloses the cost.

The two bodies will have to reach agreement on their two standards if they are to converge to a global set of standards by their likely June 2011 deadline.

Last month IASB chairman Sir David Tweedie told the Journal of Accountancy that the two standards could be reconciled on paper.

“There are ways to do it,” he said. “Say we both stick to our same positions, maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value…FASB would do the opposite.”

Accountants say this “Tweedie model” would require agreement in a third area; which to the uninitiated seems like little more than a formating change.

The IASB wants to place two income statements on the same page. Under the proposal the profit and loss statement and the statement of “other consolidated income” (OCI) would be printed together in financial statements.

The move would offer account users all the numbers they need, within the same statement, to reconcile the US fair value rule with the international rule. However this approach is not without its critics.

“While reconciliation is one way of dealing with the situation, it must be inferior to full alignment of the rules,” said Kathryn Cearns, consultant accountant with lawyers Herbert Smith. “It’s to be hoped that as people respond to both the IASB and FASB on these proposals they will come to one standard instead of two different ones.”

Veronica Poole, global IFRS leader with Deloitte, believes reconciliation is not a clear cut process. She said the con­trasting fair value measurements feed through to other calculations, including interest rate accrual, impairment and hedging. “Disclosure does not substitute for convergence,” she said. “The actual measurement basis you are using has to feed through to all the numbers.”

The IASB is seeking feedback on its OCI proposals, with the deadline closing 30 September.

In our view

It’s becoming increasingly clear that FASB and the IASB need to come to some form of agreement on financial instruments. A sticking plaster won’t cut it. Changes to the presentation of OCI may make it easier for account users to reconcile different measurement models, but let’s be clear, this isn’t convergence.

Further reading:

iasb.org