IFRS 9 leaves IASB with impaired convergence

YOU MIGHT have long suspected it, but now it’s official: the IASB and the US Financial Accounting Standards Board have failed to develop a common financial instruments accounting standard. We have no convergence.

The reality about the lack of a single asset impairment model emerged during a 23 January IASB meeting. It leaves preparers playing piggy in the middle between the competing IFRS and US GAAP models.

Speaking at the meeting, Hans Hoogervorst, chairman of the IASB, said the two boards would meet later this year “once the two models are completely clear”. Regulators, he explained, have the option of imposing “additional disclosures” in order to bridge the gap.

Hoogervorst, a former Dutch securities regulator and finance minister, added: “But we cannot let the preparers pay the price for the two boards not getting completely converged.”

On 20 February there was worse to come. On the parallel effort to finalise the board’s approach to classification and measurement, Hoogervorst was forced to concede: “What can we say? A lot of work has been done for nothing, it seems.”

IASB member Patrick Finnegan was equally blunt in his assessment: “I would just observe the same thing. I joined this board with a full expectation that there were great aspirations for global convergence in three or four major areas. … It is a terrible disappointment, in my opinion, for global investors.

“I’m not quite sure what more we can do if the two boards continue to work the problem … but the FASB has decided not to continue with the current IFRS 9 proposed work plan that we developed, and unfortunately that’s the way it is.”

The board also voted to fix a new effective date for IFRS 9, Financial Instruments, of 1 January 2018. IASB members were reluctant to delay the standard, or make further changes to it, pending decisions on the linked insurance contracts literature.

Later that same meeting, staff reported that the FASB will almost certainly reject two central features of the IFRS 9 classification and measurement approach – the business model and the contractual cashflow assessments for amortised cost.

So how did it come to this? The IASB embarked on its project to replace IAS 39 in early 2009. It is possible to distill any number of motivations and drivers for the project: to respond to the financial crisis; to reduce complexity; to address the too-much too-late criticism of the IAS39 incurred-loss impairment model.

The project began under the chairmanship of Sir David Tweedie, and glancing back at an official IASB project summary document from 2009, a fully-fledged classification and measurement, impairment and hedging model was supposed to be in place by the final quarter of 2010.

As is now plain to see, the board failed. In 2009, it issued the first completed phase of IFRS 9, which dealt with the classification and measurement of financial assets. It followed this in 2010 with a further module addressing financial liabilities and the fair value option.

In its 2013 iteration, the standard has acquired a new hedging model. This approach to hedging is something of a marmite experience. On the one hand, its supporters claim it will make hedge accounting available in more situations; its critics point to its complexity.

Also in 2013, the board put out proposals to add a new category – fair value through OCI [other comprehensive income] – to IFRS 9. Redeliberation of those proposals is now complete and the IASB has confirmed it will include the FVOCI category alongside fair value and amortised cost.

Since 2009, the standard has also featured a presentational option that allows entities to book gains and losses on fair value holdings of equity investments in OCI. And impairment? Well, the board published its first proposals in November 2009 and followed this with a so-called supplementary document in January 2011. The 2011 document marked the high-water mark of the convergence drive with the FASB.

From that point onwards, what was supposed to be a convergence effort degenerated into a religious war. If the pre-crisis years had been marked out by the clash of fair value and amortised cost, the new battle lines were between 12-months initial loan loss allowance and the FASB’s preference for full lifetime expected losses on initial recognition.

And it was here that the convergence effort truly floundered. But as insurmountable though the technical challenges of two competing financial instruments models might appear, there is a much bigger issue: politics.

In recent weeks, the European Parliament has shown an increased willingness to challenge the IASB, even going so far as to propose linking funding for the IASB’s activities to specific outcomes.

Separately, the G20 nations have urged the two boards to come up with a single financial instruments model. At some point in time, Hoogervorst is going to have a very awkward conversation with his political masters.

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  • Apple Pie

    The whole process of convergence is more “marmite” (Eurpoean focused) than apple pie (US focused), There are two parties to convergence. The IASB appears to believe it should rule and all others should follow. Disappointment? Heck, yes, the US is disappointed, too, that the IASB has chosen routes that do not improve US GAAP.

  • Motherhood

    I can’t agree “the whole process of convergence is more European focused than US focused”. The IASB conceded way too much to the US in a vain attempt to win them over to IFRS.

    Tweedie knew well before leaving the ASB of the desire for the UK GAAP principles that earned him his knighthood to be taken global. He also knew that key to global convergence was the support of the US. Among his last few standards at the ASB was FRS 18 which effectively removed prudence from UK GAAP along with the definition of “realised” previously in SSAP 2. Provisioning for future losses had already been ruled out by FRS 12. At the time of FRS 18, the ASB was questioning in its own Statement of Principles whether its methodology was lawful. It carried on regardless as a pretext to its attempt to converge with US GAAP.

    Among the principles we have lost along the way is substance over form. We are meant to believe it is the same as faithful representation but that is just hoodwinking all who rely on financial reporting.

  • Apple Pie

    If the IASB conceded way too much to the US in an attempt to win them over the IFRS, then isn’t that a political rather than technical decision? If they do that with the US, will they also bend to other countries for the sake of adoption of IFRS, which also might not be the best technical accounting decision?

  • Motherhood

    To get a global set of standards, Tweedie realised he needed to win over the US. Absolutely that was a political decision and one he failed to achieve but it explains the nonsensical standards we have in some areas focusing on short-term decision taking instead of long-term stability in the wider public interest. It’s also why the profession has redefined its overriding objective of “serving the public interest” to fit the situation they find themselves in. The courts will rule against such audacity before long.