Supplementary memorandum by the IASB/IFRS
Foundation (ADT 50)
SUMMARY OF IFRSs UNDER REVIEW RELATED TO
THE GLOBAL FINANCIAL CRISIS
CONTEXT
1. At the request of the Group of 20 (G20)
Leaders, the Financial Stability Board, European Finance Ministers
and others, the work programme of the IASB continues to be guided
by the twin priorities of completing its comprehensive response
to the financial crisis, and the completion of its joint work
with the US Financial Accounting Standards Board (FASB) to improve
International Financial Reporting Standards (IFRSs) and US generally
accepted accounting principles (GAAP) and to bring about their
convergence.
2. The G20 has called for convergence in global
accounting standards to be completed by the end of 2011, as a
precursor to the establishment of global accounting standards.
The boards remain on track to achieve this goal.
3. IFRSs are now required or permitted by more
than 120 countries. By 2012, two-thirds of G20 members will have
mandated the use of IFRSs, with the remaining members having established
time lines to adopt or converge with IFRSs.
4. This remainder of this summary provides
a brief overview of the projects on the technical agenda of the
IASB related to the global financial crisis.
RESPONSE TO
THE FINANCIAL
CRISIS
5. In particular, the IASB was asked to
accelerate the review of aspects of the standards related to:
(a) financial instruments accounting, and in
particular the complexity of IAS 39 Financial Instruments: Recognition
and Measurement;
(b) the effectiveness of the incurred loss model
for loan provisions;
(c) off balance sheet risks in particular related
to securitisations (derecognition) and special purpose vehicles
(consolidation); and
(d) fair value measurement (otherwise known
as mark-to-market accounting) of assets especially when markets
became illiquid.
REFORM OF
FINANCIAL INSTRUMENTS
ACCOUNTING
6. In order to undertake a comprehensive
review of the accounting for financial instruments, while dealing
with the most urgent issues in a timely manner, the IASB split
the project to replace IAS 39 into three main phases—classification
and measurement, impairment accounting (provisions) and hedge
accounting.
Phase 1: Classification and measurement
7. In November 2009 the IASB finalised new requirements
for the classification and measurement of financial assets by
issuing IFRS 9 Financial Instruments. Although the mandatory application
date for IFRS 9 is 1 January 2013, it was made available for earlier
application from when it was published. Many jurisdictions have
already made IFRS 9 available for use by their registrants, including
Australia and New Zealand, Brazil, Hong Kong, Japan (for those
applying IFRSs from 2010) and South Africa. IFRS 9 has not yet
been endorsed for application in Europe, which prevents European
entities that want to apply the new requirements from doing so.
8. The IASB did not address the accounting for
financial liabilities in IFRS 9. Most respondents to the exposure
draft preceding IFRS 9 told us that the accounting for financial
liabilities worked well except for one aspect—the volatility
in net income that arises when an entity's own debt is measured
at fair value. In such cases, changes in the creditworthiness
of the issuer give rise to net income volatility (the "own
credit" question). There is particular concern that as an
entity's credit quality deteriorates, the entity reports accounting
gains, which is counter-intuitive.
9. In May 2010 the IASB published an exposure
draft proposing a solution to the own credit question. The comment
period ended in mid-July and the proposals were well received.
The IASB finalised and added these requirements to IFRS 9 in November
2010, with an application date of 1 January 2013 (although earlier
application is permitted).
Phase 2: Impairment
10. In June 2009 the IASB sought views on
moving to a more forward-looking expected loss impairment/provisions
model. In November 2009 it published an exposure draft outlining
such a model. Recognising the significant challenges of moving
to such a model, the exposure draft had a long comment period
of eight months, ending on 30 June 2010. During the comment period,
the IASB set up a panel of credit and systems experts—the
Expert Advisory Panel (EAP)—to advise the IASB on the operational
issues associated with introducing an expected loss impairment
model. Prudential regulators were active participants in the EAP,
and the IASB and its staff have maintained an active dialogue
with prudential supervisors, including regular meetings with the
Accounting Task Force of the Basel Committee on Banking Supervision.
11. The IASB received broad support for a move
to an expected loss impairment model. However, a number of operational
challenges were identified, and the EAP has suggested solutions
for many of them.
12. The IASB and FASB have been considering
their impairment proposals. In doing so each board began to develop
a model for impairment accounting that was a variant of its original
proposal. However, both boards are committed to enhancing comparability
internationally in the accounting for financial instruments. In
particular, they are committed to seeking a common solution to
the accounting for the impairment of financial assets. The importance
of achieving a common solution to this particular issue has been
stressed to the boards by the G20, regulators and others.
13. On 31 January 2011 the boards jointly
published a supplement to the December 2009 exposure draft. This
supplement presents an impairment model that the boards believe
will enable them to satisfy their individual objectives for impairment
accounting while achieving a common solution to impairment. The
objective remains to complete this phase by 30 June 2011.
Phase 3: Hedge accounting
14. On 9 December 2010 the IASB published
an exposure draft of proposals to revise hedge accounting. The
proposals address hedge accounting for both financial and non-financial
exposures. Of all the phases of this project, this phase is of
the greatest relevance to (non-financial) corporate stakeholders.
Comments are due by 9 March 2011. The FASB has plans to invite
comments on the IASB document.
15. The IASB expects to publish proposals
on portfolio hedging in the summer.
Other developments: Balance sheet netting of derivatives
and other financial instruments
16. In response to stakeholders' concerns
(including those of the Basel Committee on Banking Supervision
and the Financial Stability Board), the IASB and FASB expanded
the scope of the joint project on financial instruments to address
the netting or offsetting of financial assets. This is the single
largest source of difference between the statements of financial
position (balance sheets) of financial institutions using US GAAP
and those using IFRSs. A common solution would be of great assistance
to regulators and other users of financial statements.
17. On 28 January 2011 the boards published a
joint exposure draft proposing changes to IFRSs and US GAAP that
would align the reporting of offsetting financial assets and liabilities.
The changes would be more significant for those entities currently
applying US GAAP because, for some US banks, it would result in
reporting significantly more assets and liabilities on their balance
sheets. The boards have heard consistently from the G20, regulators
and others that a common solution is preferable. The boards are
aiming to finalise the proposals in the first half of 2011.
ACCOUNTING REQUIREMENTS
FOR OFF
BALANCE SHEET
ACTIVITIES
Derecognition
18. At the time that the financial crisis
developed, the requirements in IFRSs and US GAAP in relation to
derecognition were different. US GAAP had an emphasis on legal
isolation and also had a concept called a "qualifying special
purpose entity" (QSPE) that was often used for securitisation
arrangements. The IFRS approach is based on a combination of risks
and rewards, control and continuing involvement. The financial
crisis forced the FASB to make short-term amendments to its existing
requirements (SFAS 140 and FIN46R) and improve the related disclosures.
As a consequence, the FASB reduced the opportunities to move assets
and liabilities off balance sheets by tightening the requirements
and eliminating the concept of a QSPE.
19. At the same time as the FASB was making its
changes, the IASB developed and exposed proposals aimed at improving
the assessment of when a financial asset should be derecognised
and also at providing users of financial statements with more
and better information about an entity's risk exposure. The overwhelming
preponderance of the responses was that the existing requirements
had stood up well during the crisis and that fundamental changes
to the IASB derecognition criteria were not needed. However, the
responses highlighted the need for improved disclosure to assist
investors.
20. Even though some differences remain
between the boards' derecognition requirements, they thought that
it would be more appropriate to conduct a post-implementation
review of the FASB's new requirements before conducting any additional
work in this area. Instead, the IASB refocused its efforts on
improving derecognition-related disclosures for both transferred
assets that remain on the balance sheet and for those that are
derecognised. The IASB completed and issued those improvements
in October 2010 and they are effective for periods beginning on
or after 1 July 2011.
Consolidation
21. In 2008, as part of its comprehensive
review of off balance sheet activities, the IASB published an
exposure draft of a comprehensive replacement of the consolidation
requirements, including a new definition of control of an entity
that would apply to all entities and that would be more difficult
to evade by special structuring. The exposure draft also proposed
enhanced disclosures about securitisation and investment vehicles
(such as special purpose entities and structured investment vehicles)
that an entity has sponsored (or with which it has a special relationship)
but does not control.
22. In June 2009, the FASB completed a project
that amended and improved US GAAP to address reporting issues
in standards for consolidation of variable interest entities (and
related disclosures). Those issues had been highlighted by the
financial crisis.
23. In October 2010 the FASB, in conjunction
with the IASB, held round-table meetings to consider a staff draft
of the new Consolidations IFRS. The aim of the public meetings
was to help the FASB to decide whether it should publish an exposure
draft based on the IASB's forthcoming IFRS, as a first step towards
aligning the requirements for what US GAAP refers to as voting
interest entities.
24. In the light of the responses, the FASB
has decided to expose the principal-agent sections of the IFRS
model. The IASB modified some wording in the staff draft to address
matters raised at the round table. The IASB is now finalising
what will become IFRS 10 Consolidated Financial Statements, which
it plans to issue in late February in conjunction with IFRS 11
Joint Arrangements and IFRS 12 Disclosure of Interests in Other
Entities.
25. Some small differences will remain in
relation to voting interest entities. US GAAP will continue to
allow some entities controlled by votes not to be consolidated.
The FASB chose not to implement the full IFRS model now, but to
review application of IFRS 10. Despite this gap, the changes made
by both boards align the recognition and disclosure requirements
for the areas that caused the greatest concern during the financial
crisis.
FAIR VALUE
MEASUREMENT
26. The objective of this project is to
develop a common definition of fair value and common implementation
guidance between the FASB and the IASB, such as guidance on measuring
fair value when markets are illiquid. Achieving convergence of
the definition of fair value is necessary to achieving full convergence
of any standards that require a fair value measurement. The IASB
standard will not, and the FASB standard did not, introduce any
new requirements about when to use fair value. The fair value
standards are concerned only with how to measure fair value.
27. In June 2010 the FASB published exposure
drafts proposing minor amendments to the wording of the US GAAP
requirements and the IASB exposed a proposal to clarify one disclosure
requirement. The boards have considered the responses to those
proposals and plan to finalise the new standard, which will be
IFRS 13 Fair Value Measurement, early in the second quarter.
31 January 2011
| 
