IASB proposes two-part solution to troubled financial assets

BVWireIssue #82-3
July 22, 2009

Last week (July 14, 2009) the International Accounting Standards Board (IASB) published “Financial Instruments: Classification and Measurement.” These proposals will form part of the IASB’s “comprehensive review of financial instrument accounting,” the Board says, in a related release. The proposals will:

  • significantly reduce complexity and make it easier for investors to understand financial statements;
  • address how financial instruments are classified and measured; and
  • answer concerns raised by interested parties during the financial crisis (e.g., eliminating the different impairment approaches for available-for-sale assets and assets measured using amortized cost).  

Critics are already weighing in. “Rewriting laws in a hurry is never a great idea, but that is exactly what the International Accounting Standards Board…has been forced to do,” says a recent article in the Economist:

IASB’s proposed solution…is to put all financial assets into two buckets. Loans and securities which share the characteristics of loans—in other words, assets that derive their value only from interest and repayment of principal—will be held at cost, provided banks can show they will hold them for the long term. Everything else, including equities, derivatives and more complicated securities, will be held at fair value. Companies will be allowed to start applying the new rules from the end of this year, and will be obliged to by 2012.

“This is far simpler than the existing system,” the article adds. “But according to one bank’s finance chief, defining the boundary between the two types of assets is likely to prove tricky.” The IASB “still needs to be on its guard,” the Economist observes, in a related story. “First, it must police the boundary between the two categories with a big stick….Second, IASB must ensure that investors can still find out the market price of any asset being carried at cost—a far better indicator of many assets’ toxicity than managers’ opinions.”

The Board is currently inviting comments on the exposure draft by September 14, 2009; a copy is available on the “Open for Comment” section at www.iasb.org.

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