Preparing for an informed conversation with the IASB later this year, FASB seeks comment on IAS 39.
Back in December the International Accounting Standards Board released its proposals to overhaul IAS 39. As it stands, constituents have until March 9, 2011, to comment directly to the IASB. Now the Financial Accounting Standards Board is inviting users to comment on those proposals as well, giving them until April 25, 2011, to comment.
FASB said its purpose in inviting comment on the proposals now is to solicit opinions in order to assist the FASB “as it continues its deliberations to improve and simplify its hedge accounting guidance.” Then in the second quarter of 2011, FASB plans to participate in the IASB’s discussion of the comments it received.
At first glance it appeared as though the IASB was heading in the right direction and would result in making hedging more of a rule rather than a “limited exception.” But looking closer at the proposals, some felt that the IASB was in fact limiting the available approaches to risk management via its new guidance on hedge accounting (see related story here).
According to FASB, the IASB’s proposed guidance “would rely substantially on an entity’s risk management objectives as a basis for hedge accounting,” with IASB stating that, “The objective of hedge accounting is to represent in the financial statements the effect of an entity’s risk management activities that use financial instruments to manage exposures arising from particular risks that could affect profit or loss.” (See a good table from Deloitte on the similarities and differences between the FASB’s hedging model under the proposed ASU and the IASB’s ED on hedge accounting here).
The IASB’s December ED didn’t meet with approval of its full board, with one member, John T. Smith, voting against it, based on his view that it wouldn’t improve financial reporting. He further stated that reliance on risk management “provides little rigor” because “risk positions are arbitrary and can be changed according to an entity’s tolerance of risk, its expectations for the future and its assessment of the cost and benefits of entering into risk management activities.” Therefore, risk policies can be written “in any manner to permit an entity to move in and out of hedge accounting freely as a function of how it evaluates risk and documents its risk management policy.” Because of this heavy reliance on risk management, Mr. Smith felt hedge accounting should be the exception and not the norm.
In the FASB’s discussion paper, it included several questions on risk management for commenters to consider, including among others,
- “When an entity uses financial instruments to manage risk exposures in economic hedges but those instruments are not designated in hedging relationships for accounting purposes, do you believe that the proposed guidance would provide useful information about all of the effects of an entity’s risk management objectives?” And also,
- “Do you believe that the proposed guidance and illustrative examples included in the IASB’s Exposure Draft are sufficient to understand what is meant by risk management, how to apply that notion to determine accounting at a transaction level, and how to determine the appropriate level of documentation required? Why or why not?”
Both FASB and the IASB have been coming together on many issues that had slowed convergence (see related story here), with many observers feeling as though FASB was leaning toward the IASB’s accounting rules. It will be interesting to see in what direction the final IAS 39 revisions lean.