The swaps and derivatives association says derivatives should be reported on a “net” basis.
The IASB and FASB can go back and forth all they want when it comes to converging international and US accounting standards, but that won’t stop ISDA from weighing in. In a recent blog post, the International Swaps and Derivatives Association (ISDA) backed Generally Accepted Accounting Principles (GAAP) treatment of derivatives vs. the looser international rules.
US GAAP says that derivatives be reported on a net basis instead of on a gross basis – the preferred treatment of the International Accounting Standards Board or IASB. The IASB, said ISDA, “has permitted significantly less balance sheet offsetting than the US-based Financial Accounting Standards Board (FASB).”
“ISDA believes that net presentation, in accordance with US GAAP, provides the most faithful representation of an entity’s financial position, solvency, and exposure to credit and liquidity risk,” ISDA wrote in its post. What’s implied here is that the current mess European banks find themselves in probably wouldn’t have happened had those banks used GAAP rules. The extent of European banks’ exposure to the debt of Greece, Spain, Italy, et al has nearly sunk both banks and the euro itself.
Currently, the US and international accounting authorities are hashing out a way for their two standards to come together – or more accurately, a way for the US to just adopt the international standards. But this has been a slow process with many delays (the European debt crisis hasn’t helped). Now a decision on convergence may not come until mid-2013. The SEC is now examining a mechanism for incorporating IFRS into US GAAP on a rule-by-rule basis, vs. a full adoption carried out in the EU. Last year the SEC offered up a “condorsement” approach, which would be a phase-in approach to convergence (5 to 7 years) followed by an endorsement. Observers say this drip by drip approach means convergence might never happen.
Having ISDA weigh in on the side of GAAP could add to the anti-IFRS noise and lead to more foot dragging by the US. “The treatment of netting under US GAAP ensures the accounting practices regarding netting are appropriately aligned with this state of affairs. The IFRS approach, in our view, creates distortions and misperceptions in the treatment of derivatives,” ISDA wrote.