A taste of what US MNCs said in their comment letters.
With over 1,569 comment letters posted to its website, it’s fair to say the FASB’s proposed update on new approaches to measuring financial instruments, including loans and core deposits, on a fair value basis, have garnered some interest.
It’s also fair to say that few companies or banks are endorsing the proposals, officially known as Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities—Financial Instruments (Topic 825) and Derivatives and Hedging (Topic 815). Indeed, banks are quite vocal in their opposition as well as on the adverse impact such accounting guidance will have on banking activities in a recovering economy (more on this later). The comment period ended September 30.
Multinational corporations are less opposed by comparison, but the impact to their investment portfolios and the volatility introduced by the mismatch between potentially measuring their own debt (along with other financial instruments on the balance sheet) at fair value while non-financial instruments are carried differently draws ire. Almost all MNCs are quick to point out that the proposed FASB guidance creates further divergence with IFRS standards, and with the SEC supposed to decide on global convergence by 2011, greater convergence is advised.
One area where they would like both sides to offer more flexibility is with changes to business model considerations so that cash-investment portfolios could be characterized as being in the business of collecting cash flows from investments in debt instruments. This will allow companies to avoid impairment and mark-to-market volatility so long as the cash flows on these investments are coming in. On the equity side, most argue for greater retention of the equity method.
On the hedge accounting front, the comments range from almost total approval to a smattering of talking points on issues such as:
- Wanting more clarity on what is meant by reasonably effective
- Wishing for short-cut and critical terms match to be continued in the name of the “simplicity objective”
- A desire to keep even more of a component-based hedge approach (bifurcation of risk)
- Disagreement on ineffectiveness due to underhedges impacting the P&L
- Allowing voluntary de-designation of hedges to continue
- Asking for further assurances that FX hedges intercompany cash flows continue to be allowed
At least one comment letter, like the one from McDonald’s, also picked up on the due process issue presented with the decision by the FASB not to issue a redline version of the ED, with specific proposed amendments indicated. We will have more to say on this in the coming weeks, but it will be interesting to see how the FASB responds to the lack of support for its proposed changes.