Financial Instruments and International Convergence

by Leah Donti, MBA

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Allison Henry, Vice President - Professional & Technical Standards, spoke with Leah Donti, MBA, an internationally credited certified management accountant, to get her take on FASB’s latest position on financial instruments.

What effect does FASB’s proposed accounting standards update, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, have on financial instruments and international standards convergence?
In their recent exposure drafts, the IASB and FASB have taken two different approaches to financial instruments, despite the Group of Twenty’s direction to make convergence a high priority. This is puzzling because FASB has collaborated with the IASB on financial instruments for many years. In 2008, IASB issued a discussion paper dealing with financial instruments in which the FASB solicited comments. Both boards requested comments on their exposure drafts until September 2010.

The finance world continues to create new financial instruments, therefore, we can continue to expect ongoing evolution of accounting standards. Most financial instruments involve counter parties from different countries, making it important for the boards to reach a consensus in this area. After IFRS, it will be difficult for the United States to claim unique needs pertaining to financial instruments. We cannot have the debit side of one transaction from the U.S. party accounted for in a different way from the counter party in another country. This has the potential to create confusion for users of the financial statements.

How effectively do you believe this standard (or other standards issued in conjunction with it) addresses the issues surrounding fair value accounting?
Fair value—a measurement tool to evaluate performance on the income statement—is here to stay. Many finance companies complained about unrealized losses in 2008, but in 2009, when they experienced substantial unrealized gains, there were no objections heard.

 

How does the proposed standard affect investors, 401(k) participants, and other nonfinancial services businesses with investments on their books?
If a firm does not have significant financial instrument transactions, their financial instruments will not be heavily affected by this statement.Investors of financial instruments such as those in 401(k) plans might wish to have a consistent domestic or international model with which to measure fair value of all instruments. It is a high priority to achieve this with a global standard.

Does this standard portend future changes in standard-setting? If so, what might this indicate?
FASB and IASB are working on numerous projects. The area of financial instruments has created problems for accountants who are trying to understand the finance models that value these instruments. On the other hand, finance professionals are also challenged by the financial statement implications of these standards. Both accounting and finance people need to work together to fine-tune fair value accounting.

The financial instruments exposure draft also includes significant changes for hedge accounting, and proposes a major overhaul of this area.

FASB and IASB will make it a priority to work together on this standard, and are likely to go down in history for achieving significant improvements in this area. The financial statement presentation project will be significantly affected by decisions made about financial instruments. The lease exposure draft is another area that will be affected.

Every CPA should become familiar with the new exposure draft, and if possible, participate in a FASB round table or attend a seminar on this subject.

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Leah Donti is a provider of continuing education seminars on topics including international accounting, stock options, business combinations, variable interests, revenue recognition, fair value accounting, and A&A updates.