Financial reporting

  The International Accounting Standards Board (IASB) issued a new financial instruments standard that introduces an expected-loss impairment model. But the standard falls short of the goal of convergence with financial instruments guidance being developed by FASB.

IFRS 9, Financial Instruments, is the final element of the IASB’s response to the global financial crisis.

The IASB and FASB worked for years to meet international calls for a converged financial instruments standard, but their efforts proved unsuccessful in part because they were unable to agree on a model for impairment.

The standard, which takes effect for annual periods beginning on or after Jan. 1, 2018, includes:

  • A model for the classification and measurement of financial instruments.
  • The new impairment model.
  • A substantially reformed model for hedge accounting.
  • Changes removing the volatility in profit or loss that was caused by changes in the credit risk of liabilities elected to be measured at fair value.

“The reforms introduced by IFRS 9 are much-needed improvements to the reporting of financial instruments and are consistent with the requests from the G-20, the Financial Stability Board, and others for a forward-looking approach to loan-loss provisioning,” IASB Chairman Hans Hoogervorst said in a news release. “The new standard will enhance investor confidence in banks’ balance sheets and the financial system as a whole.”

The lack of convergence with the standard FASB is developing, though, falls short of the goals of some in the international community. FASB’s standard is expected to be published late this year.

Although the IASB and FASB agreed that their standards needed to reflect expected-loss rather than incurred-loss principles, they developed different models for recognizing those expected losses.

The AICPA Financial Reporting Executive Committee wrote to FASB in May 2013 strongly supporting convergence but said convergence should not be more important than a high-quality accounting standard.

The standard published by the IASB provides an approach for the classification of financial assets that is driven by cash flow characteristics and the business model in which an asset is held. This single, principles-based approach replaces existing, rules-based requirements that, according to the IASB, are considered complex and difficult to apply. The new model also aims to remove complexity by applying a single impairment model to all financial instruments.

The new expected-loss impairment model is designed to require more timely recognition of expected credit losses, addressing concerns about delayed recognition of credit losses on loans that arose during the financial crisis. Entities will be required to account for expected credit losses from the time that financial instruments are first recognized and to recognize full lifetime expected losses on a more timely basis, according to the IASB.

A transition resource group the IASB plans to form will support stakeholders in the transition to the new impairment requirements.

The IASB’s substantially reformed model for hedge accounting will enhance disclosures about risk management activity. The hedge accounting changes are designed to align the accounting treatment with risk management activities, enabling these activities to be better reflected in financial statements. The changes are designed to give financial statement users more information about risk management and the effect of hedge accounting on financial statements.

In addition, IFRS 9 will bring about changes in an entity’s own credit risk reflected in profit or loss. An entity will no longer recognize in profit or loss gains caused by the deterioration of an entity’s own credit risk that are elected to be measured at fair value. Early application of this change, before any other changes in the accounting for financial instruments, is permitted by IFRS 9.

A summary of the project is available on the IFRS website at

  The goal of global accounting standards will be achieved at some point, an IASB official said in South Africa.

Ian Mackintosh, vice-chairman of the IASB, called global accounting standards “desirable, achievable, and … inevitable” in a speech in Johannesburg.

Although more than 100 countries have adopted IFRS, some large countries, including the United States, remain undecided. Standards in individual countries “add cost, complexity, and translation risk to companies and investors operating in today’s global marketplace,” Mackintosh said.

“As economic globalization continues apace, so too will the force of the arguments in favor of IFRS adoption within these remaining jurisdictions,” Mackintosh said. “That is why I believe that we should not fret too much about the timing by which we get every jurisdiction onto global standards.”

Mackintosh’s comments differ from recent comments attributed to IASB Chairman Hans Hoogervorst. The Business Times in Singapore reported that Hoogervorst said that full convergence with U.S. accounting standards is unachievable.

In the United States, there have been signs recently that the SEC is at least considering whether to give U.S. public companies an option to use IFRS for financial reporting. During a speech in May, SEC Chairman Mary Jo White said that considering whether to further incorporate IFRS into the U.S. financial reporting system is a priority for her, adding that she hoped to be able to say more in the near future.

The AICPA favors one global set of accounting standards and urged the SEC in 2012 to allow U.S. public companies the option to adopt IFRS. In a statement in 2012, AICPA President and CEO Barry Melancon, CPA, CGMA, said an adoption option would provide a level of consistency in the treatment of foreign private issuers (which the SEC allows to use IFRS for financial reporting) and U.S. companies. Melancon said an adoption option would facilitate the comparison of U.S. companies that elect IFRS with their non-U.S. competitors that use IFRS.

In May, the IASB and FASB released a historic, converged revenue recognition standard. However, they have had difficulty achieving convergence on two projects: leases, in which the boards are moving forward with different approaches, and financial instruments.

Mackintosh acknowledged the success in the revenue recognition standard but also the struggles regarding other projects.

“At the same time, we have also seen failures in convergence in other important areas, such as in the financial instruments project,” he said. “In various aspects of this project, including the netting of derivatives, loan-loss provisioning, and in the classification and measurement of financial instruments, we have seen the boards sit around the table and reach a converged outcome, only to see that agreement melt away.”

He predicts a different outcome regarding the adoption of IFRS around the world.

“IFRS has become the de facto global language of business, and over time, the IFRS map of the world will be complete,” Mackintosh said.

  The number of restatements announced per year by SEC-registered companies has fallen significantly since the early years of Sarbanes-Oxley implementation, according to research released by the Center for Audit Quality (CAQ).

Restatements, which surged in 2005 and 2006, fell to a 10-year low in 2009 and remained relatively low through 2012, according to the research report authored by Susan Scholz, a University of Kansas professor. The report is available at The research, which was commissioned by the CAQ, examines restatements and their severity from 2003 to 2012. The research chronicles several regulatory and policy changes in the past 15 years that may have affected financial statements.

Restatements rose 66% to 1,600 in 2005 and peaked at 1,784 in 2006, soon after the implementation of internal control over financial reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX), P.L. 107-204.

But restatements fell steadily over the next three years, reaching a low of 711 in 2009, and remained fairly constant at 817 in 2010, 810 in 2011, and 738 in 2012, according to the research.

“As the paper capably summarizes, policy developments—such as new laws, regulations, and auditing standards—have played a role in these positive trends,” CAQ Executive Director Cindy Fornelli said in a news release. “This is an encouraging development for all market participants, especially the investors who play such a critical role in the effective functioning of our capital markets.”

The CAQ is affiliated with the AICPA.

One policy development was the SEC’s introduction of Form 8-K Item 4.02 to report certain restatements. Since late 2004, the SEC has required companies to disclose a restatement on Form 8-K Item 4.02 if the restatement renders a company’s overall financial statements unreliable.

These “4.02” restatements, which are generally considered more serious than other restatements, peaked in 2005, when they accounted for 61% of all restatements. Since then, the percentage of 4.02 reports compared with overall restatements has fallen steadily to a low of 35% in 2012.

The study includes 10,479 restatements publicly disclosed by U.S. and foreign filers registered with the SEC. The report also found that:

  • Restatement periods were shorter in later years, falling from an average of 2.06 years in 2005 to about 17 months each in 2008, 2009, 2010, 2011, and 2012.
  • The average stock price reaction to restatements was –1.5%. This reaction was measured as the percentage change in the stock price at the time of the announcement, adjusted for the overall market return.
  • Average stock prices declined more for the more serious 4.02 restatements. Reactions to 4.02 restatements averaged –2.3%, compared with –0.6% for non-4.02 restatements.


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