FASB Chairman Provides Update on Financial Instruments

Editor's note: On April 14, FASB and the IASB said the priority projects on revenue recognition, leases and financial instruments, scheduled to be completed in June, would require a few more months of work. No specific deadline was set for the projects. Read "FASB, IASB Announce Delay on Priority Projects" for more information.

In part two of this exclusive JofA interview, FASB Chairman Leslie Seidman provides updates on accounting for financial instruments.

JofA: Could you comment on the status of the financial instruments project?

Seidman: Financial instruments is on a track different from [revenue recognition and leases] in the sense that the IASB and [FASB] started at different points. If I can just digress back to [revenue recognition] and leasing—those we started together. So, we’re very much on the same timetables, trying to work toward the final standards, as I laid out.

Financial instruments—that was not the case. The IASB, as you know, issued IFRS 9 [Financial Instruments] last year. We decided to approach it in a more comprehensive manner, issuing one exposure draft to address all of the different aspects of the proposal.

Having said that, we are still trying to come together with a converged standard on financial instruments. We’re approaching it in phases, though, because of the fact that we started in different places.

Our current emphasis is on impairment of financial assets. You mentioned before that we had issued an exposure draft, and let me just correct the terminology there.

It does not represent a full-blown exposure draft in the sense that it does not contain all of the guidance that we would expect to include on a standard addressing impairment of financial assets. Rather, it is intended to solicit feedback on a new approach relative to what the FASB exposed and to what the IASB originally exposed with respect to impairment of financial assets.

What we’re asking companies and other participants in the process around the world to do is weigh in on whether they think this modified approach represents a good starting point for a new standard on impairment. It reflects some of the thinking of the FASB in the sense that we’re keenly interested in making sure that the balance sheet represents an allowance that would cover the expected losses that you can foresee at the reporting date.

The IASB is keenly interested in making sure that the income statement reflects the interest that has been charged as compensation for the arrangement and the expected losses in income in a pattern that was anticipated at the inception of the loan. Then, to the extent that there are changes in those expectations, they would be reflected in income currently. So, it’s a marriage of the two points of view, if you will.

We’re asking people, do you think that’s an improvement? Do you think that it’s operational? If we got the green light that people think that it does form an appropriate basis for the new standard, then we’ll fully develop it into a standard. So, the impairment issue is something that we’re working on intensely with the IASB to try and come to a converged, improved standard as soon as we possibly can.

There are many other aspects to the financial instruments project though, as you know. The hedging aspects of it are also on a different track. The IASB has exposed a proposal on hedging that is much more comprehensive than what we had exposed.

So, what we are doing at this point is asking U.S. constituents to let us know whether they think [the IASB proposal] forms the basis for an improved, converged standard on hedging. We will take that under advisement at about the same time that we had planned to talk about the comments we received on our hedging proposal. I can’t signal yet how that’s going to go, but that is the plan at this point for hedging.

We will also be participating in the IASB’s discussions of the comments they get on their hedging proposal. So, we’ll be at the table to hear that firsthand.

On the more key issues having to do with the measurement of financial instruments, the IASB has issued IFRS 9. We issued an exposure draft that was different from IFRS 9 in many respects.

We received a great deal of commentary on our proposal, which had proposed that all financial instruments would be carried at fair value. But then it went through a decision tree to distinguish between cases where the gains and losses would go through income, and cases where the gains and losses would go through other comprehensive income. There are a couple of other exceptions that I won’t go into.

The feedback we got on that proposal from our constituents, including investors, accounting practitioners and other interested parties, was overwhelmingly opposed to the idea that all financial instruments should be carried at fair value. Many of our constituents believe that, at least in some cases, financial assets and financial liabilities should be carried at cost.

So this is a case where our due process procedures indicated to us that many of our constituents, including investors, did not agree with a fundamental aspect of the proposal. We’ve already had a couple of meetings so far on that. The board unanimously agreed to change the proposal so that at least some financial assets and financial liabilities would be eligible for cost accounting. We are still working through exactly what the cases would be where those items would be carried at cost.

But another important point to make is that we also received overwhelming feedback from investors that they do think that there is a need to provide enhanced disclosures about financial instruments, especially in those cases where things are carried at cost. So, I want to make it clear that we will be attempting to provide a comprehensive set of information for investors that includes a mixed attribute approach on the balance sheet, but also a robust disclosure package. The disclosures would give insight to other risks that are present in financial instruments, including fair value, credit risk, which we actually significantly enhanced in the recent year, and interest rate risk, such as asset liability mismatches. So, the idea is to end up with a complete standard that provides information that’s relevant to everyone.

FASB Chairman Provides Update on Financial Instruments

Where to find June’s flipbook issue

Leases standard: Tackling implementation — and beyond