FASB took what appears to be two steps back from convergence with the International Accounting Standards Board (IASB) last week with a pair of major tentative decisions in its project on accounting for financial instruments.
In the classification and measurement portion of the project, the board decided not to continue to pursue its proposed “solely payment of principal and interest (SPPI)” model to determine the classification and measurement of financial assets.
The fundamental principles of FASB’s proposed SPPI model were aligned with the IASB’s model, although the boards already differed in other areas on classification and measurement.
FASB instead decided to retain the bifurcation requirements for embedded derivative features in hybrid financial assets in current U.S. GAAP. Board members said that although the current guidance is complex, the SPPI model also was complex.
“The outcome [of the SPPI model] would be similar, but the cost would be great,” FASB Chairman Russell Golden said.
The board directed the staff to perform additional analysis of whether FASB should develop a new approach for using a cash flow characteristics test for financial assets.
Decisions made last week also keep FASB’s proposed model separated from the IASB’s proposed model on impairment in the accounting for financial instruments project. FASB voted to continue refining its proposed current expected credit loss (CECL) model for impairment.
The proposed CECL model would call for the allowance for credit losses on the balance sheet to represent lifetime expected credit losses. At each reporting date, the changes to that allowance would be immediately recognized as an increase or decrease of the allowance, and an impairment expense in net income.
FASB’s proposed CECL model calls for more upfront recognition of loan losses than the IASB’s proposed model. The IASB has proposed initial recognition of expected credit losses for 12 months. After initial recognition in the IASB model, lifetime expected credit losses would be recognized for financial assets that experience significant deterioration in credit quality.
FASB and the IASB have struggled to reach common ground in the financial instruments project despite international pressure to bring their standards together. The G-20 Finance Ministers and Central Bank Governors in February urged the boards to achieve a single set of high-quality standards for this topic by the end of 2013.
The divergence on impairment has resulted in part from conflicting feedback the boards have received on what investors want. An overwhelming majority (92%) of investment professionals said in a recent CFA Institute survey that FASB and the IASB should arrive at the same model for estimating credit losses.
But Americas respondents in the survey preferred FASB’s model (53% to 41%), while the IASB model was preferred by respondents in Europe, the Middle East, and Africa (50% to 40%) and Asia Pacific (49% to 42%).
Ken Tysiac (
) is a JofA senior editor.