Convergence unachieved after IASB publishes financial instruments standard

The International Accounting Standards Board (IASB) on Thursday 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 the US Financial Accounting Standards Board (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 January 1st 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.”

Convergence not achieved

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.

In a December 2012 letter to FASB and the IASB, the Basel Committee on Banking Supervision expressed concern that the boards may not reach convergence and reiterated the committee’s strong support for a converged standard. In July 2013, the Basel Committee urged the boards to reconvene to reach a converged solution.

The Financial Stability Board also restated its support for a converged standard in a September 2013 report.

“It continues to be very important to have a globally applied standard on accounting for loan loss provisions, which recognises losses on portfolios earlier and more consistently,” the report stated.

Although the IASB and FASB agreed that their standards needed to reflect expected-loss rather than incurred-loss principles, they developed different models for recognising those expected losses. An IASB summary of the financial instruments project states that the international board worked closely with FASB throughout the development of IFRS 9. The summary states that although every effort was made to reach a converged solution, those efforts were unsuccessful.

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

IASB’s new approach

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 recognised, and to recognise 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 recognise 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.

Ken Tysiac ( is a CGMA editorial director.