Project Update

Accounting for Financial Instruments (formerly Financial Instruments: Improvements to Recognition and Measurement and including the Accounting for Hedging Activities Project)—Joint Project of the IASB and FASB

Last Updated: November 17, 2009 (Updated sections are indicated with an asterisk *)

This project update summarizes the project activities and decisions of the IASB and the FASB (Boards). It was prepared by the staff and is for the information and convenience of their constituents. All decisions of the Boards are tentative, may change at future Board meetings, and do not change current accounting and reporting requirements. Decisions of the Boards become final only after extensive due process.

Project Objective
Due Process Documents
*IASB Due Process Documents
*Decisions Reached at the Last Meeting
*Summary of Decisions Reached to Date
*FASB/IASB Comparison
*Next Steps/Project Plan
*Board/Other Public Meeting Dates
Background Information
Contact Information

Project Objective

The objective of this project is to significantly improve the decision usefulness of financial instrument reporting for users of financial statements. The project will replace the FASB’s and IASB’s respective financial instruments standards with a common standard. The Boards believe that simplification of the accounting requirements for financial instruments should be an outcome of this improvement. Although the project objective is comprehensive, it is also the Boards’ objective that the project should be completed expeditiously.

The Boards believe that this project will:

  1. Reconsider the recognition and measurement of financial instruments
  2. Address issues related to impairment of financial instruments and hedge accounting
  3. Increase convergence in accounting for financial instruments.

The Board decided to include redeliberations on the Accounting for Hedging Activities Project within this project.   Therefore, this project will also:

  1. Simplify and resolve practice issues in accounting for hedging activities
  2. Improve the financial reporting of hedging activities to make the accounting model and associated disclosures easier to understand for users of financial statements
  3. Address differences in the accounting for derivative instruments and hedged items or transactions.

Due Process Documents

The FASB and IASB issued for comment a Discussion Paper, Reducing Complexity in Reporting Financial Instruments, in March 2008. The comment period ended September 19, 2008.

Reducing Complexity Discussion Paper

Reducing Complexity Comment Letters

Reducing Complexity Comment Letter Summary

The Board issued an Exposure Draft, Accounting for Hedging Activities, on June 6, 2008. The comment period ended on August 15, 2008.

Accounting for Hedging Activities Exposure Draft

Accounting for Hedging Activities Comment Letters

Accounting for Hedging Activities Comment Letter Summary

*IASB Due Process Documents 

The IASB completed its first phase of classification and measurement with the issuance of IFRS 9 Financial Instruments on November 12, 2009.

*IFRS 9 Financial Instruments

The IASB issued an Exposure Draft, Amortised Cost and Impairment, on November 5, 2009 with a comment period ending on June 30, 2010.

*IASB Amortised Cost and Impairment Exposure Draft

 *Decisions Reached at the Last Meeting (as of November 4, 2009) 

The Board’s decision at the October 14, 2009 meeting was to initially measure financial instruments with subsequent changes in fair value recognized in other comprehensive income at the transaction price. At today’s Board meeting, the Board discussed how an entity would account for the difference, if any, between transaction price and fair value at initial measurement for those financial instruments in situations when it is clear that the transaction price differs from fair value. The staff was asked to develop a principle to help identify when the transaction price would differ from fair value and, if so, how to calculate the initial value of the financial instrument at that date, similar to FASB Accounting Standards CodificationTM Section 310-10-30 on initial measurement of receivables (originally issued as APB Opinion No. 21, Interest on Receivables and Payables). For example, if an entity issues a loan with a zero interest rate in a 5 percent market rate environment, it is clear that the transaction price differs from the fair value of the loan. In that situation the entity would record the loan at an amount other than the transaction price with the loss recorded in other comprehensive income. If the entity decides that the transaction involves any other consideration, an expense may be recognized relating to the other element in the transaction.

*Summary of Decisions Reached to Date (as of November 4, 2009)

The Summary of Decisions Reached to Date is provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Accounting Standards Update.

*Summary of Decisions Reached to Date (as of November 4, 2009)    

See the Accounting for Hedging Activities Exposure Draft above for decisions reached in the hedging project. Redeliberations on the hedging project will be included in this project and have not commenced.

*FASB/IASB Comparison

The following document provides a side-by-side comparison of the FASB and IASB proposed models for financial instruments. For a complete description of the FASB proposed model, see the Summary of Decisions Reached to Date section above. For a complete description of the IASB model, refer to the IFRS 9 Financial Instruments and the IASB financial instruments project website for a summary of their redeliberations to date.

*Comparison of FASB and IASB models (as of November 2009)

*Next Steps/Project Plan

The Boards will continue to develop a comprehensive model for accounting for financial instruments, including hedge accounting. The Boards plan to deliberate certain issues relevant to this project separately and then meet subsequently to reconcile differences in their technical decisions.. The Boards plan to jointly discuss the accounting for credit losses of financial instruments and hedge accounting.

The FASB is participating with the IASB in an Expert Advisory Panel (EAP) that will advise the Boards on the operational issues surrounding the IASB’s Expected Cash Flow approach and the FASB’s approach for determining credit impairments.

The FASB will continue to consider the financial statement presentation of financial instruments other than those measured at fair value with changes in fair value recognized in net income.

The IASB will separately consider whether to require presentation of:

  1. fair value for financial instruments measured at amortized cost on the face of the statement of financial position
  2. information about changes in fair value of financial instruments recognized at amortized cost on the face of the performance statement
  3. the components of other comprehensive income, including any fair value changes recognized in other comprehensive income on the face of the performance statement.

FASB Project Plan

The FASB expects to issue one Exposure Draft that addresses the measurement, classification, and impairment of financial instruments, as well as hedge accounting, by early 2010. The Board considered approaching the project in several phases and issuing multiple exposure documents. However, the Board believes that these issues are interrelated and that its comprehensive approach will result in requirements that are more coherent making it easier for constituents to react to and understand. For example, the Board is considering various impairment models and the possibility of selecting one of those impairment models for all financial instruments. The Board’s decision on impairment depends on the overall classification and measurement model for financial instruments as the classification and measurement model will influence the relevance and cost/benefit of each impairment model. The Board must also consider overlapping issues with respect to hedge accounting. In addition, a comprehensive approach to accounting for financial instruments may also reduce the possibility of entities having to change their accounting policies and systems on several occasions.

FASB Project Plan (as of November 3, 2009) 

The FASB has posted to its website a detailed description of its tentative approach to classification and measurement of financial instruments (see Summary of Decisions Reached to Date) as a way of informing interested constituents and obtaining early input from them. The FASB will continuously update that description as the Board makes additional decisions.

As another way of obtaining early input on tentative decisions reached and issues relevant to the Accounting for Financial Instruments project, the Board and staff have held informal discussions in addition to public roundtables with constituents. The Board and staff obtained input from various investors, preparers, auditors, regulators, and valuation specialists. The summary below is provided for the information and convenience of constituents who are following the project.
 

The FASB will consider input received on its tentative model as well as feedback received on the IASB’s Exposure Draft and IASB redeliberations as it develops its proposed Accounting Standards Update.

*FASB Outreach Summary (as of November 2009) 

IASB Project Plan

The IASB decided to complete its deliberations on the project in three phases:

    Phase 1: Classification and measurement—The IASB has completed this phase with the issuance of IFRS 9 Financial Instruments in time to allow, but not require, early adoption for 2009 calendar year end financial statements.

    Phase 2: Impairment—The IASB has made tentative decisions about impairment and issued an exposure document on amortized cost and impairment in November 2009. The comment period ends on June 30, 2010.

    Phase 3: Hedge accounting—The IASB plans to issue an exposure draft on hedge accounting in the first quarter of 2010.
The IASB plans to complete the remaining phases during 2010.

Click here to access the IASB's financial instruments project website for more information about the IASB project plan and IASB's summary of decisions reached to date.

*Board/Other Public Meeting Dates

The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Accounting Standards Update.

*November 10, 2009 Education Session—Discussions about the measurement attribute for core deposits
*November 4, 2009 Board Meeting—Additional decisions on initial measurement of financial instruments.
October 26, 2009 Joint Board Meeting—Discussions about presentation alternatives, impairment, and core principles related to the accounting for financial instruments.
October 21, 2009 Board Meeting—Decisions regarding a credit impairment model for financial assets measured at fair value with changes in fair value recognized in other comprehensive income.
October 14, 2009 Board Meeting—Decisions about recognition and initial measurement of financial instruments.
September 23, 2009 Board Meeting—Summary of feedback received through roundtable meetings and U.S. investor outreach and discussions about remeasurement approaches for the valuation of deposits.
September 16, 2009 Education Session—Discussions about the valuation of deposits.
September 14, 2009 Joint FASB/IASB Roundtable—Discussions about the IASB proposed model and FASB tentative model for accounting for financial instruments.
September 10, 2009 Joint FASB/IASB Roundtable (London)—Discussions about the IASB proposed model and FASB tentative model for accounting for financial instruments.
September 3, 2009 Joint FASB/IASB Roundtable (Tokyo)—Discussions about the IASB proposed model and FASB tentative model for accounting for financial instruments.
August 19, 2009 Board Meeting—Decisions regarding financial instruments within the scope of this project.
August 13, 2009 Education Session—Discussions about financial instruments within the scope of this project.
August 13, 2009 Board Meeting—Decisions regarding financial statement presentation alternatives for financial instruments.
August 5, 2009 Education Session—Discussions about the valuation of deposits and presentation alternatives for financial instruments.
July 29, 2009 Education Session—An external subject matter expert educated the Board and staff about the valuation of deposits.
July 24, 2009 Joint Board Meeting—Discussions about the tentative FASB model and proposed IASB model for financial instruments, including next steps.
July 15, 2009 Board Meeting—Decisions regarding categorization, measurement, and recognition methods of financial instruments
July 13, 2009 Education Session—Discussions about the classification and measurement of financial instruments.
July 9, 2009 Education Session—Summary of outreach and research performed and discussions about the classification and measurement of financial instruments.
June 24, 2009 Education Session—Discussions about amortized cost as a measurement method for financial instruments, various impairment models for financial instruments, and initial discussions about classification of financial instruments
June 17, 2009 Education Session—Discussions about measurement and presentation alternatives for financial instruments (Fair Value through OCI Dual Presentation Model)
June 3, 2009 Education Session—Discussions about the broad application of fair value measurement for financial instruments
May 6, 2009 Education Session—Discussions about another potential measurement method for financial instruments (Current Value Measurement Method)
March 24, 2009 Joint Board Meeting—Decisions on project objectives and discussion about potential measurement methods and characteristics for categorizing financial instruments
December 15, 2008 Board Meeting—Agenda Decision

 

 

Board Meetings related only to the Accounting for Hedging Activities project

 

 

April 30, 2008

Board Meeting – Board discusses final technical issues, effective date, and comment period

December 20, 2007

Board Meeting – Board discusses fair value approach to foreign currency hedges and instructs staff to draft an Exposure Draft for vote by written ballot

November 7, 2007

Board Meeting – Board discusses fair value approach to cash flow hedge accounting and possible exception to fair value approach for entity’s own debt

October 17, 2007

Board Meeting – Board discusses fair value approach to fair value hedge accounting

May 23, 2007

Board Meeting – Board adds hedging project to the agenda

January 31, 2007

Board Meeting – Board instructs staff to research accounting for hedging activities

Background Information

At their joint meetings in April and October 2005, the FASB and the IASB discussed the future of reporting for financial instruments. The Boards established three long-term objectives to improve and simplify the reporting for financial instruments:

  1. Develop a new standard for the derecognition of financial instruments
  2. Require all financial instruments to be measured at fair value with realized and unrealized gains and losses recognized in the period in which they occur
  3. Simplify or eliminate the need for special hedge accounting requirements.

In March 2006, the Boards further clarified their intentions to work together to improve and converge financial reporting standards by issuing a Memorandum of Understanding (MoU), A Roadmap for Convergence between IFRSs and US GAAP—2006 – 2008. As part of the MoU, the Boards worked jointly on a research project to reduce the complexity of the accounting for financial instruments. This joint effort resulted in the IASB’s issuance of the March 2008 Discussion Paper, Reducing Complexity in Reporting Financial Instruments, which the FASB also published for comment by its constituents. Focusing on the measurement of financial instruments and hedge accounting, the Discussion Paper identified several possible approaches for improving and simplifying the accounting for financial instruments.

In addition, the FASB was asked to address numerous issues on many aspects of hedge accounting. As a result, at its January 31, 2007 meeting, the Board directed the staff to research (a) issues causing difficulties in the application of hedge accounting and (b) potential approaches to accounting for hedging activities.

Based on that research, the staff identified seven issues that cause significant difficulties in hedge accounting:

  1. Strict documentation requirements 
  2. Lack of clarity regarding when dedesignation and redesignation is necessary 
  3. Which hedged items or hedged transactions could be included in a group 
  4. How effectiveness should be assessed and what should be included in effectiveness testing 
  5. How cash flows and different aspects of the discount rate should be incorporated into the measurement of a hedged item to determine the change in value attributable to an individual hedged risk 
  6. How ineffectiveness should be measured in a cash flow hedge and what features should be included in a perfect hypothetical derivative 
  7. What the consequences should be for failing to meet the criteria for hedge accounting 

The FASB issued an Exposure Draft, Accounting for Hedging Activities, on June 6, 2008 to address the issues identified.

At the October 2008 joint FASB/IASB meeting, the FASB and IASB staffs presented summaries of the comments received on both the Discussion Paper on reducing complexity and the Exposure Draft on hedging.

  • A majority of respondents to the Discussion Paper supported a significant change in the current requirements for reporting financial instruments. In addition, many of the user respondents expressed support for the Boards’ working together on a project to simplify the accounting for hedging activities, provided that the simplification would reduce the complexity of financial statement interpretation.
  • A majority of respondents to the Exposure Draft were concerned that many of the proposed amendments would create further divergence between hedge accounting under U.S. GAAP and under IFRS; many of these respondents urged the Boards to work together on a joint project to improve hedge accounting, noting that the FASB’s hedge accounting project could be incorporated into the Boards’ research projects on reducing complexity.

At the joint meeting in October 2008, the FASB and IASB decided to create an advisory group that comprises senior leaders with broad international experience in financial markets. The Financial Crisis Advisory Group (FCAG) was asked to identify any accounting issues that require the Boards’ urgent and immediate attention as well as issues for longer-term consideration. On July 28, 2009, the FCAG issued their Final Report.

The Boards also organized three round tables in 2008 – one each in London (November 14, 2008), Norwalk (November 25, 2008), and Tokyo (December 3, 2008). The purpose of these round tables was to (a) allow members of the Boards to hear input from a wide range of stakeholders, including users, prepares, and auditors of financial statements, regulators, and others; and (b) help the Boards identify accounting issues that may require their urgent and immediate attention to improve financial reporting and help enhance investor confidence in financial markets.

Participants in the round tables made general comments about the importance of (a) working toward convergence between IFRS and U.S. GAAP and (b) allowing sufficient due process before the IASB or the FASB make any changes to current accounting guidance. Participants raised the following issues at the round tables: (a) impairment, (b) fair value option, (c) fair value measurement, (d) clarification of the interaction of conflicting accounting standards, and (e) clarification for investments in collateralized debt obligations.

In addition to considering the potential for short-term responses to the credit crisis, both Boards emphasized their commitment to developing common solutions aimed at providing greater transparency and reducing complexity in the accounting of financial instruments. As starting points for this longer term objective, the Boards considered the comments received in response to the Discussion Paper on reducing complexity and the Exposure Draft on hedging, the deliberations of the Financial Crisis Advisory Group advisory group, input received at the 2008 round tables, and input received from the IASB Financial Instruments Working Group.

Contact Information

Akwasi Ampofo
Project Manager
aaampofo@fasb.org

Upaasna Laungani
Assistant Project Manager
ulaungani@fasb.org

 

Additional Details