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Fifth meeting of Financial Crisis Advisory Group

May 22, 2009

The Financial Crisis Advisory Group (FCAG) was established by the IASB and US FASB in response to the recent global financial crisis.

Its purpose is to advise both Boards about the role of accounting during the crisis and potential changes. The FCAG held its fifth meeting in London on 22 May 2009. Presented below are the preliminary and unofficial notes taken by a Deloitte observer at the meeting. For related information please see our Credit Crunch Page.

IASB-FASB Financial Crisis Advisory Group Meeting22 May 2009

The Financial Crisis Advisory Group held a short public session prior to entering a closed administrative session during which it would draft its Report to the Chairmen of the International Accounting Standards Board and the US Financial Accounting Standards Board.

Recent developments: IASB decision to split the Comprehensive Financial Instruments Project into three sections

Sir David Tweedie explained that, as a result of the FASB's April 2009 amendment of FAS 115 and FAS 124, with respect to 'other than temporary' impairment of financial instruments, the IASB had come under intense pressure to modify IFRS to follow suit: the problem was that IFRSs do not have the concept of an 'other than temporary impairment' nor is the IFRS impairment model compatible with that in US GAAP generally. To accommodate the requests to follow the FASB FSPs would be too difficult for the IASB to do and would distract its efforts to meet the undertaking made to the G20 to present proposals for a comprehensive replacement of IAS 39 later in 2009.

The IASB had considered various alternatives, but had decided that the best chance that it has to meet both the simplification and timeliness objectives is to split the comprehensive replacement of IAS 39 project in to three:

  • Classification and measurement – Exposure draft in July 2009, two to two-and-a-half months for comment;
    • There would be two categories that would drive measurement: fair value and amortised cost (with a likely fair value option for the latter category).
    • The IASB will explore two ways of making this categorisation: (i) any financial instrument that is traded would be at fair value, with all others at amortised cost; or (ii) debt instruments at amortised cost (with fair value option) and equity instruments at fair value.
    • Financial statement presentation issues (the split between gains and losses reported in net profit and loss and those reported in Other Comprehensive Income) were to be resolved, but it was highly likely that there would be no recycling between OCI and Profit or Loss.
  • Impairment – request for views (given the classification model developed) to be issued at the same time as the above ED
  • Hedging – to follow, once classification is finalised
The entire package is to be delivered by mid-2010. In response to a question, Sir David noted that the current pressure is on Available for Sale financial instruments and the impairment rules in IAS 39; the IASB hopes that by 'fixing' classification, that pressure would be relieved. Aligning US GAAP and IFRS was not possible, since the two models have fundamentally different starting points.

Sir David also noted that, given the time scales involved, any involvement of the Financial Instruments Working Group would probably have to be through email comments rather than a physical meeting.

Robert Herz, FASB Chairman, noted that there was a desire at the FASB to arrive at a good common answer with the IASB and that the FASB would use its best efforts to achieve that. However, he cautioned that some of his Board had very different views from their IASB colleagues, especially with respect to the potential 'widening' of the amortised cost category. He noted that, in his jurisdiction, the 'appetite for convergence at the price of improvements' was not there. He also noted the recent developments in the US - especially the 'stress test' developed by the US Federal Reserve and banking regulators, which he noted had a greater degree of transparency and accommodated future changes in accounting standards. He saw these developments as helpful and commended the Fed for their very constructive assistance as the tests were being developed. A member noted that it was especially worrying that the IASB and the FASB seemed to be in different positions on the categorisation of financial instruments and thought that this was a dangerous place to be. Several other members echoed these concerns, expressing the hope that the Boards would be able to agree on what financial items qualified for measurement at amortised cost.

An FCAG Co-Chairman noted that he was becoming increasingly concerned with the political environment and in particular the continual pressure on standard-setters from bankers (preparers and preparer associations) and finance ministers. The focus of these efforts is a relaxation of financial reporting standards that would permit financial institutions to boost their balance sheets: The result is that investors are getting lopsided financial reports, know they are getting lopsided reports and thus continue not to trust the information they are receiving. This is delaying any potential financial recovery.

The other Co-Chairman noted that the pressure on the IASB at the moment threatened the considerable progress of the past 15-20 years, in particular the removal of the reconciliation requirements for SEC registrants using pure IFRS. 'Scapegoating' the financial reporting standard-setters was unjustified and unhelpful, but to lose IFRS at this stage would be tragic and the long-term costs of such an event would be significant. Other FCAG members supported these comments.

A member noted that much of the current stress has been created between two jurisdictions: the US and EU; however, the financial crisis is a global one and IFRS is used in many jurisdictions. Having the IASB being constantly asked to accommodate the EU was risking having it diverted into non-productive areas wasting time and resources. The FCAG's report must, therefore, express strong support in favour of a global investor-focused set of financial reporting standards.

A member noted that piecemeal changes to financial reporting standards risked undermining confidence in the market. He noted that there was a great deal of cynicism among investors (especially in the US, the market with which he was most familiar). If investors lose trust with financial reporting standards any real recovery in the financial markets would be difficult to achieve. The IASB and FASB should not accept a solution that could be seen as ridiculous. (He suggested that changing financial reporting standards to avoid portraying reality was rather like trying to avoid the consequences of climate change by asking the scientists to recalibrate their thermometers.)

A bank regulator was concerned about the confrontational tone of some of the comments. What was needed was a cooperative attitude, understanding and respecting each others' views, in order to reach a solution. It was clear that financial reporting standards were not the cause of the crisis-that was accepted-but it was also true that they were linked to the crisis and had a role in the solution. Thus it was important to engage the bank regulators in a constructive manner. It was noted that a recent Working Paper (No 16, Findings on the interaction of market and credit risk) contained very little criticism of financial reporting standards and was far more critical of banking regulation.

Another banking regulator noted that the Financial Stability Board and the Basel Committee had made strong statements in favour of independent, private-sector financial reporting standards, in particular those of the IASB and FASB, and that the two groups had worked and continue to work to preserve the independence of the Boards. He noted the constructive cooperation between the Basel Committee and the IASB's Expert Advisory Panel that led to the very useful guidance issued in October 2008, and on the work currently under way on pro-cyclicality. He noted that the FCAG's report should note that financial reporting standard-setting is at its best when it demonstrates its independence by following due process and responding to reasonable (and reasoned) input.

Closing comments

At the invitation of the Co-Chairmen, FASB Chairman Herz stated that the IASB and the FASB 'would move heaven and earth' to achieve a common solution, but the concern of some FASB members is that 'broadening' the amortised cost bucket was not in the best interests of investors. Sir David agreed, saying that a common answer was vital. IASB members also were concerned about limiting the number of items that could be included in the amortised cost category.

Next steps

The FCAG will now draft its report. The Co-Chairmen noted that it would probably be necessary to meet in July 2009. This meeting would take place in New York.

This summary is based on notes taken by observers at the FCAG meeting and should not be regarded as an official or final summary.