IASB Chair Charts Path to New Fair Value Standard; Rejects Interim Adoption of US Standard

The IASB is on target to replace the fair value accounting standard embodied in IAS 39 with a new standard that will attain broad global acceptance. In remarks before the European Parliament’s Economic and Monetary Affairs Committee, IASB Chair David Tweedie said that the new fair value rules would be adopted after an extensive consultation that will take into account the views of all stakeholders, including the Committee, ECOFIN, central banks and regulators. The comment period on the proposed reform of IAS 39 has ended, said the Chair, and the IASB received letters from more than 200 individuals and organizations. Additional board meetings have already been held, and will continue to be scheduled as required to complete the project in time for the 2009 financial year.

The IASB chief rejected the suggestion that the Board adopt the FASB standard in the interim. He noted that stakeholders in the European Union have warned against blindly adopting US standards. Indeed, he noted that the Committee questioned the adoption of IFRS 8 on operating segments a few years ago on that ground. The IASB does not want to be bound to US standards when the Board believes that there is a better way to secure the confidence of international capital markets and investors.

He also emphasized that the IASB’s adoption of FASB’s position would neither create a level playing field, nor put an end to the level playing field question. The IASB’s impairment rules are very different, he noted, and on many issues EU financial institutions would not want the IASB to adopt the US approach on impairment. For example, the IASB permits reversals of losses in a number of instances, and FASB does not. Moreover, impairments under IFRSs have different triggers from those in US GAAP. It is for this reason that even today, after the change made by the FASB, some in the US are arguing that EU banks have a competitive advantage.

In the view of Chairman Tweedie, the IASB’s proposals on classification and measurement are consistent with the reform principles recently announced by the G-20. For example, the proposals to revise IAS 39 would significantly reduce the complexity of financial instrument accounting. In addition, the proposals are consistent with the view of many stakeholders, including the Basel Committee, that cost-based accounting is appropriate for some categories of financial instruments.

In order to provide transparency and reflect economic reality, the IASB’s emphasis has been to define, in a balanced and transparent way, the appropriate criteria for classifying instruments to be measured at cost and at fair value, noted the Chair, and not to increase or decrease arbitrarily the use of fair value. Whether there is a decrease or an increase of fair value will depend on a particular institution’s business model and holdings.

The IASB is not proposing that the loan book of banks should be held at fair value. As a result, the Board expects that banks primarily engaged in the traditional activities of deposit-taking and making basic loans are likely to make less use of fair value. Those involved in trading, or who make use of derivatives, may see a greater use of market pricing, which most investors feel is appropriate.

The IASB head believes that the Board’s approach is superior to one that would merely adopt the FASB position on impairment. First and foremost, the IASB’s work on impairment directly addresses the specific nature of EU stakeholder and institutional concerns. In addition, the IASB approach would see a much-needed reduction in the number of categories of financial assets and would leave a single impairment method. Also, the proposal anticipates future problems associated with reclassifications by replacing restrictive tainting rules affecting held-to-maturity securities with measures aimed at transparency. Finally, the transition would allow a reclassification out of the fair value option into other categories.

.