Monday, September 14, 2009

FASB-IASB Hold 3rd Roundtable On Financial Instruments

The third in a series of FASB-IASB roundtables on the financial instruments project was held earlier today in Norwalk, CT. (The first two roundtables were held in Tokyo and London.)

The roundtable handout (we understand the handout for today's roundtable is essentially identical to the 14 page handout used at the prior roundtables) includes some tables comparing some of the FASB and IASB's proposals.

Among highlights from today’s roundtable: FASB Technical Director Russell Golden asked panelists to share their views on where the IASB's proposal stood, vs. FASB deliberations to date, on where to draw the line in terms of what items would be carried at fair value vs. some other basis such as amortized cost, and where the line would be drawn on fair value changes being reflected in Other Comprehensive Income vs. Net Income.

Should Business Model Drive Valuation, Recognition?
Some panelists responded they'd like to see dual presentation of amortized cost and fair value for financial instruments (some believe this dual presentation should appear on the balance sheet; others believe dual presentation in the footnotes would be sufficient, with single presentation in the balance sheet).

Hal Schroeder of Carlson Capital said: "If I were in charge of the accounting world, I would have side by side [presentation]," on the balance sheet, and income statement as well.

Kevin Spataro, representing the Group of North American Insurance Enterprises, argued in favor of measurement principles (e.g. fair value vs. amortized cost with some form of impairment) following the entities' business model.

However, another panelist argued that if the business model became the primary driver or trump card for determining the valuation method, that would be a 'non-starter.'

IASB Board Member Jim Leisenring said: "I view 'business model' as a euphemism for free choice; is there any ‘out of bounds’ business model? Is there anything I could do that you wouldn’t say should drive the accounting? The business model is not relevant, period, to accounting, if you are trying to meet the objectives of financial reporting."

GNAIE's Spataro responded, "We are saying, if financial instrument meaurement does not comport with the business model, it doesn’t comport with decision useful [information]."

Leisenring replied, "I think the opposite; is there any boundary to the business model where you’d say that is just too wacko to drive business reporting?"

Another panelist noted that sophisticated analysts have access to information and the ability to back out information from reported earnings to arrive at their view of a firm's core earnings, but that the average investor does not have this ability, therefore, they said, "For the average retail investor who doesn’t have access to what I have access to, fair value accounting is much better."

However, another panelist said, "As users of financial statements, you do look at cash flows, it is cash flows that will service the debt, not changes in fair value."

In terms of 'geography,' there were varying views about putting fair value information (and related changes in fair value) on the balance sheet (or running changes through the income statement) vs. disclosing it in the footnotes.

FASB Board Member Tom Linsmeier noted he has heard anecdotally that information placed in the footnotes is not subject to "as high quality internal controls," as information that appears in the body of the financial statements.

A panelist replied: "I would disagree; not only are notes subject to audit, they are also subject to Sarbanes-Oxley, so as a preparer, we are not applying less due diligence to the notes than the financial statements."

Convergence Challenge
Additionally, a number of panelists noted concern with the fact that there is a timing mismatch - which could, in the view of some, lead to a potential mismatch in substance - between the IASB’s plan to issue some final standards for financial instruments by year end (in order to be responsive to requests made of the IASB by the G-20 and other governmental bodies); vs. FASB’s plan to release proposals on financial instruments this year, with final standards next year.

Rob Esson of the International Association of Insurance Supervisors asked, "How would FASB be able to converge other than by agreeing with the IASB, if the IASB standard is effectively already out there and being applied as of Dec. 31, 2009?"

FASB Board Member Larry Smith replied, "We are participating in meetings of the IASB, where [they are] redeliberating comments they’ve received on [their] ED [Exposure Draft]... we are ttying to influence the thinking of the IASB, so that it is unlikely we’ll have to issue something that is very different than what the IASB issues."

IASB Board Member Jim Leisenring responded to Esson by saying, "I think you know the answer to the question, you heard what [IASB Board Member] Bob Garnett said [last] Thursday, the political demagogues that have insisted on this by 12.31.09, probably will get something by that date." He added, "We will remain absolutely committed to being converged [with FASB], the people who adopt [the new IASB standard as of] 12.31.09 will go through two fundamenatally [different] adoptions; FASB will not rubber stamp [in its own standard, what the IASB does in its standard]."

FASB Chairman Robert Herz added, "Talking personally here, people know I am very committed to convergence, [there are] big advantages from having a single set of high quality standards. That having been said, our U.S. responsibility under the Securities Acts, [and] under the Sabanes-Oxley Act - under the policy statement from the SEC, involves a lot of things, one of which is convergence, stated in [the] goal of assessing the degree to which convergence makes sense to U.S. investors, protection of U.S. investors; we need to go through that assessment, I hope in the end, politics aside, we can [achieve that]... [it is] important to look at all the issues, a lot are interrelated, whereas the IASB believes they can do it [issue financial instruments standards] in a staged fashion... obviously keenly aware of the difficulty of achieving both goals together."

Tom Panther of the American Bankers Association noted, "In our coment letter we expressed some concerns with IASB's 3-phase approach [segmenting, e.g., measurement from impairment], particularly around, sometimes the discussion gets blurred, maybe even here today, [in] the distinction between measurement - what is the model for measurement - and impairment.... We would support much more of a joint project [between FASB and he IASB]; the operational issues on businesses the ABA represents would be extraordinary... we have talked about dual models.. bifurcating on the balance sheet, those types of things really need to get vetted and understood… and the voice of the broader business community just doesn’t have resources to [allocate] to it [i.e., analyzing and commenting on the proposals] at this point in time."

Carlo Pippolo, a Partner at Ernst & Young, made the final remark at the roundtable, saying that in his firm’s view: “ [C]onvergence is something we agree is critically important, ideally, we’d ask the IASB to take more time, deal with a more targeted project rather than, as [IASB Board member] Jim [Leisenring] said, some companies early adopting [the IASB standard this year], and change again down the road [if IASB amends its standard to conform with FASB]; ideally, [we’d like to see] the boards’ issuing final [standards] at the same time.”

We are aware of some issues with email delivery of our blog posts last Thursday Sept. 10 and Friday Sept. 11, respectively. If you did not receive them, you can read them here and here.

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