Fasb Case Study
A recent issue that is becoming increasingly contentious and providing a hurdle to convergence between GASB and IASB is accounting for Financial Instruments. The financial crisis of 2008 had devastating consequences for the financial markets everywhere. Blame was widely spread and both IASB and GASB considered making changes in the accounting of financial instruments, particularly the delayed recognition of credit losses on loans. FASB and IASB began working together, but found irreconcilable differences in their solutions to this problem. Their main differences involved classification and measurement, recognition and derecognition and hedge accounting. One of the fundamental differences on which IASB and FASB disagree is the qualifying criterion of financial instruments. IFRS, unlike GASB has qualifying criteria that entities must meet in order to elect the fair value option. Furthermore, IFRS has different criteria to elect the fair value option for assets, liabilities and equity. Under IFRS 9, paragraph
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4.2.2 a financial liability can recognized at the FVTPL if it “reduces a measurement or recognition inconsistency that would arise from measuring assets and liabilities or gains and losses on a different basis. Financial liabilities may also be designated at FVO if the financial liability is part of a group of liabilities that is managed and evaluated on a fair value basis and information pertaining to the group is provided on that basis to management personnel. Assets, under IFRS, similar to liabilities can be measured at FVTPL if measurement or recognition inconsistencies are reduced or eliminated that would occur from measuring assets or liabilities or recognizing gains and losses on a different basis (IFRS 9, paragraph, 4. 1. 5). In contrast FASB has no such requirements. In addition, IFRS allows an entity to measure all of part of a financial instrument at fair value if it meets certain constraints [IFRS 9, paragraph 6. 7. 1] FASB does not allow this, and only allows the fair value option to be applied to an entire instrument and not to portions or specific pieces of an instrument [ASC 730-10-25-2c]. FASB’s and IASB’s classifications of financial instruments are an important factor that is standing in the way of convergence, but there are many others. Another area in which FASB and IASB accounting for Financial instruments is different is in the treatment of hedging. election dates for the fair value option. Under IFRS [(9 paragraph 4. 1. 5] a finan
Accounting for impairment
Both GASB and IASB wanted to move away from measuring the incurred losses and instead focus on the expected losses. However, their methods in approaching this issue were extremely different. IFRS uses 3-stage credit approach known as the three bucket model. FASB and IASB originally worked together to develop this model, but FASB decided to go in alternative direction developing a model which it thought better captured the expected credit losses. In the IASB’s model credit losses are first put in bucket 1 and the estimated allowance for the bucket is measured through a loss allowance equal to the 12 months of expected credit losses or the full lifetime of credit losses [IFRS 9 paragraphs 5. 5. 3. and 5. 5. 5.]. If the quality of the financial loan deteriorates it can then go in the second or third bucket and an impairment allowance that is equal to the expected lifetime loses of the asset. FASB saw this as overly complicated and developed the Current Expected Credit Loss model. In this model the entity reocrds the credit losses on the financial assets on each financial statement reporting date. An entity then compares the current credit loss estimate with previous expected credit loss amounts and then reports in net income the ampunts to adjust the allowance for credit losses for management’s estimates on financial assets [ASC 326-20-351]. Using this method FASB believed that estimated credit losses would be applied more consistently over time, as opposed to the IASB’s method, negating the need for different buckets. This difference between FASB and IASB is significant, but there are still others that have proven contentious and prevent convergence. Another issue that is preventing convergence is the idea of what financial instruments should be presented at fair value. FASB wants more financial instruments reported at fair value while IASB wants fewer instrumens recognized at fair value and wants them recognized at fair value only if it reduces measurement mistmatch. Another substantial difference between FASB and IASB involving financial instruments is that reclassifications are more common under IASB.
Although both organizations impose limits to reclassification of financial instruments the process is strict under FASB guidelines. Under IASB An entity may reclassify financial assets if it changes its business model for managing financial assets [IFRS 9, paragraph 4. 4. 1] However Under FASB 320-10-35-5 reclassifications are much less common and occur only when an entity can no longer maintain a classification such as when an entity can no longer hold a debt security until maturity its classification as a held-to-maturity maturity would no longer make sense. Under IASB reclassication of securities is possible to a greater extend and somewhat elective whereas under FASB the change in classification is mandated. Although this is one reason why convergence will be difficult between FASB and IASB there are a number of
others. Another Financial Instruments, though certainly not the last issue, impeding convergence between IASB and FASB is differences in derecognition. Under guidelines set by FASB derecogition is such simpler and involves either total derecognition or partial derecognition. Under FASB 860-10-40-5 an asset, a group of assets or a participating interest in a financial asset can be held for sale if the transferor is isolated from the financial asset, no longer retains effective control, and each transferee has the right to pledge or exchange the financial asset. If these conditions are met the financial asset can be derecognized. Under IFRS 9, paragraph 3. 2. 2] it is first determined whether the financial asset is an asset in its entirety, specifically identified cash flows from an asset, a share of cash flows from an asset or specifically identified cash flows from an asset. After this determination it is considered whether the asset has truly been transferred. The asset is transferred if the entity has transferred the rights to receive the cash flow or the entity has retained the right to reciev the cahs flows but has assumed an contractual obligation to pass those rights on [IFRS 9, paragraphs 3.2.4-3.2.5]. Finally, it is determined whether or not the risks and rewards of ownership have been transferred. If the risk and rewards have been substantially transferred than the asset is derecognized, but if the reisks and rewards have not been transferred than the asset cannot be derecognized [IFRS 9, paragraph 3.2.6] The IASB codification is much more extensive on this matter than FASB and it is more likely that financial assets will be fully derecognized under FASB. This vast differences in opinion FASB and IASB have on the issue of derecognition of financial assets makes it much more difficult for eventual convergence of IASB and FASB.
4.2.2 a financial liability can recognized at the FVTPL if it “reduces a measurement or recognition inconsistency that would arise from measuring assets and liabilities or gains and losses on a different basis. Financial liabilities may also be designated at FVO if the financial liability is part of a group of liabilities that is managed and evaluated on a fair value basis and information pertaining to the group is provided on that basis to management personnel. Assets, under IFRS, similar to liabilities can be measured at FVTPL if measurement or recognition inconsistencies are reduced or eliminated that would occur from measuring assets or liabilities or recognizing gains and losses on a different basis (IFRS 9, paragraph, 4. 1. 5). In contrast FASB has no such requirements. In addition, IFRS allows an entity to measure all of part of a financial instrument at fair value if it meets certain constraints [IFRS 9, paragraph 6. 7. 1] FASB does not allow this, and only allows the fair value option to be applied to an entire instrument and not to portions or specific pieces of an instrument [ASC 730-10-25-2c]. FASB’s and IASB’s classifications of financial instruments are an important factor that is standing in the way of convergence, but there are many others. Another area in which FASB and IASB accounting for Financial instruments is different is in the treatment of hedging. election dates for the fair value option. Under IFRS [(9 paragraph 4. 1. 5] a finan
Accounting for impairment
Both GASB and IASB wanted to move away from measuring the incurred losses and instead focus on the expected losses. However, their methods in approaching this issue were extremely different. IFRS uses 3-stage credit approach known as the three bucket model. FASB and IASB originally worked together to develop this model, but FASB decided to go in alternative direction developing a model which it thought better captured the expected credit losses. In the IASB’s model credit losses are first put in bucket 1 and the estimated allowance for the bucket is measured through a loss allowance equal to the 12 months of expected credit losses or the full lifetime of credit losses [IFRS 9 paragraphs 5. 5. 3. and 5. 5. 5.]. If the quality of the financial loan deteriorates it can then go in the second or third bucket and an impairment allowance that is equal to the expected lifetime loses of the asset. FASB saw this as overly complicated and developed the Current Expected Credit Loss model. In this model the entity reocrds the credit losses on the financial assets on each financial statement reporting date. An entity then compares the current credit loss estimate with previous expected credit loss amounts and then reports in net income the ampunts to adjust the allowance for credit losses for management’s estimates on financial assets [ASC 326-20-351]. Using this method FASB believed that estimated credit losses would be applied more consistently over time, as opposed to the IASB’s method, negating the need for different buckets. This difference between FASB and IASB is significant, but there are still others that have proven contentious and prevent convergence. Another issue that is preventing convergence is the idea of what financial instruments should be presented at fair value. FASB wants more financial instruments reported at fair value while IASB wants fewer instrumens recognized at fair value and wants them recognized at fair value only if it reduces measurement mistmatch. Another substantial difference between FASB and IASB involving financial instruments is that reclassifications are more common under IASB.
Although both organizations impose limits to reclassification of financial instruments the process is strict under FASB guidelines. Under IASB An entity may reclassify financial assets if it changes its business model for managing financial assets [IFRS 9, paragraph 4. 4. 1] However Under FASB 320-10-35-5 reclassifications are much less common and occur only when an entity can no longer maintain a classification such as when an entity can no longer hold a debt security until maturity its classification as a held-to-maturity maturity would no longer make sense. Under IASB reclassication of securities is possible to a greater extend and somewhat elective whereas under FASB the change in classification is mandated. Although this is one reason why convergence will be difficult between FASB and IASB there are a number of
others. Another Financial Instruments, though certainly not the last issue, impeding convergence between IASB and FASB is differences in derecognition. Under guidelines set by FASB derecogition is such simpler and involves either total derecognition or partial derecognition. Under FASB 860-10-40-5 an asset, a group of assets or a participating interest in a financial asset can be held for sale if the transferor is isolated from the financial asset, no longer retains effective control, and each transferee has the right to pledge or exchange the financial asset. If these conditions are met the financial asset can be derecognized. Under IFRS 9, paragraph 3. 2. 2] it is first determined whether the financial asset is an asset in its entirety, specifically identified cash flows from an asset, a share of cash flows from an asset or specifically identified cash flows from an asset. After this determination it is considered whether the asset has truly been transferred. The asset is transferred if the entity has transferred the rights to receive the cash flow or the entity has retained the right to reciev the cahs flows but has assumed an contractual obligation to pass those rights on [IFRS 9, paragraphs 3.2.4-3.2.5]. Finally, it is determined whether or not the risks and rewards of ownership have been transferred. If the risk and rewards have been substantially transferred than the asset is derecognized, but if the reisks and rewards have not been transferred than the asset cannot be derecognized [IFRS 9, paragraph 3.2.6] The IASB codification is much more extensive on this matter than FASB and it is more likely that financial assets will be fully derecognized under FASB. This vast differences in opinion FASB and IASB have on the issue of derecognition of financial assets makes it much more difficult for eventual convergence of IASB and FASB.