Transcript Fair value measurement

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Financial
Accounting Standards
Board
International
Accounting Standards
Board
Updating IASB – FASB
Memorandum of Understanding
Wayne Upton – IASB Director, International Activities
Sue Bielstein – FASB Director
The views expressed in this presentation are those of the
presenter, not those of the IASB or FASB
First, Who are these people?
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IASC was founded circa 1972, about the same
time as the FASB
A part-time board with limited staff resources
Reorganized in 2001
A full-time board ( two part-time members) and a
greatly expanded professional staff
Members chosen based on criteria similar to
those used by the FASB
Board members are not “representatives” of
geographical or “background” constituencies
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Evolution of the IASB – FASB
Convergence Program
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First step, The Norwalk Agreement
 Shared goal: high-quality, compatible standards that can be
used for domestic and cross-border financial reporting
 Means: converge by eliminating differences in existing
standards
 Result: a slow process that produced improved standards but
often failed to eliminate all differences
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The SEC 2005 road map to eliminating the 20-F
reconciliation requirement
The 2006 Memorandum of Understanding
 Shift in goal: common, high-quality standards
 Shift in means: improve and converge -- serving investor
needs means the boards converging by replacing weaker
standards with stronger, common standards.
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The MoU – setting 2008 goals for
11 major projects
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Business combinations,
complete convert standard
Consolidations, work
aimed at development of
converged standards
Fair value measurement
guidance, to have issued
converged guidance
Liabilities and equity
distinctions, one or more
due process documents
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IFRS 3 and SFAS 141R
issued
Work continues
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FASB standard issued;
Discussion paper issued
by IASB
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IASB and FASB have both
issued initial documents
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The MoU – setting 2008 goals for
11 major projects
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Financial statement
presentation, one or more
due process documents
Postretirement benefits,
one or more due process
documents
Revenue recognition, one
or more to process
documents
Derecognition, one or
more due process
documents
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Joint initial document
expected by summer
2008
FASB issued new
standard, IASB issued
discussion document
Joint initial document
expected by summer
2008
Work proceeding
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The MoU – setting 2008 goals for
11 major projects
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Financial instruments, one
or more due process
documents
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Intangible assets, agenda
decision
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Leases, agenda decision
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IASB and FASB issued a
discussion paper on
reducing complexity, FASB
work on simplifying hedge
accounting proceeding
Boards declined to place
this project on their
agendas, based in part on
investor recommendations
Boards agreed to place
this project on their
agendas; work proceeds
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It’s now 2008 and time to update
the MoU
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The April 2008 joint Board meeting
Agreement on a June 2011 target for completion
of major projects
Building “improved” IFRS as a platform for
jurisdictions moving down IFRS in the next few
years
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Why June 2011?
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Widespread frustration among constituents about
the slow pace of board projects
Sharpening our focus – what improvements in
financial reporting are important to investors
Imposing discipline on ourselves
Avoiding potential for doubling up on changes in
those jurisdictions adopting IFRS
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MoU: Plans for Completion by
2011
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Revenue recognition
 Two possible models, both based on an asset – liability
approach
 Key issues
 Identifying performance obligations and how they are satisfied
 When should the measurement of a performance obligation
change for reasons other than performance
 Accounting for conditional obligations such as rights of return
 Disclosure
 Testing
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MoU: Plans for Completion by
2011
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Fair value measurement guidance
 Key issues for the IASB
 SFAS 157 exit value, or is there a complementary entry value?
 Fair value is more common in IFRS than in US GAAP, several
standards will need to be amended
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Consolidation policy
 Heightened attention brought on by the current banking
environment
 Key issues
 Effective control
 Applicability to special-purpose entities and others. Is there a
better way to capture the principles inherent in FIN 46R?
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MoU: Plans for Completion by
2011
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Derecognition
 Again, heightened attention brought on by the current
environment
 Neither IASB nor FASB has the best standard in this area,
work proceeds to developing a better approach for the
October 2008 joint Board meeting
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MoU: Plans for Completion by
2011
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Financial statement presentation
 Key issues
 Presentation, not recognition and measurement
 The cohesiveness principle and a new format or all three
statements
 The role of net income, comprehensive income, and recycling
 Initial testing already performed and it will continue during the
comment period on the upcoming discussion document
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MoU: Plans for Completion by
2011
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Postretirement benefits
 The IASB discussion paper
 Places the full obligation on the balance sheet, but
 Argues for including changes in the obligation in net income
and/or comprehensive income and examines different
approaches to doing so
 The “leap frog” phenomenon – IASB project may create new
differences
 Measurement of so-called cash balance plans
 Income statement presentation
 No broadly scoped, joint phase 2 project for now
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MoU: Plans for Completion by
2011
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Lease accounting, a focus on lessee accounting
for now. Lessor accounting to wait for revenue
recognition.
 Key issues
 Getting lease obligations on the balance sheet -- operating leases
would be reported as an intangible asset and the lease obligation
as a liability
 Can we focus on the substantive lease term as the unit of
account?
 Can we address lessee accounting without debating changes to
amortization and depreciation accounting?
 Can we avoid reconsidering areas in which current lease
accounting provides answers, even if those answers are
imperfect?
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MoU: Plans for Completion by
2011
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Financial Instruments
 FASB work on hedge accounting
 IASB Discussion Paper on reducing complexity
 Approaches to classification of financial instruments
 Approaches to hedge accounting
 Is fair value to only way to eliminate complexity?
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Thinking about the fair value and
financial instruments
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Criteria to distinguish
between types of financial
instruments (‘classification’)
Identification and
quantification of impairment
Transfers between
measurement categories of
financial instruments
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Would not be required
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Would not be required
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Would not be required
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Thinking about the fair value and
financial instruments
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Hedge accounting
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Fair value hedge accounting—
no measurement mismatches
between financial instruments.
There may be other recognition
and measurement mismatches
(eg those relating to nonfinancial instruments); in such
circumstances, there will be
demand for fair value hedge
accounting.
Cash flow hedge accounting—
there will be demand for hedge
accounting for exposures to
changes in expected future
cash flows.
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Thinking about fair value and
financial instruments
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Identification and separation
of embedded derivatives
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Not applicable for financial
instruments. May still be
required for other items (eg
non-financial instruments
with embedded derivatives).
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MoU: Plans for Completion by
2011
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Distinguishing Liabilities and Equity
 Issues for the IASB
 Narrow view of equity?
 Consistency with concepts?
 Application to puttable shares?
 Issues for the IASB and FASB
 Reaching consensus on a preferred model (considering carefully
constituent views)
 Presentation in the statement of income?
 Earnings per share implications?
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MoU: What about short-term
convergence?
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Differences are narrow but the possible changes are often
significant and contentious
Some question whether the benefits justify the resources
 Projects often took many years to complete
 The scopes were often narrow, addressing some but not all
differences
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Two scope recommendations
 Complete projects in process (earnings per share, joint ventures,
income taxes)
 Defer work on all others (investment property, impairment of longlived assets, research and development)
 Allocate Board time and staff resources to other, higher priority
improvements
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Income taxes – a possible change in approach
 FASB would propose to replace FAS 109 with the revised IAS 12
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A U.S. Perspective
What Exactly is the End Goal?
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“Common,” “high-quality” financial reporting by listed
companies (perhaps others) around the world
That system requires several elements
 Single set of high-quality accounting standards established by a
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single, independent standard setter
Mechanisms for consistent application and interpretation
internationally
Common, high-quality disclosures outside of financial
statements and a common delivery system
High-quality auditing standards and practice
Common approach to regulation and enforcement
Accounting standards have been leading the way
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A U.S. Perspective
Where are we now?
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Accounting standards internationally
 Over 100 counties have or will adopt IFRS, but
 “As adopted” versions of IFRS
 National flavors due to application differences
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Accounting standards in the U.S.
 Active convergence program with IASB
 Active dialog with other standard setters around the world
 FASB actively improving/maintaining other US GAAP
 Addressing weaknesses (e.g., derecognition, consolidation)
 On-going interpretative function
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Less focus (but some progress) on common auditing
standards and practices and cooperative efforts
between securities regulators and PCAOB and
international counterparts
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A U.S. Perspective
Where should we be going?
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Internationally?
In U.S.?
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A U.S. Perspective
What’s needed internationally
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Address national/regional endorsement mechanisms
that produce “as adopted” versions of IFRS
More consistent application of IFRS to avoid
“national flavors”
Further strengthen IFRS
 IASB to fill in major gaps (e.g., insurance, extractive industries, rate
regulation?)
 Improve major areas (e.g., per FASB – IASB MOU)
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Strengthening IASB as a global standard setter
 Funding — ongoing efforts by IASC Foundation Trustees
 Staffing
 Governance/Oversight — proposed regulatory “monitoring body”
 Structure? (e.g., having multiple locations?)
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Improve coordination of global regulatory review and
enforcement
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A U.S. Perspective
What’s needed in the US?
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Decide on an end game:
 “Mutual recognition” for foreign filers only
 With continued convergence over many years
 Without convergence (perhaps competition between
standards)
 Two-GAAP System for U.S. Registrants
 With continued convergence over many years
 Without convergence (perhaps competition between
standards)
 A single set of hiqh-quality international standards
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Each path has very different implications:
 Standard setters, preparers, auditors, investors,
regulators, educators
 Overall system costs and complexity
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FASB and FAF View of End Game
Single Set of Quality International
Standards
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Preferred by investors — enhances
comparability, reduces analytical complexity
Consistent with globalization of capital markets
Would bring U.S. into alignment with most other
international capital markets (Europe, Australia,
China, Russia, Japan, Korea, Canada, India, etc.)
Avoids added costs and complexity of a two –
GAAP system for an extended period
We advocate a well planned “improve and adopt”
approach to transitioning U.S. to IFRS
– Improvement through continued joint projects
between IASB and FASB in major areas
– Directly adopt other parts of IFRS
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U.S. Adoption of IFRS?
A complex, multi-year effort
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Requires consideration of many issues
 Private company reporting (IFRS, IFRS-SME, US GAAP?)
 Role of FASB
 Implications for company systems, internal controls, data
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Education, training, CPA exams, etc.
Possible changes to contracts, regulatory requirements, state
laws
Evaluating SEC accounting and disclosure requirements
(both within and without the financial statements
First time adoption issues
XBRL
FAF/FASB Forum to consider those and other issues
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A US Perspective
Summary Thoughts
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FASB Remains Committed to Convergence
 Single set of high-quality common standards
 Goal is improved reporting, not convergence for the sake of
convergence
 Significant Resources Devoted to this Effort
 Convergence Considerations Embedded in our Process
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Uncertainty about the path forward in the US
 Which end state scenario?
 When and how will it be decided?
 When might it be implemented?
 Who will be impacted (public companies, private companies,
NFPs)?
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One thing is certain – there will be change
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Questions and comments
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Expressions of individual views by
members of the IASB, FASB and
their staff are encouraged. The
views expressed in this presentation
are those of the presenters. Official
positions of the IASB or the FASB on
accounting matters are determined
only after extensive due process and
deliberation.
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