Convergence or controversial standards?

Convergence or controversial standards?

The International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) are independently reviewing their existing standards on accounting for financial instruments. While their approaches may turn out to be different, their goals are the same: to require companies to recognise all derivatives as either assets or liabilities in their balance sheet statements, and measure these instruments at fair value.

While the reviews could lead to different results, Paul Volcker, chairman of the governing body of the IASB, predicts that derivatives accounting will be the first substantial point of convergence between the two standard-setters. To be sure, that is because IAS 39 rule covering derivatives, is patterned under FAS 133. A common point of the ongoing reviews, for example, is determining when a loan commitment is included in the scope of the standards. The other binding factor, however, is their shared distinction of being probably the most reviled of all accounting reforms that the standard-setters are pushing.

According to Volcker, banks are active users of derivatives and they are not on the balance sheet, but if banks put them there, they fear that accounting for the changes in the value of derivatives will create a lot of volatility in their earnings. They also argue that it will make it harder to engage in activities that in their view provided a good hedge.

That is only the beginning of the controversy. Volcker says IAS 39 will open the question of the use of fair value as the global standard for accounting measurement. Many companies are generally opposed to fair value accounting and they fear that if fair value was applied to derivatives, it might set a precedent for using fair value for other accounting items long measured on historical cost basis.

(Source: CFO Asia, February 2003)