IASB announces next steps in response to credit crisis

The International Accounting Standards Board has announced the current status of its response to the credit crisis and its next steps. The IASB notes that it has already taken a number of actions to address issues related to the credit crisis

In responding to the credit crisis, the IASB says that it recognizes the need to clarify international financial reporting standards to address new market developments. Its response has primarily focused on the recommendations of the Financial Stability Forum, which had the support of the Group of Seven finance ministers.

The IASB is closely monitoring developments in the US and other jurisdictions to avoid unnecessary inconsistencies in accounting treatments under IFRS and US generally accepted accounting principles. In doing so, the IASB says it commits to undertake the following:

* Consistency of fair value measurement guidance between IFRS and US GAAP: On September16, IASB staff issued draft guidance on fair value measurement of financial instruments in markets that are no longer active. The IASB notes the recent clarification made by the Office of the Chief Accountant of the US Securities and Exchange Commission and the staff of the Financial Accounting Standards Board.The clarification is not an amendment of SFAS 157, Fair Value Measurements, but rather provides additional guidance for determining fair value in inactive markets.

The IASB staff has reviewed the clarification by the SEC and FASB staff and considers it consistent with IAS 39, Financial Instruments: Recognition and Measurement.

The IASB will continue to ensure any IFRS guidance is consistent with the clarification that has been provided by the US SEC staff and the FASB staff for those companies using US GAAP. This will help ensure comparability across borders.

* Consideration of the possible impact of the US Emergency Economic Stabilization Act of 2008 and other similar programs internationally on the valuation of assets and liabilities: The IASB will work closely with the FASB to develop a common approach to issues related to the valuation of financial assets and liabilities resulting from purchases made through the US Emergency Economic Stabilization Act of 2008 and any other similar programs internationally, if and when these programs are initiated.

* Immediate consideration of the ability to reclassify financial instruments: The IASB notes that US GAAP permits entities, in rare circumstances, to reclassify financial instruments that are in the form of securities from their trading portfolio (measured at fair value with changes through the income statement) to “held to maturity” (measured at amortized cost and subject to testing for impairment). The IASB also notes that US GAAP permits some loans that are not securities to be transferred from Held for Sale (measured at lower of cost or market with changes through the income statement) to Held for Investment (measured at amortized cost and subject to testing for impairment). Provisions aimed at counteracting abuse apply to these reclassifications.

The IASB will assess immediately any inconsistencies in how IAS 39 and US GAAP practice address the issue of reclassifications and whether to eliminate any differences. The IASB will discuss these matters and will decide its position as part of its public meeting during the week of October 13-17. At that meeting the IASB will assess the suitability of adopting the US GAAP approach and whether adapting IFRSs will provide relevant information to users of financial statements. The IASB will also consider the potential need to counteract abuse resulting from the ability to reclassify financial instruments and related areas of accounting to ensure consistency between practice in the US and in those jurisdictions using IFRS.

* Willingness to participate in any study on the impact of accounting in the credit crisis: The IASB recognizes the need to continue to examine IFRS accounting principles for financial instruments. Earlier this year, the IASB published a discussion paper, Reducing Complexity in Reporting Financial Instruments. This discussion paper is the starting point for considering a possible replacement for IAS 39.

Working with regulators, investors, and industry, the IASB says it will draw lessons from the credit crisis as it moves forward with its project to reconsider IAS 39. Consistent with discussions in the US, the IASB will be willing to assist in any study that examines the quality of existing fair value information provided to investors and any impact of financial reporting on the credit crisis.