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20.07.2012: FASB, IASB chairs spar over impairment plans

Just as the Securities and Exchange Commission shifts greater attention on the convergence effort to bring international accounting standards to the United States, standard setters working to converge U.S. and international rules have parted ways on impairment for financial instruments.

Hans Hoogervorst, chairman of the International Accounting Standards Board, made no attempt to hide his annoyance when the Financial Accounting Standards Board decided it needs to do more research before publishing an exposure draft of a proposed impairment solution that both boards agreed to in May. “Both boards have made three attempts at solving this project, two of which were joint attempts, and we have one lying ahead of us now,” Hoogervorst said during a joint meeting with FASB, according to the IASB transcript. “These were very difficult decisions and we were very happy that we finally reached, on all of the major issues, convergence in May of this year. And I am very worried that what your staff has now just indicated is that the whole thing is going to unravel again.”

Leslie Seidman, chairman of the FASB, said in a prepared statement following the meeting that staff and board members have met with a large number of preparers, auditors, users, and regulators to get feedback on the agreed solution, and they are still hearing questions and confusion. The FASB still strongly desires to achieve a converged standard with the IASB on impairment,” Seidman said. “However, we believe it is essential that we address the questions that have been raised in the U.S. before moving forward with an Exposure Draft, so that we are confident that the proposal would result in an improvement in financial reporting.”

The boards are trying to finalize a converged solution for how to account for impairments, or losses in value, for loans and other financial assets. The boards had settled on an model that would be based on expected losses, tracking loans where losses are expected through three separate categories - two categories for loans or other assets that have already shown some significant deterioration in credit quality and another category for those where problems are expected but haven't yet occurred.

The impairment project is one element of the financial instruments project, a key component of the boards' efforts to facilitate convergence of accounting standards. The convergence effort has become an increasingly critical part of the SEC's focus on eventually bringing international accounting standards to the United States, especially after a recent final staff report gave the commission reason to move cautiously on any possible adoption.

FASB says it is hearing questions about how to apply the agreed impairment guidance for those loans where losses are expected in the next 12 months but haven't happened. Some concerns focus on whether the reserves for loan portfolios might understate the risk and how assets would transfer among the three categories. Seidman said the staff has characterized the questions as pervasive.

Hoogervorst worries another round of outreach and revision will further delay the project and tarnish the boards' credibility. “If this is going to unravel ... I think it is deeply embarrassing,” said Hoogevorst during the meeting. “That in three efforts, in which we have looked at at least 10 alternatives, in which we have left no stone unturned, that after three years we are still not able to come up with an answer. I would really find that unacceptable.”

 

Source: Compliance Week

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