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Review of Financial Instruments Standards Sets Stage for End-of-Year Release

FASB staffers are reviewing comments from a panel of external reviewers who have seen confidential, late-stage drafts of the final standards for financial instruments the accounting board wants to publish before the end of the year. To meet the deadline, the FASB will have to sift through approximately 1,100 comments the panel submitted as part of a process the board uses to troubleshoot major standards just before releasing them to the public.

FASB staffers are reviewing comments from a panel of external reviewers who have seen confidential, late-stage drafts of the final standards for financial instruments the accounting board wants to publish before the end of the year.

Some of the panelists, who are members of a Transition Resource Group the FASB set up to help it with the transition to the planned standard for writing down bad loans and debt securities, are scheduled to hold a closed-door meeting with FASB representatives on September 29, 2015, to review the progress on the standard, which the board calls the asset impairment standard.

To meet the publication deadline, the FASB will have to sift through approximately 1,100 comments the panel submitted as part of a “fatal flaw” review, a process the board uses to troubleshoot major standards just before releasing them to the public. In most cases the reviews can be wrapped up in a few weeks. Given the complexity and the significance of the financial instruments standards, which are the board’s response to the 2008 financial crisis, the FASB is going through a more elaborate process than is normally the case.

The board recruited 29 panelists, including 13 companies, one trade group, six audit firms, eight regulatory bodies, and one investor, FASB member Harold Schroeder said on September 15 at a meeting with the Institute of Management Accountants at the accounting board’s Norwalk, Connecticut, offices. The letters had an average of about 35 comments each. Approximately 900 of the comments addressed issues in the asset impairment standard, which is considered the more important of the two standards.

The FASB released a draft version of the standard to the public in 2012 as Proposed Accounting Standards Update (ASU) No. 2012-260, Financial Instruments: Credit Losses (Subtopic 825-15).

The remaining comments, about 200, were in response to the classification and measurement standard, which was published in a draft form in 2013 as Proposed ASU No. 2013-220, Financial Instruments: Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities.

Schroeder did not get into the specifics of the comment letters apart from saying that all but 100 to 200 of the submitted comments amounted to editorial corrections. The FASB staffers for the financial instruments project were reviewing the remaining comments to determine if they required a review by the board. Schroeder added that there was some overlap in the issues raised in the comment letters.

Some comments wanted the board to offer more guidance on the asset impairment standard’s handling of loan modifications, also known as troubled debt restructurings, the standard’s current expected credit loss model, and the treatment of holdings in securitized pools of assets, which is also called beneficial interests.

The review panel received the draft standard in early August and had to have the comments in by September 4, Schroeder said.

FASB members downplayed the significance of the large number of comment letters and tried to persuade the IMA representatives that the comments were not expected to lead to substantial revisions to the standard or that the process meant the board was not upholding its commitment to a public standard-setting process.

“This is not an abnormal thing,” FASB Chairman Russell Golden said. “This is what the process is designed to do.”

Yet the IMA representatives did not seem convinced.

“It seems to me you can’t classify something as a fatal flaw review if you get 1,100 comments,” said Dennis Beresford, now an accounting professor at the University of Georgia and the FASB’s chairman from 1987 to 1997. “It’s evolved into a second-level of due process with some insiders.”

FASB members, while acknowledging the IMA’s concerns, also said the process is somewhat out of their control, given that reviewers are free to submit an unlimited number of comments. One reviewer had 300 comments.

“We would agree with you,”┬ásaid FASB member Lawrence Smith. “We don’t want it to evolve to a private, second exposure draft. Our objective is to get fatal flaw comments.”

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