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Financial Instruments, Revenue up for Joint Discussion

Sep 16, 2013

The FASB and IASB plan to discuss three major projects—credit losses, classification and measurement of financial instruments, and revenue recognition—when they meet in London September 17-18, 2013.

The accounting boards released largely converged proposals on revenue recognition in November 2011, and the boards say they will publish a final standard by the end of 2013. Before doing so, they need to revisit some aspects of the proposal that have been criticized by pharmaceutical and entertainment companies.

The standard-setters plan to go over previous decisions on customer credit risk, the concept of “constraint,” and accounting for some license arrangements. Depending on the outcome of these discussions, the FASB and IASB may have to meet again in October before finalizing the standard. (See Controversial Revenue Recognition Decisions to Be Revisited in the September 11, 2013, edition of Accounting & Compliance Alert.)

The two parts of the financial instruments project—credit losses and classification and measurement—are at earlier stages of development than revenue.

The work on classification and measurement aims to streamline the way financial instruments are categorized, an effort the accounting boards hope will produce consistent measurements. The proposal took on heightened significance in the wake of the 2008 financial crisis when it became clear that financial products had become increasingly complex, and accounting methods had not kept pace with them.

The most recent publications from the boards are the IASB’s Exposure Draft (ED) No. 2012-4,Classification and Measurement: Limited Amendments to IFRS 9 (Proposed amendments to IFRS 9-2010), released in November 2012 and the FASB’s Proposed Accounting Standards Update (ASU) No. 2013-220,Financial Instruments—Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities, published in February 2013.

The boards are scheduled to cover the types of instruments that qualify for amortized cost measurement.

The boards are farther apart on the credit losses project, which aims to give investors and analysts earlier warning signals about bad loans and other financial instruments. Under current U.S. GAAP, banks can’t recognize a drop in a loan’s value until the likelihood that the loss has been incurred rises to the threshold of probable. After the financial crisis, critics said this accounting treatment delayed recognition of the crisis’s severity until billions of dollars in losses had accumulated.

The FASB and IASB want banks and other businesses to recognize losses and set reserves based on the losses they expect to incur, but the boards can’t agree on the mechanics of how to do so.

The FASB in December 2012 released Proposed ASU No. 2012-260,Financial Instruments—Credit Losses (Subtopic 825-15), and the IASB in March released ED No. 2013-3,Financial Instruments: Expected Credit Losses.

The boards are under pressure to agree on a common approach, however, and they plan to use the meeting to try to reach an agreement. (See Effort Continues to Bridge Differences Between GAAP and IFRS on Asset Impairments in the September 6, 2013, edition of Accounting & Compliance Alert.)

Separately, the FASB’s Private Company Council plans to hold an education session September 17 to discuss Proposed ASU No. PCC-13-01A,Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination, a proposal of the Private Company Council. The proposal allows private companies to skip the recognition of some types of hard-to-value intangible assets they acquire when they buy another business.

The PCC education session will be held via webcast. No decisions are made at education sessions, but the discussion is expected to prepare council members for a September 30 meeting at FASB headquarters in Norwalk, CT.