Comments from ACCA to the International Accounting Standards Board, April 2009.
ACCA is pleased to provide our views to the IASB, on the FASB Staff Position (FSP) documents on Determining Whether a Market is Not Active and a Transaction is Not Distressed (FAS 157-e), and Recognition and Presentation of Other-Than-Temporary Impairments. These documents were considered by ACCA's Financial Reporting Committee and I am writing to give you their views.
We note the background of the proposals as set out in the FSP documents and understand the FASB's efforts to address public interest issues with a level of urgency. However, we feel that significant accounting issues such as those relating to fair value measurement are common to issuers and users of US GAAP and IFRS.
Indeed, it is noteworthy that G20 recommendations following their recent meetings in November 2008 and April 2009, highlighted the need for convergence through ‘significant progress towards a single set of high quality global accounting standards'. We therefore believe it is unfortunate that the proposals in the FSP documents have not been coordinated with the IASB. This is especially so, given the joint efforts to deal with financial reporting issues arising from the global financial crisis, such as the setting up of the Financial Crisis Advisory Group and the regular round-table meetings that have been held in recent months.
We strongly believe that both the IASB and FASB should avoid piecemeal approaches to resolving issues with the accounting for financial instruments. This is already a highly complex area of financial reporting, and we would therefore prefer a more sustained effort to move the joint project on replacing the current standards forward with a global, quality standard, which would also address any issues arising from the financial crisis in a principled manner.
Our response to the FASB based was on the proposals in FAS 157-e. Our comments below acknowledge the subsequent decisions made by the FASB.
We did not comment on the second FSP document on Recognition and Presentation of Other-Than-Temporary Impairments, as we consider the differences between the impairment models in IFRS and US GAAP to be too significant for any potential changes in IFRS in response to those proposals.
Step 1: Factors that indicate that a market is inactive
We had significant concerns that the initial proposals in FAS 157-e appeared to move the onus of proof as to whether a market is illiquid such that entities would be more likely to reach such a conclusion and apply Level 2 and Level 3 estimates to measure the fair value of relevant financial instruments.
In our response to the FASB we also noted that the factors that should be considered as indicative of an inactive market, as outlined in Paragraph 11 of the FSP document, were excessive and not entirely clear. For example we are uncertain as to how factors (d) and (e) in that document would be considered in practice.
We do not believe there are any specific bright lines between active and inactive markets, and therefore the factors outlined in Paragraph 11 alone, do not necessarily mean that a market is no longer active. While Paragraph 12 does state the need to ‘use judgement' in addition to evaluating those factors, we believe that greater emphasis should be placed on the need to consider the specific facts and circumstances of the market for the financial instrument being assessed.
We believe the subsequent announcements by the FASB in their Additional Briefing Document and Summary of Board Decisions (please see the external links list at the bottom of this page), dated 6 April 2009 and 2 April 2009 respectively, were more appropriate. These are also more consistent with the guidance issued by the IASB's Expert Advisory Panel (the Panel) in October 2008, with greater emphasis on the objective of fair value in inactive markets.
Step 2: Distressed transactions
We had significant concerns that Step 2, as outlined in Paragraph 13 of the FSP document, could be seen as a foregone conclusion in terms of assessing that a distressed transaction has taken place. As mentioned in the Panel's report, ‘even when a market has become inactive, it is not appropriate to conclude that all market activity represents forced transactions'. We believe that it would be more appropriate to consider what might be indicators of a forced transaction (such as point (a) in Paragraph 12) while again emphasising the need to thoroughly consider all facts and circumstances of the particular transaction.
Again the subsequent Summary of Board Decisions suggests that the final FSP will ‘eliminate the proposed presumption that all transactions are distressed (not orderly) unless proven otherwise'. We believe that this is more appropriate, and again is consistent with the guidance issued by the IASB.