GAAP and IFRS

Credit Crunch Team in the Works

FASB and IASB are looking for a few good advisors to constitute a rapid-response team for accounting issues stemming from the credit crisis.
Marie LeoneOctober 16, 2008

While central bankers and G7 leaders work to form panels to respond to the global banking crisis, accounting standard-setters are doing their part to do the same. On Thursday, the U.S. Financial Accounting Standards Board and the International Accounting Standards Board created an advisory group to deal with financial reporting issues that bubble up from the credit crunch.

The boards will convene on Oct. 20 for a two-day meeting to discuss the initial topics for the advisory board to consider. It is likely that one of the first topics to be addressed will be the application of fair-value accounting to financial instruments in illiquid markets. Current fair value rules have been a lightning rod for criticism, as some critics have demonized the mark-to-market methodology as exacerbating the subprime mortgage crisis and sending the credit markets into a tailspin.

The advisory group, meeting in public sessions, will comprise regulators, prepares, auditors, investors, and other users of financial statements. It is unclear, however, whether the boards will be able to find volunteers for their new committee given the market turmoil. Nevertheless, the boards hope to use their meeting next week to put in motion an appointment process so advisory panel members can meet as quickly as possible.

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The formation of the panel is seen by the boards as being in line with its joint memorandum of understanding to work together on converging U.S. generally accepted accounting standards with international rules. “In spirit of the MOU it is critical that we serve investors around the world and have a unified approach to financial reporting issues … rather than dealing [with the issues] on an ad hoc basis,” FASB spokesman Neal McGarity told CFO.com.

The advisory group “will help the boards to develop rapidly a co-ordinated response to the economic crisis,” said IASB chairman David Tweedie in a statement. He noted that in light of the credit crisis IASB “acted quickly” to amend accounting rules affecting financial instruments.

Indeed, within past few weeks, IASB and FASB have issued amendments and new guidance pertaining to fair value rules. For example, this week, IASB adopted an existing U.S. GAAP rule that allows companies to — in rare circumstance — reclassify trading assets as “held for maturity.” That switch would allow companies to avoid fair value accounting for those assets over the long-term, although they would have to take an immediate writedown.

In addition, IASB released guidance yesterday clarifying that distressed transactions should not be considered in fair value measurement. FASB reached a similar conclusion last week — and issued similar guidance for companies that use U.S. GAAP. Also on Wednesday, the U.S. Securities and Exchange Commission agreed to allow public companies to delay writedowns on “perpetual preferred securities” that are showing paper losses, another easing of fair value accounting rules.

Also, earlier this month, FASB clarified existing fair value guidance saying that companies were allowed to use their own assumptions about future cash flows and appropriate risk-adjusted discount rates when observable inputs into fair value formulas were not available. IASB issued a similar clarification on yesterday.

“The advisory group … is aimed at helping both boards indentify reporting issues arising from ongoing developments in the global financial markets so that we can develop common solutions that promote sound reporting and enhance transparency,” added FASB chairman Robert Herz in a statement.