We could learn a lot from our friends in Canada who seem to have nailed both hedge accounting and International Finance Reporting Standards (IFRS) convergence. That's not the case in the U.S. where hedge accounting under FAS 133 has caused over 200 re-statements since it was implemented eight years ago. Now FASB is proposing FAS 133R in an effort to "simplify" the standard. (See Governance and Accounting on page 20-21)
Canada's Accounting Standards Board (AcSB) concluded that the standard's rules-based hedge accounting is flawed compared to the principles-based approach of International Accounting Standard (IAS) 39. The AcSB first phased in its hedge accounting standard, AcG-13, with documentation and assessments, but no measurement of ineffectiveness for fiscal years after October 2004, with measurements coming in 2007 via the Canadian Institute of Chartered Accountants (CICA) 3865. This gave everyone time to prepare and separated some of the complicated quantitative calculations from the upfront documentation work.
Although CICA 3865 follows FAS 133 closely, CICA has wisely decided to adopt IFRS in 2011, again allowing for ramp-up time. Meanwhile, U.S. companies are adopting FAS 157 this year and FAS 161 next year, and face possible adoption of FAS 133R in 2010. As if back-to-back implementation of three standards wasn't difficult enough, almost certain IFRS convergence would mean re-implementing derivatives accounting for a third time.
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FASB says it is committed to convergence in its Reducing Complexity in Reporting Financial Instruments comment document issued in March. For its part, the Securities and Exchange Commission (SEC) removed the requirement of U.S. GAAP reconciliation for foreign filings in compliance with IFRS last November, and aims to make international standards available to U.S. companies as well.
U.S. capital markets and exchanges really want more listings and issuers after Sarbanes-Oxley requirements scared away foreign firms. But the weak dollar, slowing U.S. economy and shifting balance of global wealth may be doing more to drive away investors. Overhauling accounting standards will not return liquidity to U.S. markets. And it will cost plenty to implement a completely new standard.
IFRS is no picnic either. Principles-based accounting sounds great on paper, but in practice companies and auditors still need guidance. For example, guidance in International Accounting Standard (IAS) 39 states that a highly effective hedge meets an 80%-125% effectiveness test – which is essentially a rule. There are also different flavors of IFRS by country.
What we need is a one-year delay on the FAS 133 revision, by which time the date for IFRS convergence would be known and the triple-implementation of hedge accounting can be avoided. Perhaps the best path is to switch to IAS 39 in 2011, just like the Canadians. (To get more information on an electronic petition to delay amending FAS 133, go to www.timeoutfas133.com)
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