Behold the International Accounting Standards Board’s proposed revisions to IAS 39.
IAS 39 being an accounting principle at the centre of much controversy in recent months and even years. The standard sets out how to value financial instruments, among other things, and the debate is essentially another mark-to-market one.
First, an explanation of IAS 39 in its current form.
At the moment you have four categories under the standard — fair value, held-to-maturity, loans and receivables and available-for-sale. Fair value is of course mostly financial instruments marked-to-market with profits and losses feeding into the income statement. Held-to-maturity assets are non-derivatives with fixed payments, that are intended to be held ’till maturity (i.e. not traded) and are valued at an amortised cost. Loans and receivables are also non-derivatives with fixed payments also valued at amortised cost.
The available-for-sale category is a bit trickier. It includes non-derivative non-loans and receivables on financial assets. These things are measured at fair value but unlike assets in the actual fair value category, gains and losses on them are not recorded in the income statement. Instead they’re taken in an equity reserve. See here for detail.
In contrast, the IASB’s proposal involves creating just two categories — amortised cost and fair value. The first box would include stuff like debt, with predictable cashflows, while the second includes equities, derivatives and anything that will be traded. Here’s the basic premise in graphic form:
The new rules will likely become mandatory from 2012, but banks can opt to use them earlier. Whether they do so will of course probably depend on whether it is profitable for them to do so. At the moment, by all accounts, opinion remains divided on whether the IASB’s proposal will increase or decrease the amount of fair value assets on banks’ balance sheets.
Related links:
Son of IAS 39 – or several sons? – PwC’s IFRS blog
Financial briefing: fair value accounting rules – FT
IASB to consider changes to fair value rule – FT
Own credit condundrum at the IASB – FT Alphaville