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New accounting standard creates winners and losers and a lot of unfinished business


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Professional services firm, Deloitte, today welcomed the International Accounting Standards Board’s (IASB) publishing of a new standard on how to classify and measure certain financial instruments. However, Australian companies need to think carefully about when and how to adopt the new standard once an equivalent standard is released in Australia.

The new standard, IFRS 9 Financial Instruments is ‘phase 1’ of a complete rewrite of accounting standards on financial instruments. The current standards, particularly IAS 39 Financial Instruments: Recognition and Measurement, are considered by many, including the Group of Twenty (G20), to be overly complex and difficult to apply. The IASB’s project seeks to rectify these difficulties in a “fast-tracked” project.

Debbie Hankey, an Accounting Technical Partner with Deloitte, said the urgent nature of the project reflects the current political realities facing the IASB.

“The global financial crisis has been the catalyst for fast tracking the project and the call from the G20 for something to be done has been partially answered in the release of IFRS 9. The real challenge for the IASB is to get acceptance for its new approaches and keep the push towards global accounting standards alive.”

The ‘simplification’ introduced by the new standard will see some changes in accounting, with some winners and some losers. The new Standard will apply from 2013 but can be applied early.

Ms Hankey said: “Some companies will find the new approach to equity investments quite attractive as it potentially removes some volatility out of reported profits by eliminating the somewhat unfair treatment of impairment losses under existing standards, a lesson learned painfully by some companies as a result of the recent volatility in share prices.”

“As a result, we expect that some companies may want to take advantage of these changes by adopting the standard early, even if it means that future gains on disposal cannot be included in profit or loss,” continued Ms Hankey.

There are other downsides too. Companies investing in compound financial instruments and securitisation vehicles may experience more volatility as these instruments are required to be fair valued. Limited recourse lending arrangements may also trigger a fair value requirement in some cases.

Ms Hankey said: “Our financial services clients have concerns about some of these new requirements not accurately reflecting the commercial reality or imposing unreasonable information gathering burdens.”

Global reaction

The global reaction to the release of IFRS 9 has been varied. The big accounting firms generally support the new requirements. However, there is a lot of resistance from some sectors, particularly in Europe. EFRAG, the body charged with endorsing IFRS for use in Europe, are so far refusing to endorse the new standard in time for it to be adopted at 31December 2009 by companies that wish to do so.

“The IASB took an unusual step of releasing a full response to European concerns at the same time as IFRS 9. With murmurs of the possibility of the creation of a new accounting standard setter for Europe, the IASB is taking this issue very seriously.” said Ms Hankey.

Further changes are expected

The question also arises as to whether IFRS 9 will retain its current requirements even in the short term. The US standard setter, the Financial Accounting Standards Board, is also undertaking a concurrent project on financial instruments and the IASB has acknowledged that this will see further changes to IFRS 9 before its mandatory application date. The treatment of financial liabilities also remains a contentious area and was dropped from IFRS 9 very late in the process.

“The IASB has grappled with the concept of how an entity’s own credit risk should impact the measurement of liabilities. The idea that an entity should make a gain from a decline in its own credit worthiness has been the source of much debate.”

The IASB is concurrently considering other issues in financial instrument accounting, particularly hedging and impairment.

Ms Hankey noted: “The unfinished business in financial instrument accounting is likely to meet significant resistance from preparers – again the challenge for the IASB is to develop a principle-based accounting framework reflecting commercial realities.”

So what does this mean for global accounting standard setting?

“The current uncertainty in global accounting standard setting is very unhelpful to preparers trying to plan for the future and take advantage of the promise of a single set of high quality accounting standards,” said Ms Hankey.

“The IASB should survive this current challenge, but it may be wounded and the push towards global accounting standard setting may well suffer. Our clients are looking for simplicity, certainty, consistency with the commercial substance of transactions and events and global consistency. IFRS 9 is a first step in the long process of rewriting the accounting rules for financial instruments.”

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Contacts

Name:
Vessa Playfair
Company:
Deloitte Australia
Job Title:
Head of Corporate Affairs
Phone:
Tel: +61 2 9322 7576, Mobile: +61 419 267 676
Email
vplayfair@deloitte.com.au

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