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Accounting alert 2009/04 - Changes to mark-to-market accounting

What does it mean for Australian companies?

Background

The hype surrounding interpretations of comments made at the recent G20 summit and the recent change to mark-to-market accounting requirements in the US may lead one to believe that the fair value rules in Australia have changed. Needless to say, changes in mark-to-market rules in the US, whilst they may have some influence on Australian Accounting Standards, do not mean the Australian standards have changed.

The International Accounting Standards Board (IASB) has however indicated in response to the G20 summit that proposals to replace the existing financial instrument Standards would be published within six months. The final application date for any changes emerging from these proposals is yet to be determined. For further information on the IASB response to the G20 summit refer to IAS Plus Update: G20 Implication for IFRS (PDF 100kb).

What are the US amendments?

The two amendments to US Generally Accepted Accounting Practice (US GAAP) that have recently been approved by the Financial Accounting Standards Board's (FASB) may however have more immediate effect on global reporting:

  1. Guidance to assist preparers to determine whether a market is not active and a transaction is not distressed 
  2. Changes on the recognition and presentation of other-than-temporary impairments on debt instruments.

Does this mean that the mark-to-market rules are being relaxed?

In respect of the second amendment, International Financial Reporting Standards (IFRS) and US GAAP currently differ significantly in respect of the assessment and recognition of impairment losses on financial instruments. Any change to the existing impairment rules under IFRS will require significant rework of the existing standard. This is unlikely to occur in the short term outside of the IASB response to the G20 summit referred to above.

However, it is the first amendment which seems to be causing the greatest excitement. Many commentators view it as a significant relaxation of mark-to-market rules which will give companies the unreserved ability to depart from market prices and use own judgement so as to avoid and even mask asset write downs.

The US GAAP change itself is not vastly different to the guidance already contained in IFRS. On 14 October 2008, the IASB's Expert Advisory Panel released a discussion paper on Measuring and disclosing the fair value of financial instruments in markets that are no longer active (PDF 649kb). In many ways, the FASB's objectives and approach on the application of fair value when a market is not active appear to be broadly similar to those in IFRS.

The IASB's paper, which applies equally in Australia, emphasises that "that the objective of a fair value measurement is the price at which an orderly transaction would take place between market participants on the measurement date, not the price that would be achieved in a forced liquidation or distressed sale." The discussion paper continues to say that "using the entity's own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available." 

Whilst the US GAAP amendment provides further assistance on when an entity may consider that a market is inactive, Australian entities claiming compliance with IFRS should continue to apply judgement on the matter. Neither current IFRS nor US GAAP permits the use of internal pricing where valid market prices are available.

Further information on the US GAAP amendments can be found in the US fair value amendment Heads Up (PDF 146kb).

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