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IASB Moves on Derivatives Risk; More

Tammy Whitehouse | April 1, 2008

While nerves over market turmoil involving complicated financial instruments are still raw, the International Accounting Standards Board and the Financial Accounting Standards Board are floating some preliminary ideas for how to strip complexity out of the reporting of such instruments.

IASB published a discussion paper titled “Reducing Complexity in Reporting Financial Instruments” as part of a long-term project under the joint IASB-FASB “Memorandum of Understanding” to converge accounting standards. FASB followed suit by publishing the same paper with some additional caveats for U.S. Generally Accepted Accounting Principles and asking for comment in the United States as well.


“The discussion paper seeks views from our constituents as to how to reduce complexity in accounting for financial instruments and it identifies a number of alternatives,” IASB member John Smith told Compliance Week. “It also asks if there are other alternatives.”

IASB’s efforts are focused on a revision of International Accounting Standard No. 39, Financial Instruments, Recognition and Measurement, looking for ways to make it more principled and less complicated. The discussion paper says there are a number of accounting and reporting problems that can be traced to the numerous ways in which financial instruments are measured.

The board says it could probably address such problems by requiring all financial instruments to be measured in the same way, namely using fair value, but it acknowledges it wouldn’t be easy. “Various issues and concerns have to be addressed before a general requirement for fair-value measurement can be introduced,” IASB says in the discussion paper.

So the board is floating some “intermediate approaches” that could be adopted more quickly, such as amending existing measurement requirements, replacing existing measurement requirements with a fair-value principle and some optional exceptions, or any of several ideas for simplifying hedge accounting.

FASB is already deep into a project to revise Financial Accounting Standard No. 133: Accounting for Derivative Instruments and Hedging Activities, and the board notes there are fundamental differences between FASB and IASB in how they define fair value.

Smith said IASB has a number of projects on its agenda related to financial instruments, looking for new approaches to derecognition, consolidation, fair-value measurement, and distinguishing liabilities from equity. With ongoing market turmoil that is rooted in complex, credit-based securities, Smith said he expects plenty of comments to the discussion paper. “Given the current disruption in the marketplace, our projects relating to financial instruments will receive added attention,” he said.

IASB is open to comment on the discussion paper through September 19.

CAQ Speaks on End of GAAP Reconciliation

The Center for Audit Quality has published the results of its back-and-forth with the Securities and Exchange Commission about how the market will transition to accepting certain international filings without reconciliation to U.S. reporting standards.

The International Practices Task Force of the CAQ’s SEC Regulations Committee has met with the SEC staff to discuss the agency’s final rule, “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP.” Carol Banford, a member of the task force and managing partner of international client services for Grant Thornton, says the task force identified numerous questions regarding how the rule would go into effect, so they posed them to the SEC staff to get some feedback.

The results of that Q&A dialogue are contained in a CAQ implementation paper that the SEC staff has reviewed and revised, Banford says, although officially the document is not considered authoritative guidance from the SEC.


“It’s a very technical implementation paper that will handle some of the questions that arise as foreign private issuers start to implement the SEC rules,” she says. For example, the paper addresses what an FPI is to do with prior reconciliations to U.S. Generally Accepted Accounting Principles, what happens when there’s an acquisition involved, and what might be required for entities subject to specific industry accounting guides, among other issues, Banford says.

While not sanctioned as official guidance from the SEC, Banford says companies and auditors can view it as reliable. “It’s gone through the members of the international task force representing the largest firms, we vetted it among ourselves, then it was reviewed by the SEC, and they made comments and asked for corrections,” she says. “The whole purpose is to make things easier for foreign filers.”

Survey: Audit Comms Pleased With Audit Quality

The vast majority of audit committee members—87 percent—who participated in a recent Center for Audit Quality poll believe the risk of fraud affecting financial statement accuracy is “not very high.”

Sixty percent of the 253 audit committee members who answered the CAQ survey said they believed the risk of fraud hitting financial statements has declined since the implementation of Sarbanes-Oxley. As for audit quality, 82 percent rate it “very good” or “excellent,” saying it has improved in recent years. Survey respondents said risk of material inaccuracy is reduced because of tighter internal controls and increased audit scrutiny.

The CAQ says the survey findings indicate that even as markets experience considerable turbulence, audit committee members have a high degree of confidence in the quality of audited financial statements. Further, 65 percent of audit committee members said investors should have more confidence in capital markets as a result of Sarbanes-Oxley.

“The CAQ’s research tells us that Sarbanes-Oxley is working—for investors, for audit committee members, and for our capital markets,” says Michele Hooper, cofounder of the Directors’ Council and one of three public members on the CAQ’s governing board, in a statement. “We should always strive to do better when it comes to safeguarding the integrity of the markets, but it’s good to know that we’re making progress.”

Fred Lipman, a director for the Association for Audit Committee Members, says he would agree audit quality is good, but he doesn’t see it as a way to assure against fraud. “I think that there is always a significant fraud risk if senior management is so inclined, particularly in view of the ability of senior management to override even the best internal controls,” he says. “The problem is auditors, by their own admission, don’t pick up all frauds, and in many cases, they miss it completely. It’s one check, but it’s not the only check.”

Cindy Fornelli, executive director of the CAQ, concedes there’s room for improvement, but says the findings “provide valuable insight that gives cause for optimism in the profession.”