2010 is going to be an interesting year in the accounting standard-setting arena. The financial crisis may have passed but its implications are still being felt. This year we can expect to see many of the initiatives of the standard-setters to address the accounting problems highlighted during the financial crisis coming to fruition. Project Director Deepa Raval looks at the scene and surveys the year ahead.

The environment

Accounting standards were the subject of much discussion last year with politicians and regulators in particular becoming involved in the debate. Most notably, accounting standards were a feature of both the G20 Economic Summits held during 2009, where the leaders have called upon the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) to 'redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard-setting process'.

More specifically, the G20 encouraged the IASB and FASB to take action by the end of 2009 to:

• reduce the complexity of accounting standards for financial instruments;
• strengthen accounting recognition of loan-loss provisions by incorporating a broader range of credit information;
• improve accounting standards for provisioning, off-balance sheet exposures and valuation uncertainty;

as well as making significant progress on convergence. The European Union (EU) also pressed the IASB to find solutions to crisis related issues in time for the preparation of the 2009 year end financial statements, notably on the application of fair value accounting (on which more below).

The detail of how the two Boards have responded can be seen on the IASB's website at http://www.iasb.org/ Financial+crisis/Response+to+the+credit+crisis.htm. But it has led to a busy period for all participants in the financial reporting community. The ASB, for example, responded to 27 consultations from Cannon Street during 2009, with at least another 15 anticipated for 2010.

The saga of IFRS 9

The major development during the year was the issue by the IASB, on 12 November, of International Financial Reporting Standard (IFRS) 9 on the classification and measurement of financial assets, and the reaction to its publication in the EU. IFRS 9 represents the first phase of the IASB's work to replace its existing standard (IAS 39) on the recognition and measurement of financial instruments.
The IASB had been urged by many to issue a standard by the end of 2009, with early adoption permitted from 2009 year-end financial statements. In finalising the standard, the IASB had sought to respond to a number of European concerns, in particular to give primacy to the so-called business model test as the main criterion for determining which financial assets should be measured at amortised cost, and scoping out financial liabilities (which had been included in the Exposure Draft, (ED).

Given the importance of the issue, moves were made to provide for the possibility of a 'fast-track' endorsement of IFRS 9 for use in the EU in time for 2009 year-ends. The European Financial Reporting Advisory Group (EFRAG) provided draft advice that IFRS 9 met the technical criteria for endorsement and recommended that it should be adopted for use in the EU. The ASB supported EFRAG's recommendation and encouraged UK constituents to register their support. However, while the UK business community was solidly in support of endorsing IFRS 9, this was not the case across all of Europe, as was evident from a stakeholder meeting hosted by the European Commission on 11 November. Following an Accounting Regulatory Committee (ARC) meeting later that day, it was decided not to seek an accelerated endorsement of IFRS 9, although Commissioner McCreevy subsequently wrote to the Chairman of the Trustees of the International Accounting Standards Committee Foundation (IASCF) to emphasise that the EC remains "fully committed to IFRS as the single set of globally accepted accounting standards".

At the time of writing, there are no indications of when endorsement might be expected. The assumption is that the usual process for endorsement is being followed.

In 2010 we hope to see the standardsetting process escaping political pressures and focusing on quality. In particular the process needs to allow sufficient time for consultation field-testing to ensure the standards produced are workable.

So what can we expect from the IASB in 2010?

Further new standards which address some of the issues arising from the global financial crisis are due to be issued. The most significant changes to financial reporting will be contained in the next phases of the new standard on financial instruments. The IASB has set itself an ambitious target that the complete IFRS 9 will be available by the end of 2010. The key dates for each of the phases are listed below.

Financial liabilities

Prior to issuing the standard on Classification and Measurement the IASB decided to exclude financial liabilities from the scope of this part of the project. The main reasons for this relate to unresolved issues relating to own credit risk and the treatment of embedded derivatives. Members of the IASB's Financial Instruments Working Group (FIWG) were asked for their views on the treatment of own credit risk in December 2009. It is expected that the IASB will use input from its outreach activities to develop an approach for financial liabilities in the upcoming months.

Impairment

In a nutshell, the IASB's Exposure Draft (ED) 'Financial Instruments: Amortised Cost and Impairment', issued in November 2009, proposes an expected loss model as an alternative to the current incurred loss approach. The main difficulty of the expected loss model is its operational aspects and there are calls for more guidance than is provided currently in the ED. An Expert Advisory Panel (EAP), which met for the first time in December, has been set up specifically to consider how the model can be implemented in practice. Further meetings of the EAP are due to be held every 4-6 weeks. The questions are whether the expected loss model represents an improvement and whether it will be acceptable to politicians and regulators, as the model is unlikely to solve the problem of banks having insufficient capital buffers.

Hedge accounting

The IASB is expected to publish an exposure draft on hedge accounting in the first quarter of 2010. The ED is likely to contain proposals to simplify the existing hedge accounting requirements. Discussions to date have focused on replacing fair value hedge accounting with an approach similar to cash flow hedge accounting whereby gains and losses on hedging instruments are deferred in Other Comprehensive Income (OCI) until such time as the hedged item affects profit or loss. The hedged item would not be adjusted under this approach. Portfolio hedge accounting and hedge accounting for net investments in a foreign operation are going to be dealt with separately and may not form part of the ED. The main theme arising from discussions with constituents in this area is the lack of an overarching principle for hedge accounting. Further, there is a need for a hedge accounting model to provide further information about an entity's risks and how an entity uses hedging instruments to manage these risks.

Derecognition

The IASB is developing an alternative approach to derecognition based on the alternative approach proposed in the Derecognition ED published last year (as reported in Inside Track 60). Discussions are at an early stage. However, it is recognised that the treatment of repos, which would have come off balance sheet as proposed in the ED, is going to be problematic.

Fair Value Measurement

In January 2010, the IASB began joint discussions with FASB to develop converged fair value measurement guidance, in the light of responses to its May 2009 ED 'Fair Value Measurement' (reported on in Inside Track 60).

FASB work on financial instruments

FASB is planning to publish comprehensive proposals for its replacement standard for financial instruments in the first quarter of 2010 but is not as advanced as the IASB in its discussions. FASB is likely to move towards a full fair value model for classification and measurement, which could make a converged solution more difficult to achieve.

But convergence goes on

That said. both the IASB and FASB continue to work in pursuit of convergence. During November the two Boards reaffirmed their commitment to work together to bring about the convergence of IFRS and US GAAP and to intensify their efforts to complete the major joint projects set out in their Memorandum of Understanding (MoU).