FASB rulings cast doubt on financial instruments convergence

The Financial Accounting and Standards Board (FASB) took measures towards removing itself from merging with the International Accounting Standards Board (IASB) last week with several provisional rulings on its project on accounting for financial instruments.

With regards to classification and measurement, the board determined that it would not move forward with the “solely payment of principal and interest” (SPPI) model to calculate and define financial assets.

While the proposed SPPI model was similar to the IASB’s model, the two disagreed on several areas of classification and measurement. Instead, the “FASB elected to preserve the bifurcation requirements for embedded derivatives in hybrid financial assets in current U.S. GAAP.”

Ultimately, board members determined that while current methods were complicated, the SPPI proposal was similarly complicated. While the two methods would have similar outcomes, the cost of implementing the new proposal would be preventatively high.    

The FASB also elected not to incorporate the IASB’s model on impairment in the accounting for financial instruments project, instead opting to maintain the current expected credit loss (CECL) model.

Despite international pressure, the FASB and the IASB have had difficulties finding common ground on the financial instruments project. 92 percent of investment professionals surveyed by the CFA Institute indicated that the FASB and the IASB should pursue the same estimating credit losses model. While there is pressure to agree there are conflicting opinions on which model should be used. Respondents in the Americas seem to prefer the FASB model, while Europe, the Middle East, and Africa express a preference for the IASB model. 

For more information on the FASB’s CECL model and the differences between it and the IASB proposal, download FASB vs. IASB Proposals: Can’t We “ALLL” Just Get Along?