The IASB and the US FASB are jointly undertaking a project to design a Conceptual Framework. The project's overall aim is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged. The boards are conducting this project in eight phases, four of which are currently active. Phase C concerns measurement and the aim of the boards is to publish a discussion paper in the fourth quarter of 2009. (Sullivan, arthur; Steven M. Sheffrin 2003, 62-78)
Given the far reaching nature of the IAS 39 replacement project, many companies may need to undertake changes in systems and internal reporting in order to comply with its requirements. For this reason KPMG commends the Board's decision to set a longer term time horizon for mandatory adoption of the new standard (2013). This will also allow preparers to adopt all phases of the project at once. Importantly, however, the new standard will be available for early adoption in 2009 without the need to restate comparatives. (Sullivan, arthur; Steven M. Sheffrin 2003, 62-78)
Advising the IASB and the US FASBassets should be measured in financial reports
As proposed in the exposure draft, the standard retains a mixed measurement model, with some financial assets measured at amortised cost and others at fair value. Retaining but simplifying the mixed measurement model was an important recommendation of the Financial Crisis Advisory Group, which issued its report in July 2009. (Sullivan, arthur; Steven M. Sheffrin 2003, 62-78)
In the current environment KPMG believes that this is the right approach. The distinction between the two measurement models is driven by the business model of each entity, supplemented by a requirement to assess whether the cash flows of an individual instrument are only principal and interest. This business model approach is a fundamental building block of the new standard and aligns the accounting with the way that management deploys assets in its business while also considering the characteristics of the assets. (Sullivan, arthur; Steven M. Sheffrin 2003, 62-78)
One of the more controversial aspects of the exposure draft was the proposed accounting for investments in securitisations. The proposal was that only investments in the most senior tranche of debt issued by a securitisation vehicle could be accounted for at amortised cost. Many commentators felt that this was inappropriately restrictive. Under the final standard, an entity holding these investments "looks through" the investment in the securitisation vehicle to the underlying cash flows of the assets within it to assess which measurement basis is appropriate using the underlying principles in the standard. (Sullivan, arthur; Steven M. Sheffrin 2003, 62-78)
While the exposure draft's proposals also would have applied to liabilities, the standard addresses at present only financial assets. This change in scope reflects the complexities of some of the issues around liability measurement, including the measurement of own credit risk and embedded derivatives. Addressing financial assets and liabilities separately is not ideal but KPMG believes that the Board has made a sensible decision pending further discussion on these ...