Friday, June 3, 2011

Controversy Brewing on Financial Instruments Proposal

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The change portended by the fresh U.S. accounting proposal on financial instruments and its planned shift to recording loans and many more items at fair value on balance sheets already appears to be causing controversy in the standard-setting world, at banks, and in seats of finance and government.

A divided Financial Accounting Standards Board, which issued the benchmark draft standard May 26 after a vote of 3-to-2, likely faces a difficult challenge in trying to finalize the proposal over the next year, as signaled in initial commentary examined June 4.

The American Bankers Association strongly criticized FASB's proposal within an hour of its publication. A leading commercial real estate industry group, the Real Estate Roundtable, said it would view final rules coming out of the draft accounting principles as a major setback and potentially “disastrous to the real estate credit environment.” ABA and Roundtable leaders did not welcome what they see as a prospect of loan portfolios being marked down significantly despite positive performance pictures.

In Brussels, where the European Commission has long exerted pressure on the International Accounting Standards Board to steer away from more fair-value-based accounting in response to bankers' complaints, an EC spokeswoman spoke May 31 about FASB's approach on instruments. Chantal Hughes told BNA of the EC's hope that the boards will resolve their differences in accounting principles on the topic.

FASB has set a comment deadline of Sept. 30 for the proposal. After that, the U.S. board--acting with IASB, which is conducting rulemaking on the impairment and derivatives phases in its side of the joint project--would redeliberate issues raised in the comment process.

As the debate about the proposal heats up and views of opposing camps may harden, the stances of the leading accounting firms could be pivotal.

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