A post on the FT Alphaville blog on Tuesday September 15 caught my eye ‘How accounting changes can create a world of investment banks’.   Tracy Alloway’s blog refers to a speech by Elizabeth A Duke, governor of the US Federal Reserve Bank, in which the governor raised several concerns with proposals by the IASB and the FASB on accounting for financial instruments.

To recap these proposals, the IASB is suggesting that financial instruments that have basic loan features (payments represent interest and capital) and are managed on a contracted yield basis should be accounted for using the amortised cost model rather than fair value.  Showing that we still have some way to go before US GAAP and IFRS are converged, FASB wants to measure all financial instruments at fair value.  Ms Duke believes that neither of these approaches accurately reflect the traditional commercial banking model and would favour, in her words ‘originate to distribute’ rather than ‘originate and hold’ lending models.

CIMA’s Financial Reporting Development Group considered the IASB proposals earlier this week and concluded that the primary consideration for determining the classification of financial instruments should be the way they are managed.  If the financial instrument is being managed on the basis that it is being held to maturity then the amortised cost model would seem more appropriate than the fair value model.  As I said in my comment on Tracy Alloway’s post ‘it is of key importance that accounting reflects the business model rather than determines it’ and this is equally important outside of the banking sector.

CIMA’s response to the IASB proposals also pointed out that it is important not to lose sight of the historic gain or loss as a key performance measure. The income statement as distinct from the statement of other comprehensive income (OCI) can play an important part here as we believe that only realised gains and losses should be recognised in the income statement. Unrealised gains and losses should be taken to OCI and then recycled to the income statement when realised.

It will be interesting to see how this project proceeds; I just hope that the IASB doesn’t lose sight of the overriding need which is to simplify the accounting for financial instruments.