Proposed replacement for IAS 39 to be released in October

This project - which was officially launched by the IASB in March 2008 when it published a discussion paper entitled Reducing Complexity in Reporting Financial Instruments - envisages a wide-ranging overhaul of the current standard, aiming to solve all perceived flaws in the rule. The IASB and Financial Accounting Standards Board (FASB) have also cited this as an opportunity to align their standards. "The IASB is committed to working with the FASB to pursue the objective of replacing existing requirements," an IASB press release stated.

Auditors say the project is much needed. "I think there's a lot of appetite on both sides of the Atlantic to try and find solutions, as at the moment there are some differences in the accounting treatment that are fairly fundamental," observed Pauline Wallace, London-based head of the global financial instruments team at PricewaterhouseCoopers.

The IASB has released a timetable detailing when key issues will be discussed. Decisions regarding classification and impairment - which along with loan-loss provisioning are seen as the most significant areas under review - will be made in July, while the final proposals will be released in October. At this point, the IASB is likely to begin re-assessing other areas of complexity in the standard such as hedge accounting.

With regard to classification, the IASB is thought to be considering narrowing down the number of categories from four to two. At present there are two amortised cost categories: fair-value through equity and fair-value through profit and loss (P&L). The IASB is said to be considering maintaining the fair-value through P&L category along with some type of amortised cost category, which has yet to be determined.

Auditors have warned this simplification is not as straightforward as it seems, as some market participants will inevitably be unhappy with the results. There is particular debate around removing the fair-value through equity category - known as "available-for-sale" - as these assets will either have to be moved into fair value through P&L - which will upset banks as they may take a bigger hit on their income statement - or amortised cost - which will aggravate investors, who want as many assets as possible measured at fair-value.

"Trying to simplify the number of categories while pleasing all the people is going to be a Holy Grail. Almost certainly they're going to end up upsetting somebody," said Tony Clifford, London-based financial services partner at Ernst & Young.

Impairment is viewed as an equally tricky subject, as the IASB's and FASB's current standards are not only extremely complex; they also diverge markedly. "Impairment is fundamentally in need of review; there's no reason why it should be so complex," said Wallace.

Accounting standards in general have attracted much criticism over the past 18 months. Fair-value accounting has come under heavy fire, as banks have been forced to mark down assets at market values they feel are not reflective of inherent value. In contrast, investors are wary of any moves that enable banks to move away from marking to market and establishing their own subjective valuations of assets and liabilities.

The matter has not escaped the attention of world leaders, who have cited it as an area critically in need of review. In its April 2 communiqué, the Group of 20 urged accounting standard setters to "reduce the complexity of accounting standards for financial instruments" and "make significant progress towards a single set of high quality global accounting standards" by the end of 2009.

"We have heard a clear and consistent message on financial instruments accounting - fix this once, fix it comprehensively and fix it in an urgent and responsible manner. The IASB is committed to do just that by developing proposals within six months for public comment," said David Tweedie, chairman of the IASB, in a written statement.

See also: Concerns over political influence overshadow FASB's changes to fair value;
IASB amends fair-value disclosure