Tweedie defends IASB fair value policy at ECOFIN meeting

IASB chairman Sir David Tweedie is not a man given to kow-towing to anyone, but he was on his best behaviour this week as he defended the board’s technical policies at a meeting of the European Union’s ECOFIN ministerial council.

Sir David was invited to the ministers’ meeting on Tuesday to report on progress towards convergence of IFRS and US GAAP, as requested by the G20 at their Pittsburgh summit in September 2009. According to the IASB chairman, the two boards have made “signficiant progress” of a agreeing a single set of global accounting standards by June 2011.

Sir David also pointed to recent institutional reforms designed to allay criticisms from Europe of the IASB structure.

But the most delicate and technically complex part of his statement related to the IASB’s work on accounting for financial instruments. In November, the IASB published its new standard on the classification and measurement of financial instruments, IFRS 9 Financial Instruments – bringing the project schedule forward in response to requests to have something in place for 2009 financial statements, he told ministers.

“Despite the earlier request for speed in completing this phase of the project, the European Commission now wishes to follow the normal endorsement procedure for IFRS 9,” he chided the council. IAS 9 only deals with instruments held as assets on the balance sheet, he noted. With hedging a major issue on the ECOFIN agenda, policy makers wanted to know what the IASB (and FASB) were doing to address liabilities, provisions and hedging.

He also sought to allay fears that IFRS 9 will result in an increase in the use of fair value. “The IASB did not seek to increase or decrease the use of fair value accounting when overhauling the accounting for financial instruments. Our aim was to find the right balance and establish appropriate criteria for determining whether to use cost or fair value. The decision depends upon whether cost or fair value provides the most useful information about likely future cash flows,” said Sir David.

Cost-based measurement will be required when a financial asset has predictable cash flows and if the objective of the holder is to collect principal and interest over the life of the asset rather than to collect cash proceeds from sale, he explained, adding: “For a traditional bank, being one that takes deposits and lends money to customers that it holds to collect principal and interest, we expect IFRS 9 to result in fewer rather than more items being measured at fair value.”

The full text of Sir David Tweedie’s statement to ECOFIN ministers is available on the IASB website.

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