Community Banks, US GAAP and IFRS By: Kent Tekrony, CPA Date: 10/22/09 The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IABS) are currently focused on the convergence of a few differences between United States Generally Accepted Accounting Principles (US GAAP) and International Financial Reporting Standards (IFRS) which are of particular interest to the financial services industry. Community banks will likely find it useful to focus on a few of these specific issues.  This approach will put community banks on notice early in the process as the regulators attempt to resolve those issues most likely to impact them.  Given the regulatory bodies’ track record of resolving differences incrementally over time, this approach will also keep community banks abreast of those issues where the convergence process has begun but is not yet complete. As indicated above, the FASB and IABS are currently in the process of attempting to resolve a number of differences which have the potential to impact community banks and the financial services industry.  These two standards setters are moving forward on a number of these issues with a sense of urgency in large part due to the recent financial crisis.  Sir David Tweedle’s (IASB chair) response to the G20 Financial Stability Forum clearly expresses the motivation for resolving issues related to the accounting for financial instruments, “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 issued its Fair Value Measurement Exposure Draft (ED) in May 2009 in an attempt to simplify accounting for financial instruments and coverage differences between IFRS and US GAAP.  The IASB sets a very aggressive timetable for addressing these issues.  Although this ED closes many of the differences between US GAAP and IFRS, some key differences still remain.  For instance, the scope of the ED applies to leases in addition to other financial instruments.  The comparable US GAAP guidance to the IASB’s ED is FAS 157.  FAS 157 does not apply to leases.  The ED considers the reference market for valuation purposes to be the most advantageous market vs. the principal market under FAS 157.  The ED also proposes presenting an asset’s “incremental value” when an asset’s current use is not actually its highest and best use.  There are also differences related to blockage factors, day one gains and losses, and the measurement of equity securities.  The IASB considers these differences improvements over US GAAP. The IASB is also in the process of revising the classification and measurement of financial instrument within the context of its International Accounting Standards (IAS) 39 replacement project.  The IABS’s project proposes a two-category measurement approach for assets and liabilities.  The FASB tentatively decided in a July 2009 meeting to proceed with its own financial instruments project.  The FASB’s project proposes fair value as the only measurement basis with an option for companies to reflect their own debt liabilities at amortized cost.  The FASB’s approach is very different from the IASB’s two-category approach.  The overall goal of convergence may be delayed if the standards setters cannot resolve their differences and agree to a joint solution in this arena in the near future. The IASB is also seeking comments related to a proposed expected loss impairment model.  The IASB’s model is driven by expected cash flows.  The FASB is also considering a similar impairment model.  However, the FASB’s model is an incurred loss model.  The two standards setters will need to resolve the differences in the conceptual approach to addressing impairment issues. The IASB released IFRS for Small and Medium-sized Entities (SME) in July 2009.  This IFRS for SMEs provides an alternative accounting framework for qualifying entries.  The IFRS for SMEs is a self-contained, comprehensive set of accounting standards designed for entities outside the public arena.  This IFRS for SMEs is particularly interesting in light of the growing opinion in the United States that two different sets of reporting requirements are needed; one for the larger public entities and a second for the smaller nonpublic entities.  It will be interesting to see how the regulatory bodies resolve this difference between US GAAP and IFRS. The bottom line is community banks will continue to see significant reporting changes resulting from efforts to unify US GAAP and IFRS over the coming years.  However, due to the incremental and fluid nature of the convergence process, the nature of these changes, degree of changes, and timeframes involved will remain up in the air.  Fortunately, the nature of this process will likely allow community banks to identify those issues most likely to impart them early in the convergence process and also allow for the continued monitoring of these issues throughout the resolution process. IFRS has already wielded significant influence over US GAAP.  This influence is likely to increase significantly as the pace and pervasiveness of changes increase to unprecedented levels over the next several years.