IASB response to the credit crisis

In responding to the credit crisis, the IASB recognises the need to clarify International Financial Reporting Standards (IFRSs) to address new market developments.

The IASB’s response has been primarily focused on the recommendations of the Financial Stability Forum, while also avoiding inconsistencies in accounting treatments under IFRSs and US generally accepted accounting principles (GAAP).

Recommendations of the Financial Stability Forum

In April 2008 the Financial Stability Forum published a report to the G7 group of Finance Ministers and Central Bank Governors making recommendations for Enhancing Market and Institutional Resilience.

The report was the result of collaboration by the main international bodies and national authorities in key financial centres, including the IASB. It set out 67 recommendations, which were endorsed by the G7 on 11 April.

Of the recommendations, three relate to enhancements to financial reporting. Those recommendations form the core of the IASB’s response to the credit crisis.

  1. Off balance sheet: The IASB should improve the accounting and disclosure standards for off balance sheet vehicles on an accelerated basis and work with other standard-setters toward international convergence.

    Response: The IASB already had two projects under way directly related to off balance sheet vehicles. The Consolidation project aims to identify when an entity should be brought on to another entity’s balance sheet, and the Derecognition project is examining when assets should be removed from the balance sheet. Both of these projects are described by the Memorandum of Understanding between the IASB and the US Financial Accounting Standards Board (FASB) which sets out a roadmap for the convergence of IFRSs and US GAAP.

    The IASB has given both projects priority in order to accelerate their completion.  A working draft of a revised standard on consolidation [PDF] has been prepared by IASB staff, and will be discussed during a series of round-table discussions, the first of which was held in in London on 17 September 2008.

    At its meeting on 2 October, the IASB addressed the topic of off balance sheet items as part of its Consolidation project. On the basis of continued progress on that project, the IASB intends to have a proposal on consolidations ready to publish for comment in November.  The IASB is also developing a proposal on the derecognition of financial assets and expects to publish an exposure draft on this subject in the first quarter of 2009.

  2. Fair value in illiquid markets: The IASB should enhance its guidance on valuing financial instruments when markets are no longer active. To this end, it will set up an expert advisory panel in 2008.

    Response: At its meeting in May 2008, and as part of its Fair Value Measurement project, the IASB announced plans to set up an expert advisory panel to identify valuation and disclosure issues encountered in practice in the current market environment.  Since its formation in May 2008 the panel has met on seven occasions (the last on 10 October).   

    Although the panel meetings were held in private, summaries of the discussions were presented to the IASB in public meetings and are available on the Fair Value Measurement project page.

    On 16 September as a first step in developing guidance on the application of fair value in illiquid markets, the IASB staff released draft guidance emanating from discussions of its expert advisory panel.   The panel met on 10 October to discuss comments received on the document.

    On 30 September a clarification to the US standard FAS 157 Fair Value Measurements was made by the US Securities and Exchange Commission (SEC) and staff of the Financial Accounting Standards Board (FASB). The IASB considers this clarification consistent with IFRSs and a useful contribution.

  3. Disclosure: The IASB will strengthen its standards to achieve better disclosures about valuations, methodologies and the uncertainty associated with valuations.

    The IASB is reviewing IFRS 7 Financial Instruments: Disclosures (including as part of its Consolidation project) to assess its effectiveness in ensuring that entities disclose information that reflects their exposure to risk and any potential losses arising from financial instruments with the off balance sheet entities with which they are involved.

    Steps taken to date include consultation with preparers and users of IFRS-compliant financial statements, an analysis of good disclosure practice observed in financial reports and a review of good practice suggestions made by regulatory bodies.

    At its meeting in September the IASB considered a comprehensive package of proposed amendments to IFRS 7. The package included disclosures related to off balance sheet risk, fair value measurement and financial instrument risk, including disclosures related to liquidity risk.

    The IASB published an exposure draft on Wednesday 15 October that proposes enhancements to disclosure about fair value measurement and about liquidity risks.

Other responses to the credit crisis

The IASB has committed itself to undertake the following:

Timeline of key announcements and measures taken by the IASB in response to the credit crisis (2008)