IASB January 2007

Due process document

At their joint meeting in April 2006, the IASB and the Financial Accounting Standards Board agreed to a goal of publishing a due process document on financial instruments (as envisaged in their Memorandum of Understanding) by January 2008. The boards agreed that this document would, as far as possible, include the preliminary views of each board.

At this meeting the Board discussed how debtors should measure guaranteed liabilities. The Board tentatively decided that a third-party contractual guarantee does not affect the measurement of a liability by a debtor if the guarantee does not affect the future obligations of the debtor. The Board also tentatively decided that a liability should include any measurement effect arising from the regulatory environment within which the debtor operates, for example statutory deposit insurance.

The Board discussed whether any exception from normal accounting principles in the form of hedge accounting should be permitted. This discussion was based on the Board’s prior tentative decision that all items within the scope of the document should be measured at fair value with changes in fair value recognised in profit or loss. The Board tentatively decided that no exceptions (hedge accounting) would be permitted for recognised assets, liabilities and firm commitments within the scope of the document or for any forecast transaction regardless of whether the resulting item would be within the scope. In addition, the Board tentatively decided that the document should include a discussion about whether some form of hedge accounting would be justified for hedged assets, liabilities and firm commitments outside the scope of the document. The Board also tentatively decided that the document will discuss issues arising from foreign exchange risks embedded in items outside the scope of the document.

Board members again observed that the document should discuss other possible approaches to financial instruments, and that it will invite comments on both the alternative approaches and the Board’s preliminary views.