Last week, at a joint meeting held in London, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) announced that they would begin working “jointly and expeditiously towards common standards that deal with off-balance sheet activity and accounting for financial instruments.” The FASB and the IASB also intend to address loan loss accounting as part of the financial instruments project.

At the London meeting the boards agreed to “work together towards common standards by developing the IASB projects on consolidation and derecognition as joint projects once the FASB has completed its short-term amendments to its existing standards.” The boards also agreed “to issue proposals to replace their respective financial instruments standards with a common standard in a matter of months, not years. As part of this project the boards will examine loan loss accounting, including the incurred and expected loss models.” Although fair value accounting standards have attracted the most attention, loan loss accounting standards have also been criticized, particularly for their countercyclical impact (with banks required to build loss reserves in difficult economic environments, limiting capacity and incentives to lend, but prevented from building loss reserves when losses are low).

Last year, the two accounting standard setter bodies formed a joint Financial Crisis Advisory Group (FCAG) designed to inform and advise the boards “about [the] standard-setting implications of (1) the global financial crisis and (2) potential changes to the global regulatory environment.” The boards state their intention to continue to rely upon the expertise provided by the FCAG to guide them “in their joint response to the financial crisis.”

Sir David Tweedie, Chairman of the IASB emphasized the importance of achieving common accounting standards in many areas including financial instruments. He noted that “[t]he path to achieving convergence will undoubtedly be challenging but the remit we have from policymakers is clear.”