FINANCIAL CRISIS ADVISORY GROUP Crowne Plaza Hotel London, The City. December 15, 2009 MEETING SUMMARY OPEN SESSION

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1 Members attending in person Harvey Goldschmid (co-chair) Hans Hoogervorst (co-chair) Toru Hashimoto Michel Prada Nobuo Inaba Jane Diplock Stephen Haddrill Klaus-Peter Müller Wiseman Nkuhlu FINANCIAL CRISIS ADVISORY GROUP Crowne Plaza Hotel London, The City December 15, 2009 MEETING SUMMARY OPEN SESSION Members/Observers attending by telephone Lucas Papademos Fermin Del Valle Don Nicolaisen Jerry Corrigan Eugene Ludwig James Kroeker (Observer) U.S. Securities and Exchange Commission Observers attending Sylvie Matherat Lee Piller Robert Esson Masamichi Kono Nelson Carvalho Dennis Chookaszian Jerry Edwards IASB members attending David Tweedie Jim Leisenring John Smith IASB Staff attending Gavin Francis Basel Committee on Banking Supervision Committee of European Securities Regulators International Association of Insurance Supervisors Japan Financial Services Agency IASB SAC, Brazil FASAC, United States Financial Stability Board FASB members attending Bob Herz FASB staff attending Russ Golden IASC Foundation staff attending Tom Seidenstein FAF staff attending Jodi Dottori Members not in attendance John Bogle, Yezdi Malegam, Tommaso Padoa Schioppa, Raudline Etienne 1

2 DELIVERABLES AS A RESULT OF THIS MEETING: 1. Mr Goldschmid explained that the FCAG will probably need to meet again during the third quarter of 2010 to discuss progress made by both the IASB and the FASB in light of the recommendations contained within the Report of the Financial Crisis Advisory Group, which was published on July 28, 2009, 1 as well as developments in the accounting standard-setting world, including: a. Voluntary adoption of International Financial Reporting Standards (IFRS) by some companies in Japan b. The SEC s response to the comments on its Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers c. The endorsement decision on IFRS 9, Financial Instruments: Classification and Measurement, by the European Commission d. The issuance by the FASB of comprehensive proposals on financial instruments e. Continued convergence efforts by the IASB and the FASB f. Group of Twenty (G-20) meetings and recommendations. 2. The FCAG will be sending a letter to the G-20 to provide the G-20 with an update of the Boards progress in light of recommendations by the FCAG. OPEN SESSION Briefings (IASB and FASB): 3. Mr Goldschmid and Mr Hoogervorst, FCAG Co-chairs, welcomed everyone to the meeting and explained that Mr Robert Herz, Chairman of the FASB, and Sir David Tweedie, Chairman of the IASB, would be discussing recent developments at the FASB and the IASB. 4. Mr Hoogervorst presented a brief synopsis of actions taken by the Boards after the FCAG final report was published. Highlights include: a. During November 2009, the IASB issued IFRS 9, Financial Instruments: Classification and Measurement. b. During November 2009, the IASB issued an Exposure Draft, Financial Instruments: Amortised Cost and Impairment, for public comment. c. At a recent meeting of the European Commission (EC), the EC decided not to accelerate the endorsement process for IFRS 9 because it is waiting for the completed review of IAS 39, Financial Instruments: Recognition and Measurement. Briefing of the IASB Sir David Tweedie 5. Mr Tweedie explained that after the FASB issued FSP FAS and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (now in Subtopic of the FASB Accounting Standards Codification TM ) the IASB had been under great pressure to do something very similar, and otherwise modify the impairment guidance in IFRS. However, Mr Tweedie explained that this is a difficult task because current IASB literature does not contain the notion of other-than-temporary impairments. 1 Available at 2

3 6. Mr Tweedie noted that the IASB Board agreed that undertaking work to produce such a change would be a major distraction from achieving a goal outlined by the G-20, which is to remove the complexity from, and otherwise improve, the accounting for financial instruments, currently contained in IAS 39 within the 2009 calendar year. 7. To achieve that goal, Mr Tweedie spoke to the European Finance Ministers and explained that tentatively the IASB would address, in three phases, the accounting for financial instruments. Phase 1 would deal with measurement and classification of financial instruments, Phase 2 would deal with impairments and provisioning, and Phase 3 would deal with hedging. 8. Phase 1 Measurement and Classification: In July 2009, the IASB issued an Exposure Draft, Financial Instruments: Classification and Measurement. After issuing the Exposure Draft, the IASB spoke with nearly 100 individuals and organizations about the proposed standard, and met weekly to discuss modifications to it. After considering comment letters and constituent outreach, the IASB issued IFRS 9. Mr Tweedie provided a brief summary of IFRS 9: a. It applies only to financial assets. b. It requires entities to classify financial assets on the basis of the objective of an entity s business model for managing financial assets and the characteristics of the contractual cash flows. This allows for both the use of fair value and amortized cost. c. It requires reclassifications between amortized cost and fair value classification when the entity s business model changes. d. Equity instruments are recognized at fair value. However, for some instruments in which the business model is not to trade the instruments, as an option, the gains and losses can be taken through other comprehensive income; whereas, all other financial instruments presented at fair value have gains and losses through income. e. Phase 1 of IFRS 9 will become effective in 2013, which will allow the IASB to issue the other phases of IFRS 9 so that all of them become effective at the same time. f. At this point, IFRS 9 scopes out insurance companies because both Boards have a joint project to define the liability in insurance contracts, and, in their view, defining the liability is a more important first step for insurance companies. 9. The IASB issued an Invitation to Comment, Own Credit Risk, and it plans to further deliberate the issue with the FASB. 10. Phase 2 Impairment and provisioning: The IASB s Exposure Draft on the expected loss model is a rather significant change from the currently used incurred loss model. Though the expected loss model has gained traction at the IASB, implementation issues have arisen in the application of the model. 11. Phase 3 Hedging: The IASB plans to deliberate hedging with the FASB, and when the FASB issues updated guidance on financial instruments, the IASB will simultaneously issue an Exposure Draft on hedging. 12. The IASB issued an Exposure Draft, Consolidated Financial Statements, and plans to discuss any differences between its Exposure Draft and guidance on consolidations in U.S. GAAP with the FASB in an attempt to issue joint guidance by the end of

4 13. The FASB issued an Accounting Standards Update, Accounting for Transfers of Financial Assets, and the IASB is having difficulty coming to the same conclusions reached in the Update. Once the IASB determines the contents of its final standard, it will propose them to the FASB. 14. In responding to a question, Mr Tweedie explained that the European Finance Ministers were very clear that IFRS 9 had to be completed by the end of the year. Also, to clear up confusion, the EC did not reject the proposal or delay endorsement; they simply did not put the endorsement onto an accelerated approval process. Mr Tweedie explained he was not sure what the ramifications would be of not having completed all phases of IFRS 9 by year-end 2010, though in his view, the EC will be under pressure to endorse the first phase of the proposal. 15. In responding to a question, Mr Tweedie stated that if the IASB and the FASB cannot come to a converged solution, it may be possible to converge financial accounting guidance through presentation. For example, if the FASB requires fair value for a particular instrument, but the IASB requires amortized cost for that instrument, both could require amortized costs and fair value amounts to be displayed on the balance sheet. Briefing of the FASB Mr Robert Herz 16. Mr Herz stated that as explained in the joint communiqué, FASB and IASB Reaffirm Commitment to Memorandum of Understanding, issued by the FASB and the IASB on November 5, 2009, the Boards are redoubling their efforts to work together to create a single set of high-quality financial standards in accordance with the 2006 Memorandum of Understanding, which was updated in 2008 and further updated through the recent communiqué. 17. Mr Herz explained, however, that the Boards are not pursuing convergence soley for the sake of convergence. They are also seeking improvement in standards. To help facilitate convergence and improvement, and as explained in the communiqué, the FASB and the IASB will hold joint monthly meetings, as opposed to tri-annually. Mr Herz believes that having more joint meetings will help lead to more thoughtful, timelier, and higher quality decisions. In addition, the Boards will distribute quarterly progress reports on their activities. 18. Mr Herz explained that when the Boards do not work together, a concern is that an individual Board will leap-frog the other by publishing new guidance before the other Board has a chance to deliberate the issues and publish similar guidance. Mr Herz explained that there have been outside pressures that have caused one Board to leapfrog the other. However, this ultimately decreases the ability to arrive at joint standards in a timely manner. 19. Mr Herz explained that the FASB participated in IFRS 9 roundtable discussions; however, because the FASB thinks that the three phases that the IASB has determined as part of the project to improve the accounting for financial instruments are interconnected, the FASB would rather evaluate all issues with the intention of issuing a comprehensive proposal in the first quarter of

5 20. Mr Herz explained that there appears to be differences in perspective between U.S. investors and investors from other parts of the world. For example, many U.S. investors have said they are interested in the presentation of both the amortized costs and fair value of all financial instruments. On a side note, the FASB has published a document on its website, Project Plan, that contains a list of all outstanding issues related to the financial instruments project, and dates for when the FASB would like those issues to be completed. 21. In working through the joint project on financial instruments, the Boards are determining the conditions that distinguish when an instrument should be measured at fair value through net income or otherwise. The FASB is considering the IASB s Exposure Draft on the expected loan loss valuation model; however, some U.S. constituents have expressed operationality concerns about the model. 22. The FASB issued FASB Statements No. 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46 (R), which are effective beginning January Thus far, bank regulators have been supportive of that guidance, and included it in U.S. bank stress tests. 23. Mr Herz explained that there are proposals in the U.S. Congress regarding regulatory reform. Most notably, in the past few months, a bill was proposed in the House, which was supported by certain parties, particularly the American Bankers Association. If passed, the bill would have allowed the proposed Systemic Risk Council the ability to override any FASB and SEC guidance that it believed posed a systemic risk to the financial system without any due process. Many organizations and individuals outside of the FASB weighed in against this proposal, and ultimately the House amended the proposal to allow the Systemic Risk Council to comment on any accounting guidance. In response to a question, Mr Herz noted that Paul Volcker, former Chairman of the Federal Reserve Board, had also opposed this legislative proposal. 24. In responding to a question, Mr Herz explained that the FASB is conducting significant outreach with constituents, discussing the financial instruments projects at many public Board meetings, and holding roundtable meetings to finish the guidance in a timely manner. 25. Mr Herz also explained the FASB view that both amortized cost and fair value are important pieces of information, and that there may be ways to reach convergence, for example, through presentation if the Boards disagree on the overall approach. 26. In responding to another question, Mr Herz explained that the Boards have many important joint projects, besides the one on financial instruments, which will affect many companies throughout the world, including the projects on leases, insurance, revenue recognition, financial statement presentation, and others. 27. In responding to a question on the role of prudential supervisors and regulators, Mr Herz stated that he believes that accounting standard setters should work with regulators to try to find common solutions whenever possible and appropriate, but where this is not possible, differences between GAAP and regulatory capital requirements are in order and should be transparently reported. 5

6 Comments from Observers: 28. Basel Committee on Banking Supervision The Basel Committee representative made the following comments: a. There is appreciation for the consultation that both the IASB and the FASB have asked from the Basel Committee. b. There is appreciation of IFRS 9, and the focus of valuing financial assets based on the business model, however there are some remaining concerns (valuation uncertainty, share of fair value) that have been outlined in a letter of the BCBS Chairman to Sir David Tweedie (letter of 11 December 2009). c. The Basel committee is willing to assist in working on the finalization of the project on financial instruments and stressed the need to have consistency between the accounting and prudential frameworks. d. The Basel committee stands ready to assist the Boards in creating an operational expected loss model for valuing loans. e. There are plans to do a re-evaluation of Basel 2, and the Basel Committee will consider the Boards changes. [consultation launched on 17 December 2009] f. The Basel Committee supports the creation of joint guidance but stresses that convergence should not result in displaying both the fair value amount and the amortised cost of a financial instrument on the balance sheet. 29. International Association of Insurance Supervisors The IAIS representative made the following comments: a. The IAIS continues to support convergence, and would like accounting guidance to be used as an input into the determination of insurance solvency (capital) requirements, with the intention of having as few differences as possible between accounting requirements and solvency requirements. b. In the view of the IAIS, the most critical issue for the Boards to consider is the mismatch between the valuation of long-term assets and liabilities for entities that invest in those instruments for considerable amounts of time. 30. Financial Stability Board The FSB representative made the following comments: a. The FSB has made substantial progress in the financial reform and regulatory agenda, including in the areas of capital requirements, compensation, over-the-counter derivatives, accounting, and reducing moral hazard. b. The G-20 has asked the FSB to monitor the implementation of the G-20 recommendations and FSB recommendations on accounting issues. The FSB has encouraged the achievement of the objective of improved converged accounting standards, to increase transparency for investors, while achieving important prudential objectives. c. The FSB would like to see loan loss recognition at an earlier stage than currently allowed for under the incurred loss model based on recommendations developed by a working group co-chaired by SEC Commissioner Kathy Casey and Comptroller of the Currency John Dugan. d. The FSB s most recent report to the G20 summarizes the progress made by the IASB and the FASB in their efforts and their commitment to intensify their dialogue with respect to convergence projects. 6

7 31. Japan Financial Services Agency The Japan FSA representative made the following comments: a. The Japan FSA was disappointed by the European Commission when it decided not to accelerate the endorsement of IFRS 9. b. In June 2009, Japan issued a roadmap for full adoption of IFRS, with the first step being voluntary adoption of IFRS. The regulation on voluntary adoption of IFRS was published in December 2009, which shows Japan s commitment to IFRS, and certain Japanese companies may apply IFRS from the consolidated fiscal year ending on or after March 31, c. The Japan FSA commended the IASB for taking input from countries outside of Europe when finalizing IFRS 9. d. The Japan FSA hopes that more countries will adopt IFRS and move toward a single global set of accounting standards. 32. Committee of European Securities Regulators The CESR representative made the following comments: a. The CESR congratulated the IASB on IFRS 9, and is showing continued support for IFRS 9 because the CESR believes IFRS 9 is an improvement on IAS 39. b. The CESR welcomes the decision by the EC not to accelerate the endorsement of IFRS 9 under extraordinary circumstances. The CESR stated that this shows that the European Commission is taking pressure off the IASB, and that the EC is taking this issue very seriously. In addition the long period until mandatory application of IFRS 9 should ensure that European companies are still compliant with the full IFRS (and not only EC endorsed IFRS) without having to follow IFRS 9 in the short-term. 33. Securities and Exchange Commission The SEC representative made the following comments: a. The SEC appreciates the joint communiqué issued by the Boards, especially the joint principles and shared values. The SEC notes that the communiqué reminds the Boards of the successes to date, and the SEC approves of the FASB s efforts on convergence. b. The SEC staff is in the process of analyzing and following up on the comments received related to the proposed Roadmap to IFRS and at this point the SEC staff expects that further action could occur sometime in the near term. General Discussion: 34. The following three questions were the basis for the general discussion: a. Have the Boards been appropriately responsive to the FCAG s recommendations? What should they be doing additionally or differently? b. Have the threats to the Boards independence sufficiently abated? If not, what else could be said or done in that regard? c. In the past six months, have any other issues concerning the financial crisis or the regulatory environment come to your attention that you believe warrant discussion by the FCAG? 7

8 General Themes in the Discussion 35. The group opened with a show of gratitude for the progress that both the FASB and the IASB have achieved to date in light of the recommendations contained within the final report of the FCAG. It was noted that there are enormous gains to be had from reaching convergence and the group urged that the Boards continue to work toward the ultimate goal of a single set of globally accepted financial accounting standards. A member highlighted that the high-quality shared goals, values and principles expressed in the Boards November 5, 2009 Joint Statement formed an excellent basis for reaching convergence. It was stated that the most significant risk to convergence was that the IASB and the FASB would simply not agree on the treatment, but that both Boards were committed to working toward converged guidance. 36. In general, the group agreed that the crisis is not only a European or North American crisis, but, rather, a global crisis that will require global solutions. With that said, constituents throughout the world are looking toward the FASB and the IASB as leaders to create global accounting solutions. The group agreed that accounting guidance created by the FASB and the IASB should not be changed because of pressure coming from discrete sectors, but, rather, that change must reflect the goal of achieving converged high-quality improvements based on an independent, accountable standard-setting process. 37. The group acknowledged that investors in the United States, Europe, Asia, Japan, and other parts of the world may have different perspectives on what is to be issued by the Boards, for example, the extent of fair value and amortized cost used in valuing financial instruments. And though the decisions made by the Boards will never satisfy all interested parties, the Boards must continue to work together to create joint guidance on financial instruments. Many members noted that this applies to more than the guidance on financial instruments, and that the Boards have to work through differences of opinions between interested parties and Board members. 38. In general, the group agreed that it would be a tragedy to move back to country-specific accounting guidance, and lose the work the IASB has done. The group urged that the Boards be allowed to work independently with due process but without undue outside pressures. Hidden agendas or outside influence will take away from the quality of accounting guidance produced by the IASB or the FASB. 39. In general, the group agreed that when one Board publishes new guidance before the other, it will only hinder the ultimate goal of convergence. The Boards should continue with monthly joint meetings to facilitate convergence. 40. The group also appreciates that the Boards produced a joint communiqué that will serve as a basis for convergence and contains principles for creating accounting guidance. 41. A few members noted that convergence does not come without some compromise. Once a decision is made by a country to apply IFRS, it should not be allowed to veto specific parts of the guidance. All must accept the new standards in full unless and until there is a further improvements project. Further Detailed Comments by Members 8

9 42. Concern was expressed by a number of members that, given that it exerted pressure on the IASB to produce a standard, the EC had deferred its decision on endorsement of IFRS 9. A member responded, explaining that the EC did not ask the IASB to create an entirely new standard on financial instruments. The EC had asked the IASB to review the differences between impairment guidance in U.S. GAAP, Subtopic (originally issued as FSP FAS and FAS 124-2), and IASB impairment guidance to ensure that the FASB guidance did not create an unlevel playing field between the two sets of guidance. Given that the EC did not ask the IASB to do a complete revision of the accounting for financial instruments, the EC did not find it necessary to expedite an approval process for IFRS 9. The EC will meet in the first quarter of 2010 to vote on the approval for IFRS A member questioned whether the Boards would be able to use the opinions from other parts of the world to defend pressure from European-based organizations. 44. A member explained that a sustainable answer to the role of the FASB after convergence could be to assist the IASB in creating accounting guidance. 45. A member wondered if the Boards should work to increase disclosure requirements in the short term, given that convergence projects may not be finished or effective for a few years. 46. A member noted that convergence may be assisted if there is an increased focus on the business model of an entity applying the standard. 47. A member wondered whether there is a way to force countries to immediately endorse IFRS. The member noted that a lag exists between when the IASB issues a standard and when most countries decide to endorse the standard as part of that country s accounting rules. During this lag, countries have the ability to change the standard as they see fit. The member explained that a solution to this problem would be to either force countries to immediately endorse and adopt IFRS, or not to allow them to call the accounting standards used within their country IFRS unless the full standard, as issued by the IASB, is used. 48. A member noted that the FCAG could create a subgroup to assist the Boards in the convergence process. 9