The Evolution Of Accounting Standard Setting For Financial Instruments By IASC/IASB

The accounting for financial instruments is one of the toughest difficulties in the field of financial accounting. And the standard-setting has experienced a long way: from the disclosure and presentation (the easy procedures) to the recognition and measurement (the much harder ones). However, this job is still far from perfect and the standard setters are confused with many questions, both in technique and politics, including how to measure all the financial assets and liabilities in fair value—the key to develop the accounting standards, which remains a barrier. This means a fascination for me.This paper reviews the history of standard-setting and improving for financial instruments by IASC (now IASB) during the past two decades in an all-around way. The project to establish accounting standard was forced to split into two stages, disclosure and measurement, due to many practical difficulties in the end of 1994. And then IAS 32 was first released to regulate the information disclosure and presentation both on the face and in the notes of financial statements. It might be right and necessary in theory to disclose the important contents when some items can not be recognized in the financial statements for those rigorous criteria. IASC, however, appeared to have made a mistake logically, which acted against the basic procedure of traditional financial accounting. Why should an entity present any financial instruments in balance sheet and how to disclose the accounting policies of recognition and measurement before they are recorded in books and displayed in financial statements?In the following days, any modification in IAS 32 always came after those in IAS 39, the recognition and measurement standard. The IASC/IASB might be conscious of the logical inconsistency that the presentation procedure has been operated before those of recognition and measurement and it appears confusing when it was regulated with the disclosure simultaneously. This finally results in a single while comprehensive disclosure standard IFRS 7's coming into being, with the driving of market force.It is a meaningful but difficult jump for financial instruments, especially those derivatives, to be invited into the balance sheet since the release of IAS 39. But IAS 39 is still tentative and each amendment seems to be running with time. For instance, the final appraisal of core standards project cooperated with IOSCO, or the simplified application by the European listed companies before 2005. Some essential questions remain in the scale and the objective for standard-setting to realize the full fair value measurement keeps far away.Fair value is the most relevant measurement attribute to all financial instruments and related studies on capital market have already provided plentiful evidences. The reliability of fair value information is still questioned, however, which is of the same importance to the users of financial statements. So to define the concept of fair value clearly and design a framework for fair value estimation properly is the key to improve the standard-setting for financial instruments.Chinese entities have been involved into the global economic and financial activities more and more frequently and it becomes necessary for China's accounting standards to converge with the IFRSs, including the financial instruments accounting standards. Since the reference model is still imperfect and changing continuously, it is sensible for us to keep an eye on both the past and the current international developments so as to improve the CASs.