The IASB's new chairman, Hans Hoogervorst is urging swift adoption of phase one of IFRS 9 Financial Instruments which covers classification and measurement in hopes of softening the blow from the European debt crisis. However, European regulators are reluctant to permit partial, fast track adoption that would circumvent the full standard setting process and convergence with U.S. GAAP.

Under the proposed first phase of IFRS 9, many more debt instruments would qualify to be measured at amortized cost than under the existing rules of IAS 39. To qualify for amortized cost measurement under IFRS 9, debt instruments must pass a "business model" test and a "nature of the asset" test. When the business model objective is to hold the asset to collect contractual cash flows, and the nature of the asset is such that the instrument gives rise to cash flows, at a specific date that are solely payments of principal and interest, then the debt instrument would qualify for amortized cost measurement.

The FASB has also tentatively decided to permit certain financial assets to be measured at amortized cost. The FASB acquiesced in the face of overwhelming constituent support for permitting the amortized cost method when entities hold loans for collection.   The FASB's criteria for determining whether a debt instrument qualifies for the amortized cost method are similar to the IASB's "business model" and "nature of the asset" tests.

Sovereign European debt would likely qualify for measurement using amortized cost in many situations. And, some sovereign debt currently classified as "available for sale" under IAS39 and subject to "mark-to-market" fair value measurement would qualify for measurement using amortized cost under IFRS 9. Therefore, quick adoption of IFRS 9 would mean that losses would be recognized when there are changes in expected cash flows (IASB Exposure Draft 2009/12), rather than as a result of a change in market value.

Because any reclassifications under IFRS 9 must be accounted for prospectively and restatements of previously recognized losses would not be permitted, the window of opportunity for the IASB and European Union (EU) regulatory bodies to respond to the European debt crisis with new accounting standards is short. The EU's Internal Market Commission must approve the IASB rule change before it can be adopted by listed companies.

However, the Commission is opposed to approving IFRS 9 on a piecemeal basis without having final proposals for phase two and three, covering impairment methodology and hedge accounting. In addition, significant differences still exist between the FASB proposals and IASB's phase one proposal for financial instruments classification. Chief among these differences is that the IASB allows for two categories of financial assets, amortized cost and fair value measurement with full income statement impact; while the FASB allows for a third category, fair value measurement with changes in value to comprehensive income. The Commission is also awaiting the SEC's final decision on whether it will permit convergence with IFRS.