A Global Fair Value Update

The extent of the application of fair value accounting continues to be in the spotlight as the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) debate their different models proposed to overhaul the accounting for financial instruments. Both boards are seeking to reduce the complexity of financial instruments accounting standards and potentially have a converged solution, but they are pursuing this goal using different timelines and approaches. Reducing complexity in financial reporting and converging accounting standards is an important goal. Achieving this objective, however, should not come at the expense of independently developed, high-quality financial reporting standards.

The IASB approach tackles the task in three phases: (1) classification and measurement, (2) hedge accounting, and (3) impairment. In the first phase, among other matters, the IASB is proposing to allow amortized cost treatment for those financial instruments that have “basic loan features” and a business model test that ascertains whether the instruments are managed on a contractual yield basis. 

The yet-to-be-issued FASB proposal intends to handle all aspects in a single project. Indications are that the FASB will propose that all financial instruments be presented on the entity’s balance sheet at fair value. Although it is difficult to determine the full impact of the proposal until it has been issued, it appears that the FASB method may provide more fair-value-related information to investors.

CFA Institute Centre staff and the Centre’s volunteer Corporate Disclosure Policy Council, in meetings with both boards, expressed continued support for fair value accounting for financial instruments and stressed that the emphasis should be on its refinement, including improved disclosures.

Financial Reporting Focus on EMEA
The EMEA Financial Reporting Policy team has completed two key financial instrument accounting responses: one on credit risk in liability measurement and the other on classification and measurement. These and other related comment letters can be found on the Centre website.

In September, Vincent Papa, CFA, Director, Financial Reporting Policy in EMEA, met with the managing director of trustees of the Japanese Accounting Standards Board to discuss the Centre’s key positions and process of solicitation of investor views. It was agreed that it is necessary to pursue broad-based investor input and especially to ensure global representation of investor perspectives. The meeting included a detailed discussion about why the Centre supports the direct cash flow approach as a means of enhancing investor information transparency.

Vincent Papa also met recently with the chairman of the European Financial Reporting Advisory Group (EFRAG) in Brussels and has been appointed to the panel that provides user perspectives on International Financial Reporting Standards’ (IFRS) projects. In addition, the Centre is exploring further partnerships with EFRAG in soliciting CFA Institute members’ views on key financial reporting issues and on ways to provide input to EFRAG’s proactive, thought-leadership work.

Interested in Financial Reporting Matters?
The Centre’s Financial Reporting Policy Group is forming a pool of volunteers with an interest in financial reporting matters to participate in periodic surveys that will better inform accounting standard setters and regulators of the Centre's official positions. If you are a CFA Institute member — in any country — and have been seeking an opportunity to contribute to the Centre’s advocacy on financial reporting issues, please e-mail us and include in the message a brief statement of interest.

CG Manual, Second Edition, Released

The second edition of The Corporate Governance of Listed Companies: A Manual for Investors, originally published in 2005, updates principles that help guide investors and shareowners in evaluating and monitoring corporate governance practices and their associated risks. Investors often have difficulty determining which governance issues may affect an investment’s value, what governance information to look for, and how and where to find it. The Corporate Governance Manual addresses these challenges in detail for three broad areas of governance: the board, management, and shareowner rights. Visit the Centre’s website to download the manual and find other governance resources.

North American Feedback on Regulatory Reform

Canadian Advocacy Council
The Canadian Advocacy Council recently released the results of its 2009 Canadian Regulatory Structure Survey Report. Thousands of Canadian members were surveyed and 92 percent of respondents agreed that the current securities regulatory system needs reform, while 75 percent support a single national regulator. View full details (PDF) on the CAC web site.

Participate in our Webinar on 3 November

Financial Instrument Accounting: IFRS after the Crisis
The financial crisis has sharpened focus on accounting treatment of financial instruments. The accounting approach used can influence investor appreciation of risk exposures associated with complex financial instruments. Treatment of the accounting for financial instruments also represents an area of potential differences between U.S. GAAP and IFRS, and investment professionals should understand the potential consequences of these differences in the ongoing convergence of global financial reporting.