A New Year’s Resolution for Accounting Standard Setters: Real Progress on Addressing Investor Needs
As New Year’s resolutions are contemplated around the world, we have one suggestion for the accounting standard setters — let this not be a year of moving one step forward and then two steps back when it comes to serving the needs of investors.
Let’s take a look at a few such instances in which we saw signs of progress, only to have the pendulum swing right back.
So what happened with the Financial Instruments project? The Financial Accounting Standards Board (FASB) actually made considerable advancements when it proposed that most financial instruments would be carried at fair value through net income. However, the FASB reversed course, and now it appears that fair value through “other comprehensive income” (OCI) will be the likely default category. CFA Institute has long argued that OCI is an accounting construct that is simply detrimental to investor interests.
As for the International Accounting Standards Board (IASB) proposal, it is difficult to say whether more or fewer items will be accounted for on a fair value basis. However, given that the IASB has decided to reopen its own financial instruments accounting standard (IFRS 9), the IASB now has the opportunity to do the right thing and move purposefully towards a fair value measurement model.
Presentation of Comprehensive Income
The FASB had proposed to require the display of reclassification adjustments (“recycled” items) by component in both net income and OCI in the statement of comprehensive income. CFA Institute supported this proposal as it offered investors better insight on adjustments that current practices tend to obscure. But then the FASB decided to defer — and then “indefinitely defer” — the decision to show reclassification adjustments by component in the statement of comprehensive income, effectively reversing what had been a promising step forward. We clearly do not support this decision.
Insurance Contracts and OCI
In addition, the joint IASB/FASB insurance contracts project is considering the potential use of OCI to ensure that short-term volatility in asset and liability values is reflected outside of net income. But without a proper definition of OCI, or appropriate transparency of recycled items out of OCI, this course cannot be taken.
Financial Statement Presentation
Despite efforts made by the IASB and the FASB on the Financial Statement Presentation (FSP) project, both Boards sadly have placed this project on the back burner. The importance of this project to investors has been established by considerable feedback from user representatives. As CFA Institute has stated in its comment letter to the IASB on its Agenda Consultation, the significant standard-setting development effort incurred in the past on this project should be harnessed, and the project should be reinstated as a priority project by the Boards. And when the Boards decide to recommence the FSP project, the focus should be on providing at least the following four elements:
- Sufficient disaggregation of main financial statements
- Roll-forwards of key balance sheet accounts
- Cohesiveness across financial statements
- Direct cash flow statement
Financial Reporting vs. Financial Analysis
Most recently, members of the Securities and Exchange Commission (SEC) have stressed that caution should be exercised to ensure that financial reporting is not comingled with financial analysis. Indeed we believe that financial reporting of assets and liabilities at fair value is essential for the financial analysis that investors need to undertake. Investors need financial reporting to be conducted using the most relevant and decision-useful measure. And fair value measures are most relevant because they reflect the reality upon which the economic world operates: Transactions take place at fair value!
So we implore the Boards and the SEC to pay heed to our suggested New Year’s resolution and make 2012 a year of continual progress in addressing investor needs.