Views on improving the integrity of global capital markets
06 January 2012

A New Year’s Resolution for Accounting Standard Setters: Real Progress on Addressing Investor Needs

Mohini Singh, ACA

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.

Financial Instruments
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.

About the Author(s)
Mohini Singh, ACA

Mohini Singh is director of financial reporting policy at CFA Institute. She represents membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

6 thoughts on “A New Year’s Resolution for Accounting Standard Setters: Real Progress on Addressing Investor Needs”

  1. Jeff Diermeier says:

    Thank you for your comments Mohini.
    Could I ask for one point of clarification? Are these the views of our members or the views of the staff at CFA Institute? I understand our membership has diverse views but to the degree you can shed light on their views as investors it would be helpful to the debate.
    Best,

  2. Gareth Evans says:

    I find these comments narrow and disappointing – do they really accurately represent the views of all members? There are certainly other opinions in the investor community which respect the going concern basis, and do not wish to see only the break up value of firms. Is it not the case that the FASB altered the direction of their financial instruments projects specifically as a result of investor feedback to their initial full fair value proposals?
    The CFA needs to consult more broadly with the membership to fully understand their views.

  3. Thank you for your comment. Our views are always developed based upon our mission to promote transparency in financial reporting. We continually speak with and survey members to validate the positions taken by CFA Institute.

    This is illustrated by CFA Institute’s Comment Letter to the FASB on the Proposed Accounting Standards Update Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities dated 30 September 2010. The letter articulates our long standing support for fair value measurement. Our position is supported by our member surveys referred to in our comment letter to the FASB and which may be found in our Summary of CFA Institute Member Surveys at: http://www.cfainstitute.org/ethics/Documents/survey_summary_for_fasb.pdf

    As a further illustration, our comment letter to the IASB on the IFRS Agenda Consultation that calls for reinstatement of the Financial Statement Presentation (FSP) Project is based upon considerable feedback received from users, including the CFA Institute 2010 Survey on Memorandum of Understanding Projects. That survey suggested that the FSP Project was a high priority for investors. Those survey results can be found in the comment letter.

    1. Gareth Evans says:

      Many thanks for taking the time to reply – I usually read the results of the FV vs Amortised cost surveys published by the CFA institute with interest.

      The key attribute I take away from these results is the mixed view between participants. For example
      – consistently around a third of the members surveyed think that FV is not the best measure for loans or are undecided as to which is best (although this proportion continues to decline over time in the face of the increasingly singular message from the institute – the 2009 number in your summary report was just under half of respondents not in full support).
      – It is also noteworthy that, in response to the 2009 survey, some 27% (more than a quarter of respondents!) were not sure that (even) derivatives should be at fair value.

      There is clearly a significant minority view amongst the membership which is not currently being represented by CFA advocacy responses – more balance in responses would be very much appreciated.

  4. kiran bindu says:

    Off balance sheet liability is a big issue. In addition to net income EVA must be published in annual report. Cash flow statement numbers must add up, usually depreciation calculation is questionable.

    1. Thank you, Kiran. We agree. Some of these issues (such as the Cash flow statement) will be addressed by the Financial Statement Presentation project, which is why we ask that it be reinstated as a priority project by the Boards.

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