CFA Institute Survey: Investors Weigh in on FASB and IASB Expected Credit Loss Models
The financial reporting standard setters — the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) — continue their debate regarding how best to report credit losses on loans and other financial instruments. This discussion has been going on since the global financial crisis highlighted the need for more timely recognition of credit losses on loans and other financial instruments held by banks, other lending institutions, and public and private organizations. It is a widely held belief that the existing “incurred loss” model failed to alert investors to credit losses in a timely manner, given such a model required a loss-triggering event to recognize the losses. To address this criticism, the FASB and the IASB have been exploring alternatives to this model that would use a more forward-looking “expected loss” approach for recognizing credit losses (“impairments”). After several attempts at individual and joint solutions, the boards released independent proposals earlier this year.
Global Member Survey
CFA Institute conducted a credit loss and impairment member survey in July to solicit investor input on key elements of the boards’ proposed impairment models, including the related recognition and measurement of interest income and the supporting disclosures. We also sought investor input on whether the boards should reach a converged impairment solution. As expected, investors supported a converged model and enhanced disclosures given their desire for comparability and consistency in their use of financial statements.
In addition to the survey, we also performed direct outreach to members and other investors to gain their perspectives.
Recommendations for Concluding the Impairment Project
CFA Institute has been following and responding to the boards’ various proposals since they took up the matter in 2008 as a result of the financial crisis. We have stressed the importance of economic relevance in the measurement of credit losses. We felt it was important to survey members not only to form the basis of our most recent response but also to provide the boards with investor perspectives on the information most useful to investment decision making.
We recognize that the boards have been challenged in drawing this phase of the financial instruments project to a conclusion because of the need to consider the interests of various constituencies. Multiple attempts have demonstrated that no single model will satisfy regulator, investor, and preparer interests. Giving priority to the information needs of investors — consistent with the IASB’s and FASB’s mission — our proposed resolution to the impairment project is as follows:
1) Develop a converged solution by selecting one model for recognition and measurement and disclose the other.
2) Require additional key disclosures on developments of loss estimates and cash-flow characteristics.
3) Provide fair value on the face of financial statements.
While we never view disclosure as a substitute for appropriate recognition and measurement, our concern with the boards’ proposals is that, without greater insight into the assumptions and judgments made and their accuracy or development over time, they may suffer from the same criticism investors have expressed regarding the shortcomings of the current incurred loss model when tested by the financial crisis.
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