In December 2008, the IASB asked Wayne Upton to prepare a discussion paper on the single issue of credit risk and how it is reflected in the measure of a financial asset or financial liability. Mr Upton presented his paper to the meeting and asked Board members to consider whether any substantive changes should be made to it before it is published. The current text was released as the Observer Paper and is available Here on the IASB Website.
Mr Upton explained that the discussion paper was not intended to be a complete history of the topic, but rather a discussion of the three principal arguments for and against including own credit risk in the measure of a liability. He suggested to the Board that the discussion paper not include any preliminary views, although he acknowledged that the IASB is on record as stating that credit standing is a component of fair value.
Mr Upton also noted that the Board had asked for the discussion paper to be prepared in order to isolate the issue of own credit risk and credit standing and allow constituents to focus on that issue alone when responding to the IASB, rather than have it as one of a number of issues in an invitation to comment; one that might not be as high a priority as another issue in the same document.
Board members generally agreed with the approach and in particular that it should not contain any preliminary views. Board members had specific suggestions for modifications and improvements, which Mr Upton asked for some leeway to incorporate, noting his desire to have a short, easily digested document.
The Board did ask that worked examples illustrating the financial statement effects of the various approaches discussed. Board members noted that how the effects of changes in credit standing were presented in the financial statement were critical to the topic.
In addition, Board members noted that the discussion paper should be candid about what would happen if credit standing was excluded from measurement: there were significant implications for derivatives and cash flow hedges in particular. The Board agreed to issue the discussion paper on a 'negative clearance' basis. No comment period was recommended. The discussion paper is likely to be published in June or July 2009.