Participants expressed mixed views on the relative merits of fair value versus amortized cost measurement for items not managed on a fair value basis. One participant suggested that it is always better to measure on a fair value basis than on an amortized cost basis as fair value captures the potential risks and market volatilities inherent in financial instruments compared to amortized cost which has proven to be a less relevant measurement attribute to users of financial statements who are interested in what the net assets of an entity is worth at a given point of time.
A couple of participants from banks indicated support for a two-pronged test for amortized cost measurement based on a business model and instrument terms somewhat similar to that proposed by the IASB. However, they emphasized that the primary test should be an entity's business model (e.g., whether an item is managed on a contractual yield basis or on a fair value basis) and that the characteristics of the financial instrument (e.g., whether the instrument should be eligible for amortized cost measurement when the variability in its cash flows is considered) should be secondary.
Some questioned whether accounting based on an entity's business model is rigorous enough. Business models change over time. An entity that intends to hold a financial instrument for collection and payment of contractual cash flows might go bankrupt depending on the asset quality. In addition, the same company might have different desks managed on different bases.
Representatives from insurers and insurance regulators expressed concern about the potential for unintended consequences if a new financial instruments standard is developed without consideration of accounting for the liabilities of insurance companies. In particular, they were concerned that the accounting rules might suggest an accounting mismatch even if there is an economic match of assets and liabilities.
Several participants emphasized that users of financial statements often look for both fair value and amortized cost information for the same financial instruments. As long as users obtain the information they need in a timely manner in some form, it matters less how the line between different measurement categories is drawn for accounting purposes. Some user representatives suggested that preparers of financial statements should provide two sets of balance sheets: one on a fair value basis and one on an amortized cost basis. An IASB Board member asked whether the Board should require presentation of fair value information within parentheses on the face of the balance sheet or in a prominent comprehensive note disclosure. Presentation of fair value information within parentheses on the face of the balance sheet might obviate the demand for an approach in which financial instruments are measured at fair value on the balance sheet but changes in fair value are recognized in other comprehensive income (OCI), which is a key component of the FASB's tentative model.
One participant suggested that a fair value through OCI approach might be appropriate for items with more uncertainty in valuation because it reflects assets at fair value on the balance sheet without distorting the income statement with earnings volatilities.
One participant called for a detailed study of the usefulness of current fair value disclosures for financial instruments. Some potential limitations of current fair value disclosures that were noted include (1) the fact that an entry price notion rather than an exit price notion is used to prepare these disclosures, (2) portfolio valuation issues, and (3) the robustness of their preparation. A Board member indicated that based on feedback from users of financial statements, it is evident that information in the footnotes is not as rigorous as information on the face of the financial statements. Another participant highlighted the need to require information about fair value on the face of the financial statement to ensure that such information is communicated to investors in companies' earnings releases.
Investments in Equity Instruments
An IASB Board member explained that the option to elect fair value through OCI for equity instruments with no recycling of gains and losses on realization was intended, in part, to avoid the need for complex impairment tests. However, many participants instead favored recycling upon realization. There was no support for a lower-of-cost-or-market approach for such equity investments.
Representatives from insurers suggested that the distinction between realized and unrealized gains and losses is important in a long-term insurance business. If a portfolio of equity securities is held over the long term to support long-term insurance liabilities, short-term variations in fair value may mean little. Therefore, those changes in fair value should not be included in net income.
Users suggested that measures of comprehensive income are becoming more and more important. Analysts typically make adjustments on the basis of reported net income, but a better approach might be to start with comprehensive income.
Banking representatives expressed concern about the IASB model for securitisation tranches. In particular, they questioned why only the most senior tranche should qualify for amortized cost measurement and why all other tranches should be accounted for at fair value. One suggestion was that mezzanine tranches should also qualify for amortized cost measurement if the cash flows are reasonable to predict and the yield at acquisition is commensurate with the risk. Another suggestion was that tranches that are at least rated investment grade should qualify for amortized cost measurement.
Some participants expressed support for the IASB's proposal to eliminate the current accounting approach to embedded derivatives over the FASB's proposed model which does not eliminate the complexity associated with evaluating the clearly-and-closely related criterion. However, one participant suggested that an option to bifurcate an embedded derivative should be retained for financial liabilities until the issue of own credit risk in liability measurements is resolved.
Own Credit Risk in Liability Measurements
Several participants expressed unease about reflecting the impact of changes in own credit risk in fair value measurements of nonderivative financial liabilities, such as senior unsecured debt. Also, some participants expressed concerns about implications of reflecting the impact of changes in own credit risk in fair value measurement of structured product liabilities where issuers generally hedge their exposures except their own credit risk.
Participants asked how the FASB and the IASB plan to arrive at a convergence solution for financial instruments. Since the IASB plans to issue a new classification and measurement standard, with early adoption permitted for 2009 year-end financial statements, participants questioned how convergence will be possible unless the FASB accepts without changes what the IASB has already issued. One IASB Board member suggested that the year-end 2009 deadline for the IASB is in response to political demands, but that early adopters of the new standard should anticipate further changes to the standard as the IASB and the FASB work together to issue one converged standard. The FASB chairman suggested that the FASB will need to carefully assess whether convergence is in the best interest of U.S. investors in this area. While some participants expressed preference to the IASB's proposed approach over the FASB's, they urged the IASB to take time to deliberate with the FASB prior to finalizing the classification and measurement standard.
This summary is based on notes taken by observers at the roundtable and should not be regarded as an official or final summary.