Notes from the financial crisis roundtable in US

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05 Dec 2008

In response to the challenges caused by the current market conditions the IASB and the FASB have decided to hold a series of roundtables to gather views from constituents on the most urgent accounting issues and how to approach them.

The first roundtable was held in London on 14 November 2008 (click for Deloitte notes). The second was held at the FASB's office in Norwalk, CT USA, on 25 November 2008. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the 25 November roundtable. Our comprehensive credit crunch information is here.

Notes from the IASB-FASB Global Financial Crisis Roundtable
FASB Offices, Norwalk, CT
25 November 2008

On 25 November 2008, the IASB and the FASB held a public roundtable at the FASB offices in Norwalk, CT on the subject of reporting issues arising from the global financial crisis. The objective of the roundtable was for the Boards to hear input from a wide range of stakeholders on accounting issues that may require urgent attention to help enhance investor confidence in financial markets.

The main topics discussed were (1) impairment of financial assets, (2) fair value option, (3) fair value measurements, and (4) disclosures. The following are some of the highlights from the roundtable.

Impairment of Financial Assets

Much of the roundtable discussion focused on issues with the current impairment models related to debt securities. Several issues identified include:

  • The purpose of 'impairment' in financial reporting is not well understood. There is no unified definition and there are multiple models depending on the type of financial asset.
  • Triggering events are not well understood. Some believe that management intent should play a significant role in whether a triggering event has occurred. Others indicate that management intent changes and is subjective; as such, management intent should not be a factor when determining whether an asset is impaired.
  • Once impairment is deemed appropriate, the use of multiple impairment models for recognition in the financial statements creates complexity and makes it difficult for users to understand the financial statements. For example, loans receivable are carried at amortised cost less impairment for credit loss, but securitised loans, which may have the same economic characteristics as loans receivable, are written down to fair value.

Roundtable participants shared several views on how some of these issues could be address. Some Users of the financial statements were proponents of full fair value with changes in fair value reflected in the income statement. They indicated that this would take away issues related to triggering events and multiple impairment models. Others (some preparers and auditors) suggested a model that was proposed by the AICPA Center for Audit Quality (CAQ) in their Comment Letter to the SEC on Fair Value (PDF 119k). Under that model the debt security would be carried at fair value on the balance sheet with credit losses recognised currently in income and other changes in the fair value recognised in other comprehensive income. The credit loss would be calculated on the basis of changes in expected cash flows in a manner similar to the Statement 114 model. Under that proposal other comprehensive income would be displayed on the income statement so the components of change in fair value are in the same statement. These proponents indicated that it would give users of the financial statement information regarding expected cash flows of the debt security as well as other changes in fair value.

These two suggestions sparked debate about what is appropriate to be recorded in earnings. While the debate was interesting, it did not solve the issue of what is causing the lack of confidence in financial institutions. Some indicated that the lack of confidence was of result of investors not trusting what companies have reported in their balance sheet. They indicated the real issue is lack of transparency necessary for investors to make investment decisions. Several analysts suggested that additional disclosure of what the entity is holding and how management estimated the fair value are necessary. One suggestion was a table, by class of investment, which would include: cost, current fair value, implied value or other measure that the company feels is appropriate, a description of how fair value is calculated including significant inputs, a description of how implied value was calculated, and why the company believes the other measurement is appropriate. Members of the both Boards indicated that it would probably be easier to get a short term project completed that deals with disclosure than one that tries to address the multiple issues related to impairment.

Fair Value Option

Participants were asked whether they believed that the fair value option should continue to be irrevocable. Most agreed that the option should be irrevocable. They indicated that they liken it to an anti-abuse provision which keeps people from applying it to an instrument when it is beneficial and reversing the application when fair value is detrimental. Some indicated that the reason the option was initially elected may no longer be valid as a result of changes in the business. For example, if the option was selected to alleviate an accounting mismatch that no longer exists, then some believe the election should be revocable.

Fair Value Measurements

Several participants indicated that the measurement guidance in the whitepaper issued by IASB's Expert Panel was very useful and that it would be good for the Boards to codify the information into authoritative guidance. One participant asked for guidance on measuring alternative investments, such as investments in closed end hedge funds. The participant indicated that the FASB staff and FASB's Valuation Resource Group had previously discussed the difficulties in measuring these investments and whether net asset value was the appropriate measurement under Statement 157. Others indicated any short term guidance should solely focus on helping the capital markets recover and transparency.


Several participants commented on the disclosure suggestion noted above. They indicated that disclosure would be a good start but they would also like to see forward looking information, sensitivity to changes in inputs, and uncertainties in the estimate.

Others stated that the level 3 rollforward provides a significant amount of good information, and they would like to see that information for all levels within the hierarchy.

This summary is based on notes taken by observers at the Roundtable and should not be regarded as an official or final summary.

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