The members of the FCAG discussed various issues ranging from the focus and purpose of the financial statements to fair value measurements. Noted below are highlights of the issues discussed:

Aim of financial statements

The FCAG members generally agreed that the financial statements are primarily directed toward investors, which includes a broad range of stakeholders, including lenders, investors, and creditors. The members also agreed that the joint project on financial statement presentation and XBRL will significantly improve and enhance how the users view the financial statements.

Financial statements vs. financial stability

The members generally agreed that financial statements must serve the purpose of helping users in making informed decisions by providing transparent information. Further, most agreed that accounting should not be used to counteract pro-cyclicality and should be neutral. In addition, the members generally agreed that it is the job of the prudential regulators to ensure financial stability and incorporating financial stability in the financial statements would jeopardize its transparency.

Dynamic provisioning for regulatory capital allocation

Various views were raised and discussed regarding the application of 'dynamic provisioning'. Some members voiced concerns that allowing entities to create reserves (without having appropriate guidelines or regulation) may lead to earnings management, while others suggested that prudential regulators should establish a minimum requirement for capital adequacy that should drive the reserve requirement.

The Chairman of the IASB voiced concern that dynamic provisioning will distort the income statement and suggested that regulators and standard setters work together to figure out how best to display the impact of dynamic provisioning on the balance sheet, that is, through equity with no impact on the income statement. Certain members also supported this view recommending that accounting should not be changed to meet regulatory capital requirements. Certain members also recommended that regulators prohibit entities from distributing such capital reserves (recorded in equity) through dividends or stock buyback to maintain the adequacy of such reserves.

Although there was much discussion on this topic, the chairman of the FCAG recommended that this issue be discussed in greater detail during the March 5 meeting, prior to which a concept paper on dynamic provisioning will be distributed to the members. The concept papers will discuss the two models (that is, change in provision through income or equity) and may broaden the concept of dynamic provisioning to not just loans, but to other financial instruments.

Fair Value Measurements

The chairman of the FCAG highlighted that the SEC's study on mark-to-market accounting highlighted that fair value was used to measure a minority of assets and liabilities at the financial institutions studied and was not to be blamed for the failure of the financial institutions. In fact members pointed out that credit losses (as highlighted in the study) were the primary driver of bank failures.

Certain FCAG members highlighted that the real issue is how to apply fair value in distressed markets. These members also identified that recording gains on liabilities (due to credit downgrade) does not provide useful representation of bank's performance and results in misrepresentation of true losses, which are suppressed by such gains. Members also noted that Statement 157 provides flexibility in measuring fair value, which requires the use significant judgment, but due to litigation risk and risk of being second guessed, results in incorrect application of fair value.

Further, members agreed that fair value provides transparency; however, the Boards (the IASB and FASB) should continue to explore methods to improve fair value before broadening its application to other financial assets and liabilities.

In addition, the members agreed that the mixed attribute model should be reviewed and the Boards should consider simplifying the impairment guidance.