Financial Crisis Advisory Group meeting

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21 Jan 2009

The Financial Crisis Advisory Group (FCAG) was established by the IASB and US FASB in response to the recent global financial crisis. Its purpose is to advise both boards about the role of accounting during the crisis and potential changes.

The FCAG held its first meeting yesterday. Presented below are the preliminary and unofficial notes taken by Deloitte observers at the meeting.

IASB-FASB Financial Crisis Advisory Group Meeting - 20 January 2009

The chairman reminded participants in his introductory remarks about the reasons why fair value gained so much attention recently, particularly where it was applied to instruments in 'frozen' markets. He continued to explain that the fair value concept was applied more broadly after the 'savings-and-loan crisis' in the US and that it was still a 'work in progress'. He said that the two main questions asked were:

  • Where did financial reporting help to identify issues?
  • Where did financial reporting not help?

The chairmen of the US FASB and IASB gave a brief update on the actions taken by both boards. They reported that there were pressures to do more fundamental changes to financial reporting and that regulatory reforms could potentially affect financial reporting. They identified five major issues that emerged during the crisis:

  • Fair value
  • Off-balance sheet activities (consolidation)
  • Securitisations (derecognition)
  • Impairment
  • Risk reporting (users didn't see the risks in entities)
Both chairmen emphasised that the actions taken and planned focussed on those issues.

Staff from both boards gave a detailed update on the ongoing responses so far. It was highlighted that several proposed amendments to IFRS and US GAAP had been published and will be redeliberated as soon as possible. Further, the IASB expects to issue proposals on derecognition and fair value measurement in Q1/2009. Both boards will continue to accelerate work on a comprehensive review of financial instruments accounting.

The acting chief accountant of the SEC presented a summary of the recently published SEC report on the impact of fair value accounting on the financial crisis in the US. He noted that the majority of assets were not measured at fair value in the financial statements of financial institutions in the US and that only a fraction of those was measured with changes in fair value going through profit or loss. The report concluded that fair value did not play a meaningful role in the crisis. The SEC report noted that fair value was considered by investors as useful and that many alternatives presented lacked this degree of usefulness. Further, the report highlights that the FASB process was appropriate. The acting chief accountant noted that the report contained several recommendations, including the proposal not to suspend fair value accounting (see our news of 5 January 2009).

FCAG members then expressed their views. The main themes of participants' views are summarised below.

Did fair value accelerate or worsen the financial crisis?

Many participants expressed the view that fair value played 'some' role during the financial crisis, particularly with regard to the effect of procyclicality. This was seen as having been increased by the use of financial reporting numbers for regulatory purposes. However, the majority was of the view that it did not play a major role and none of the participants proposed to abandon it – it was the business risks financial institutions have taken on and did not appropriately manage.

It was highlighted that entities would need more guidance on how to determine fair value under specific circumstances, particularly in inactive market. The work of the IASB's Expert Advisory Panel and its final document was referred to as a step in the right direction. Other FCAG members were concerned that it was the valuation process itself was not transparent and this was also an issue to be tackled.

Many FCAG members highlighted that off-balance sheet activities and hence consolidation rules allowed the development of a shadow accounting system where risks were not presented in any financial statement. It was noted that management must explain in its financial reports why entities are consolidated or not.

One member noted that the incentives systems for executives aggravated the situation and that those systems were not reported appropriately in any company reports. Some commented that accounting would not avoid future crises.

Due process in standard-setting

Many emphasised the importance of adhering to due process, possibly accelerated in difficult times, even under pressure. One member noted that the period of September/October 2008 marked a low in international financial reporting standard-setting. Shortcuts to due process could undermine investors' confidence in financial reporting. In this regard it was noted that standards must be enforceable: if standards were not applied appropriately the best accounting framework would not help. Some members emphasised the need for a single global set of standards.

Investors' confidence

A further main theme was that investors' confidence in financial reporting is key to improving the market situation – investors were interested in financial reporting that depicts economic reality. Standard-setters were urged to bear that in mind when pursuing further steps. This was linked to reducing complexity in financial reporting and avoiding information overload. One of the IASB members present said that there was a lot of cynicism in the market about financial reporting and any next steps must not further this cynicism, but instead restore credibility of financial reporting. This member noted that many of the requests by politicians to changes in accounting would provide tools for earnings management and, hence, would undermine investors' confidence.


Many FCAG members were concerned over the complex rules on impairment and the differences between IFRSs and US GAAP. Some of the participants expressed concerns over the missing possibility to establish provisions in good times that could be used in bad times, that is provide for expected losses, not only incurred losses as under current impairment models in IFRS and US GAAP. Others responded this is a regulatory issue and could be resolved by appropriate reserve allocation to restrict the profits that could be distributed.

Objectives of financial reporting

It was noted that before concluding on any issues, the purpose of financial reporting must be clear. It was highlighted that the current frameworks would not identify regulators as primary users of financial statements and hence, financial stability was not an objective of financial reporting.

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

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