The CFA Institute has released the results of a survey of investor attitudes toward the varying proposals by the Financial Accounting Standards Board and the International Accounting Standards Board for accounting for expected credit losses.
FASB and the IASB have taken differing approaches to how companies should report loan losses and credit losses as they work to converge the accounting standards for financial instruments, but have come under pressure to agree on a common approach (see Banks Urge FASB and IASB to Agree on Credit Loss Standards). After initially agreeing on the proposed changes they wanted to make in the standards, FASB and the IASB parted ways during a contentious meeting last year (see FASB Splits with IASB on Impairment Standards).
The two boards have since issued differing exposure drafts on their proposed changes in the accounting standards for loan loss provisioning and expected credit losses for loan impairment, but said they hope to come together after receiving feedback from their stakeholders (see FASB Proposes More Timely Recognition of Expected Credit Losses and IASB Diverges from FASB in Revised Loan Loss Proposals).
CFA Institute conducted the global member survey in July 2013 regarding key elements of the most recently released FASB and IASB proposals in order to ascertain investor views on the boards’ impairment models, including the related recognition and measurement of interest income, and the supporting disclosures.
The investors polled by the CFA Institute overwhelmingly said they support the two standard-setting organizations arriving at a converged solution for both estimating credit losses (92 percent) and recognizing interest income (92 percent).
When asked which method of measuring credit losses would be most decision-useful, 46 percent indicated fair value would be their preference over the expected credit loss model (41 percent). The comments reflect a desire by investors for both measurements because of a need to reconcile and understand the differences in measurement (i.e., fair value being utilized as a reference point for expected losses).
When asked whether they preferred the IASB or FASB’s expected loss model, there was a slight preference for the IASB model (47 percent) over the FASB model (44 percent). There were, however, distinct regional preferences. The CFA Institute’s member survey of Chartered Financial Analysts and direct outreach indicates the boards need greater communication, outreach and comparison of the interest income recognition approaches.
Asked about interest income recognition, a majority of the survey respondents indicated they favored the IASB model (52 percent), whereas 37 percent favored the FASB model.
The disclosures related to underlying assumptions and credit quality—such as assumptions and techniques, credit-quality information, write-off policy and discount rate—rated the highest among the respondents. Missing, but rated extremely important to investors, were disclosures related to the development of expected credit loss estimates (79 percent) and the cash flow characteristics of financial instruments (75 percent).
Survey respondents were invited to provide elaborative comments to each question, and a selection of their comments were included in a CFA Institute report. The survey results and member outreach helped inform a comment letter that the CFA Institute sent to FASB and the IASB on the expected credit losses standards. In addition, a blog post by Matt Waldron, CPA, director of financial reporting policy at CFA Institute, provides a summary of the survey results.
“We recognize that the boards have been challenged in drawing this phase of the financial instruments project to a conclusion because of the need to consider the interests of various constituencies,” he wrote. “Multiple attempts have demonstrated that no single model will satisfy regulator, investor and preparer interests. … While we never view disclosure as a substitute for appropriate recognition and measurement, our concern with the boards’ proposals is that, without greater insight into the assumptions and judgments made and their accuracy or development over time, they may suffer from the same criticism investors have expressed regarding the shortcomings of the current incurred loss model when tested by the financial crisis.”