Investment professionals are hungry for international convergence of financial reporting standards for estimating credit losses, but they are divided on the best method for reporting, according to a new global survey.
Despite numerous calls for a converged standard following the financial crisis, FASB and the International Accounting Standards Board (IASB) have proposed different methods for reporting impairment in their project on accounting for financial instruments.
The FASB model calls for more upfront recognition of expected credit losses than the IASB model. The respective exposure periods for the proposals ended in May (FASB) and July (IASB). The boards are attempting to arrive at final standards and have not given up on the idea of convergence.
Investment professionals participating in a CFA Institute survey of more than 300 of its members were almost evenly split on which proposed model they preferred. Those who preferred the IASB’s proposed model (47%) slightly outnumbered those who backed FASB’s proposed model (44%). But there were clear regional differences.
Americas region participants supported FASB’s proposed model 53% to 41%. The IASB’s proposed model was preferred by Asia-Pacific respondents (49% to 42%) and Europe, Middle East, and Africa participants (50% to 40%).
Survey takers also were split on the type of method that is most decision-useful for measuring credit losses. Fair value was supported as a measurement by 46% of respondents, who slightly outnumbered the 41% who said they preferred an expected-loss model.
Both the FASB and IASB proposals contain expected-loss models. The incurred-loss approach that currently is in use was supported by just 5% of respondents.
Despite the lack of agreement on which model to use, respondents overwhelmingly indicated support for convergence. More than nine in 10 (92%) said FASB and the IASB should arrive at a method of estimating credit losses that is the same under both U.S. GAAP and IFRS.
Respondents also weighed in on which disclosures related to impairments of financial assets they desired the most. From most desired to least desired, the disclosures respondents preferred were:
Assumptions and techniques used in estimating the allowance for expected credit losses (90% rated important or very important).
- Write-off policy (86%).
- Credit-quality information (85%).
- Discount rates (85%).
- Development of expected credit loss estimates (79%).
- Past due status (79%).
- Cash flow characteristics of the financial instruments (75%).
- Allowance for expected credit losses by type of credit (75%).
- Reconciliation of gross carrying amounts and allowance for expected credit losses to balance sheet (74%).
- Nonaccrual status (64%).
- Rollforward of allowance for expected credit losses by type of credit (58%).
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.