FASB-IASB financial crisis group issues final report

Continuing our coverage on convergence (or lack thereof) by the international and U.S. financial accounting standards boards—spurred to greater intensity by the current economic climate—last week the FASB-IASB Financial Crisis Advisory Group (FCAG) published its recommendations and final report. “I urge policymakers around the world to study the report and to take note of its conclusions, especially the importance of broadly accepted accounting standards that are the result of a thorough due process,” says FCAG co-chair, Hans Hoogervorst, in a release. “The report highlights the importance but also the limits of financial reporting. Accounting was not a root cause of the financial crisis, but it has an important role to play in its resolution.”

One financial executive’s perspective. “I think there can be a positive benefit in FCAG's reminder that there are inherent limitations on financial reporting, because if people (including, but not limited to, auditors and the plaintiff's bar) were not (subconsciously, if not consciously) in search of the 'one correct number' for, e.g., the fair value of a non-traded or thinly traded instrument… then I think there'd be less pressure and more room for professional judgment (or for those who prefer the term: reasonable judgment), recognizing accounting is more of an art than a science,” comments Edith Orenstein, Director of Accounting Policy Analysis and Communications at Financial Executives International (FEI), in a recent FEI post.

However, I wonder if some of the emphasis on inherent limitations—and more significantly, the emphasis on external limitations on the reliability of financial reporting (such as weakness in clearing mechanisms and market infrastructure, which FCAG encourages the 'appropriate authorities' (presumably government, regulators) and 'business entities' to address—may place too much of the onus or 'blame' on those external parties for fair value information that is not reliable or not relevant, rather than allowing for the idea that perhaps some of the fundamental underpinnings of the fair value model established in FAS 157 should be given further consideration, such as the emphasis on the 'market participants' (aka 'exit value') model, and the prioritization ('level 1' of the 3 level hierarchy) on observable market values, and other wording in the original standard which ring fenced the area in which FASB's further guidance…could operate. (Emphasis added)

The report makes 23 recommendations in four major areas: 1) effective financial reporting; 2) limitations of financial reporting; 3) convergence of accounting standards; and 4) standard-setter’s independence and accountability. The full FCAG report is available at http://go.iasb.org/fcag, or here.