PricewaterhouseCoopers Survey Finds Investors and Analysts Add to the Critical 'Fair Value' Debate on Financial Instrument Reporting

Jun 15, 2010, 09:00 ET from PricewaterhouseCoopers

NEW YORK, June 15 /PRNewswire/ -- The global financial crisis highlighted profound challenges in financial instrument accounting, prompting the two leading accounting standards boards to get together to address these challenges and search for simplicity and consistency.

And now some detailed research conducted by PricewaterhouseCoopers ("PwC") has provided another forum for a cross-section of a key stakeholder group – the investors and analysts – to add to this critical debate.

The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) set out in late 2008, in a joint project, to reconsider all aspects of the accounting for financial instruments. However, the IASB and FASB have been moving in separate directions. FASB's approach proposes that all financial instruments are reported at fair value, including bank loans and deposits, while the IASB seeks to retain some of the existing financial instruments accounting model that used a combination of fair value and amortized cost, depending on the nature of the financial instrument:  often referred to as a mixed measurement model.

PwC surveyed a geographically diverse sample of investors and analysts to gain a better understanding of their perspectives on accounting and reporting for financial instruments.  The findings, which are based on 62 in-depth, person-to-person interviews with investment professionals, offer insight into the use of financial instrument information in their analytical processes.  The goal was not to establish definitive conclusions or positions on financial instrument accounting, but to capture and present views held by a variety of investment professionals.  There were a variety of opinions from survey respondents on all sides of the debate, but some consistent trends in survey responses were noted.

  • Fair value information for financial instruments is considered relevant and valuable by most respondents, but is not necessarily the key consideration in their analysis of an entity. It is used in a variety of ways by respondents, but usually as they form their views on an entity's liquidity or capital adequacy or in an enterprise value calculation.  It is seldom used as an indicator of future cash flow generation.
  • A majority of respondents favor a mixed measurement model, with fair value reporting for shorter lived instruments and amortized cost reporting for longer lived instruments (particularly bank loans and deposits) when the company intends to hold those instruments for the purpose of collecting the contractual cash flows. This view is held consistently across all the geographies and industry sectors included in the survey sample.
  • Respondents that favor the mixed measurement model think the information better reflects an entity's underlying business and economic reasons for holding an instrument. They also stress the importance of keeping net income free from fair value movements in instruments that are held for long-term cash flow rather than for short-term trading gains.
  • Respondents voice a consistent desire for improved disclosure of fair value information. Specific improvements cited include detailed, but not excessive, information about portfolio composition and risk factors, valuation methods and assumptions and sensitivity analysis for movements in key assumptions.  
  • There is widespread support for an impairment model based on expected losses, as opposed to one based on incurred losses. This preference is accompanied by a desire to define how an expected loss model would be applied. Respondents voiced concern that, if loosely defined, an expected loss model could lead to excessively subjective reserving in order to facilitate earnings management.

Throughout the analysis, we highlight any material differences that arose between groups of investment professionals (whether by geography or by industry sector).  Such differences are very limited, as survey results were generally consistent across all geographic and industry sectors of the sample.

Don McGovern, Global Assurance Leader for PwC, said, "The divergence in accounting proposals reflects the breadth of views held by financial statement users, preparers and others. The passion with which these opinions are held is evidenced by the volume and variety of print and television editorials, blogs and articles, as well as comment letters sent to both boards."

Mike Gallagher, PwC's U.S. National Office Leader, added, "In undertaking this latest survey, we have sought to capture and report the views of a significant and diverse sample of investment professionals on some of the key questions involving the measurement and reporting of financial instruments.  We believe the findings represent an important contribution to the ongoing debate."

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Notes to Editor:

1. The PwC survey was structured to obtain investor and analyst responses across geographic regions, key industries (banking, insurance, generalists), analyst specialties (equity analysts and credit analysts), and nature of organization (buy side, sell side and credit rating). In total, we interviewed 62 individuals across around the world.  Our sample was not intended to be statistically significant and should not be taken as such.  Rather it is simply our effort to gather an array of views from a wide cross section of the investor and analyst community. Interviews were conducted person-to-person and typically lasted about one hour.  They were designed to engage participants in meaningful conversations that focused on learning how they used financial statement information and what changes they would make to improve it.

2. Survey demographics:



Buy side








Sell side




Fixed Income


Asia Pac


Credit rating




SOURCE PricewaterhouseCoopers