For the Investor:
Investor Input Impacts Accounting Standards
An often-asked question for the FASB is: How does the feedback provided by users of financial statements affect the decisions made by the FASB?
The FASB website includes a dedicated section that describes how and why we obtain direct input from investors.The FASB website includes a dedicated section (see the Investor Page) that describes how and why we obtain direct input from investors. This column is intended to complement the terrific information available on the website to provide several concrete recent examples of how investor feedback helped the Board to make better cost-effective decisions in accounting standards.
As my colleague Hal Schroeder so articulately discussed in our 2015 second quarter issue (click here), the FASB is working to finalize a new accounting standard for how financial institutions and others should measure their estimated credit losses.
Our 2012 proposal included a requirement for lenders to disclose in the financial statement footnotes a “roll forward” of loan balances from one period to the next. However, feedback from banks and their auditors was that this would be quite costly to prepare and audit—due in part to having to collect data from multiple different systems within organizations.
To help the Board more fully appreciate the tradeoffs between the benefits of the additional disclosures and their costs, the staff and a subset of Board Members held a series of meetings in the last few months with financial institutions and their investors and analysts.
Taking into consideration what we heard from investors, along with preparer feedback, helped the Board make this cost benefit assessment.We learned that an easier way to help financial statement users analyze the allowance for loan losses (in relation to the changes in the composition of the loan portfolio) would be to require financial institutions to provide more transparency on the expected losses in their loan portfolio. Specifically, financial institutions would break out the credit quality indicators of the loan portfolio at the end of each period by vintages (that is, by year of origination).
The disclosure by vintage would give analysts the ability to estimate originations in each reporting period, without requiring a costly data extraction and auditor evaluation exercise. Taking into consideration what we heard from investors, along with preparer feedback, helped the Board make this cost benefit assessment.
Another example of how investor feedback helped the Board make better decisions is in the FASB’s efforts to improve accounting by insurance companies.
Beginning in late 2008, the FASB joined a global effort to change the reporting model for all insurers across the globe. U.S.-based analysts provided significant feedback through direct meetings, comment letters, and working with the investor group Corporate Reporting Users Forum (CRUF – see www.cruf.com for more information).
Many investors following property and casualty insurers were vocal in their view that current accounting and reporting for these companies is more than adequate.Many investors following property and casualty (P&C) insurers were very vocal in their view that current accounting and reporting for these companies is more than adequate. They told us that they desired only more comparable disclosures that provided additional insights that allowed them to, among other things, better understand the developments of insurance claims over time and how the reserves for claims are estimated.
The FASB ultimately decided that for P&C insurers, the benefits of changing to a new, global insurance accounting model at this time did not justify the costs. In my decision, the views of investors were a big reason for my conclusion. In May 2015, we issued a new standard requiring some additional disclosures that investors recommended.
These are two examples of how investor input was taken into account in decisions reached by the FASB. I encourage you to review the Investor section (Investor Page) of our website, and to get involved in the discussion, so that your voice can be included in conversations about future accounting and reporting standards.