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Investors and analysts prefer a mixed measurement model of financial instrument reporting as it better reflects an entity's underlying business and economic reasons for holding an instrument, finds a study conducted by PricewaterhouseCoopers.

The accounting for financial instruments under both International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP) was widely criticised during the financial crisis, leading to calls from politicians and regulators, among others, to simplify and merge financial instrument reporting globally.

As a result, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) set out in late 2008 on a joint project to simplify and improve the usefulness of financial instrument reporting.  While the original intention was to achieve converged accounting for financial instruments internationally, the two Boards have been moving in different directions.

The IASB seeks to retain a mixed measurement model, with some financial instruments measured at fair value and others at amortised cost.  The FASB, on the other hand, is proposing that virtually all financial instruments are reported at fair value.

PwC surveyed a geographically diverse sample of investors and analysts, from Asia Pacific, the US and Europe, 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.  There were a variety of opinions from survey respondents on all sides of the debate, but some consistent trends in survey responses were noted.

The study finds that a majority of respondents favour a mixed measurement model, with fair value reporting for shorter lived instruments and amortised cost reporting for longer lived instruments (particularly bank loans and deposits). This view is held consistently across all the geographies and industry sectors included in the survey sample.

Respondents that favour the mixed measurement model think the information better reflects an entity's underlying business and economic reasons for holding an instrument.

The study further finds that 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 also seldom used as an indicator of future cash flow generation.

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.

"The survey tells us that a majority of respondents favour a mixed measurement model, similar to that required by IFRS, over a fair value approach as currently proposed for US GAAP.  They believe that the use of amortised cost for some financial instruments better reflects the underlying business and economic reasons for holding those instruments.  Based on this survey, analysts and investors appear to be suggesting that the IASB should resist any pressure for a comprehensive re-think to its current model," says Ian Farrar, PwC Partner for Accounting Consulting Services. 

Farrar notes that any move towards the US GAAP proposals would result in a further change to the rules adopted recently in territories that apply IFRS, such as Hong Kong, and likely lead to a greater use of fair value for reporting financial instruments.

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