Speaking at a discussion entitled ‘Revisiting the accounting of long-term investment by institutional investors’, co-hosted by the Organsiation for Economic Cooperation and Development (OECD) and the Ministry of Finance of Singapore, IASB member Philippe Danjou said that long-term investment provides a key source of funding for companies so it was important that IASB ‘develops financial reporting standards that help investors make sound capital allocation decisions’.

‘We believe that our new standards will greatly improve the potential of the banking and insurance industries to be long-term investors, by making it easier for them to tap the capital markets and obtain the degree of capitalisation that is necessary to withstand the short-term volatility that is inherent to equity investments,’ Danjou said.

Danjou also said there was little evidence that the use of fair value accounting contributed to market volatility, stating that ‘accounting is a descriptive function and therefore its relevance to the challenges of short-termism in capital markets is marginal at best'.

However, the IASB has backed down on certain aspects of the revised standards on insurance and financial instruments, and has announced plans to delay implementation of IFRS 9, Financial Instruments. 

The standard-setter confirmed that it does not plan to increase the use of fair value accounting when it replaces the standards on financial instruments and insurance contracts. The aim is to ‘better align the accounting rules with the business models of the banking industry, to make them more understandable, and we will make the financial reporting by insurance companies more transparent’.

In more detailed comments on the new accounting standards, IFRS 4, Insurance Contracts, and IFRS 9, Danjou said IASB had abandoned the requirement that insurance liabilities are measured at any form of fair value or market value. Instead, IASB is proposing that liabilities arising from insurance contracts are measured using a ‘building blocks approach’ with four levels.

Danjou stressed that there is limited use of fair value outside of the financial services sector and stated that ‘fair value accounting, where it is a relevant measure, enables transparent and timely reporting of the “bad news”, which is essential for sound investment decisions'.

There will also be some changes to IFRS 9 which will create a third accounting classification called ‘fair value through OCI’ to reflect the interaction between the reporting of financial instruments held by insurance companies and the measurement proposed for their insurance liabilities.

In order to avoid a temporary accounting mismatch, the IASB will postpone to 1 January 2018 the effective date of the new standard IFRS 9, to coincide with the effective date of the new standard on insurance contracts.