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UNCTAD UNCTAD Presentation Transcript

  • IFRS fair value implementation - analysts & investors Chris Dreyer, CFA Geneva, 7 October 2009 monitoring iorp.eu
  • Overview Financial Reporting for Investors The CFA Institute’s Comprehensive Business Reporting Model Why fair value? Q&A monitoring iorp.eu
  • Financial Reporting for Investors monitoring iorp.eu
  • is mFinancial Reporting ade for Investors monitoring iorp.eu
  • What issues concern investors? Wealth creation Sustainability of creation Distribution of wealth to preceding stake-holders Accrual to residual common shareholder (ultimate risk bearer) monitoring iorp.eu
  • What information do investors need to address those issues? Resources the company controls Obligations to transfer resources to others Ability to generate long-term, sustainable net inflows of resources Ability to convert new resources to cash Risks to which these resource-generating activities and cash flows are exposed, both short-and long-term monitoring iorp.eu
  • However ... Cognitive dissonance between investors & preparers Investors focus on portfolio, not individual assets preparers focus on market perception / valuation of their firm Objective conflicts of interest Downgrades are painful Managements loose degrees of freedom of action with increased transparency monitoring iorp.eu
  • Theoretical toolbox Rational Expectations Modern Portfolio Theory Information Theory; Principal - Agent Problem &c monitoring iorp.eu
  • The CFA Institute’s Comprehensive Business Reporting Model monitoring iorp.eu
  • administers globally recognised CFA designation 94‘000+ members in 131 countries diverse investment professional backgrounds active participation in advocacy through long standing history with IASB, FASB monitoring iorp.eu
  • Directions for Standard Setting from the investors’ perspective Provides a roadmap for future changes to reporting standards in 12 Principles Aims for improved - Clarity Completeness Economic Faithfulness Understandability Represents the position of the CFA Institute’s 94’000 members strong global base monitoring iorp.eu
  • Presentation Method Scope monitoring iorp.eu
  • III. Fair value information is the most relevant information for financial decision-making. Investors’ buy, sell, and hold decisions, just as managers’ acquisition and divestiture decisions, are based on fair values, and changes in those values, not outdated historical costs Consequently, investors require assets and liabilities to be measured at fair values If fair value results in greater volatility, it has merely unmasked economic volatility already present monitoring iorp.eu
  • Why fair value? monitoring iorp.eu
  • Why indeed? Relevant for all economic decision making, not just finance No conceptually viable alternatives Most useful measure of performance Preference for “approximately right” rather than “precisely wrong” But: Transparency about sources of & assumptions used in valuation! monitoring iorp.eu
  • Frequent objections Fair valuation is analysts’ job Fair value introduces unacceptable measurement errors The Profitable Downgrade Conundrum Piecemeal modification of mixed attributes model creates new problems Fair values are hard to come by, expensive pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED Fair value introduces unacceptable measurement errors The Profitable Downgrade Conundrum Piecemeal modification of mixed attributes model creates new problems Fair values are hard to come by, expensive pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED FairOVER introduces unacceptable value RUL measurementED errors The Profitable Downgrade Conundrum Piecemeal modification of mixed attributes model creates new problems Fair values are hard to come by, expensive pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED FairOVER introduces unacceptable value RUL measurementED errors OVE The Profitable Downgrade Conundrum RRU LED Piecemeal modification of mixed attributes model creates new problems Fair values are hard to come by, expensive pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED FairOVER introduces unacceptable value RUL measurementED errors OVE The Profitable Downgrade Conundrum RRU LED Piecemeal modification of mixed attributes OVE RRU model createsD LE new problems Fair values are hard to come by, expensive pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED FairOVER introduces unacceptable value RUL measurementED errors OVE The Profitable Downgrade Conundrum RRU LED Piecemeal modification of mixed attributes OVE RRU model createsD LE new problems OVE Fair valuesU hard to come by, expensive RR are LED pro-cyclical monitoring iorp.eu
  • Frequent objections OVE Fair valuation is analysts’ job RRU LED FairOVER introduces unacceptable value RUL measurementED errors OVE The Profitable Downgrade Conundrum RRU LED Piecemeal modification of mixed attributes OVE RRU model createsD LE new problems OVE Fair valuesU hard to come by, expensive RR are LED pro-cyclical OVE RRU LED monitoring iorp.eu
  • Cui bono? fair value reporting favours dynamic view of markets proliferation of marketplaces in ever more asset categories price discovery - most important tool in finding more efficient uses of assets higher efficiency / productivity serves everybody monitoring iorp.eu
  • Survey results Support for fair value Fair value, as a measurement basis, is considered by most respondents (79 percent) as contributing to the transparency of reporting institutions and also as enhancing market integrity (74 percent)- March 2008 survey 58% of respondents prefer fair value as the single measurement basis for financial assets and liabilities with amortised cost information provided as a note disclosure item- 2007 survey 72% of respondents indicated that companies should not have recognition and measurement options for similar items. This is predicated on the belief that a single measurement basis can allow greater comparability between reporting entities and within items reported by the entity” - 2007 survey monitoring iorp.eu UNCTAD Conference Page 11
  • ? 1€ + 1€ = 2€ monitoring iorp.eu
  • monitoring iorp.eu
  • monitoring iorp.eu
  • R E A L I T Y monitoring iorp.eu
  • Causation? Standard produce Standards Setters Preparers use produce Instances Standards to Investors use discover valuation Instances to monitoring iorp.eu
  • Magic triangle Liquidity Risk Return monitoring iorp.eu
  • Crisis & Accounting Transparency Complexity Stability monitoring iorp.eu
  • Your speaker Christian Dreyer Education: M.A. HSG (political economy) LL.M. (EU Law) Edinburgh University CFA Charterholder Managing Partner of monitoring christian.dreyer@tertium.biz iorp.eu