The International Accounting Standards Board (IASB) published a discussion paper on the role of credit risk in liability measurement. The paper, for public comment, is accompanied by a staff paper that describes the most common arguments for and against including credit risk in measuring liabilities.
Credit risk in liability measurement is often referred to as ‘own credit risk’. Existing International Financial Reporting Standards (IFRSs) require profit or loss resulting from changes in ‘own credit’ to be booked when debt is fair valued. From an accounting perspective, there are good reasons for applying fair value measurement to both assets and liabilities. However, some see the outcome as counter-intuitive. Recent developments in the financial markets have led to increased concerns about gains that result from changes in the value of an entity’s liabilities.
The discussion paper responds to this concern. The issue of ‘own credit risk’ has relevance to other IASB projects, in particular in the accounting for financial instruments, insurance, fair value measurement and provisions, contingent liabilities and contingent assets. The staff paper is open for comment until 1 September 2009 and can be accessed free of charge on eIFRS or on the ‘open for comment’ section on the IASB’s website www.iasb.org.
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