Smoothed assets dismissed as a 'worse answer' to fair value

Ken Lever voices his concerns

Banks, investors and political figures have turned against the method as the credit crunch bites.

Critics say fair value ­ which means valuing assets at their market price at the reporting date rather than by how much they cost ­ introduces wild swings into company accounting, and has decimated the balance sheets of banks and insurers in particular.

Advisers to the European Commission have suggested banks should use smoothed asset values, six or 12 month averages, to remove that volatility ­ but critic have dismissed the idea. ‘It’s a worse answer,’ said Ken Wild, Deloitte’s global IFRS director.

‘Why is it better? Take a pharmaceutical company with some fantastic drug. People are developing some mystery side effect. A major part of the revenue stream goes, the share price starts falling. The company admits it will be some years before they can put it back on the market and the share price collapses. [Marking the value] down would be because of real economic effects.’

German private banking association, the Bundesverband deutscher Banken, also called for a review of the fair value rules. ‘There are some indications that mark-to-market valuation has increased the slide of prices, especially for investments that were no longer fungible,’ said president Klaus-Peter Mueller, also a Commerzbank AG chief executive.

UK companies have criticised the method too, with Hundred Group of Finance Directors chairman Ken Lever and investment group Royal London Asset Management voicing their concerns.

Bournemouth University professor Stella Fearnley, says in an article in Accountancy Age this week that the board has been ‘intransigent’ on key issues.