Standard setters to challenge 'mark-to-Paulson' accounting

Rules not to blame: John Griffith-Jones

Banks around the world may not be able to mark up the value of their toxic assets according to the prices established through the US bailout plan, it has emerged.

FASB chairman Bob Herz said at PwC’s Meet the Experts summit that standard setters were planning to work on whether the moves - branded ‘mark-to-Paulson’ accounting - would be valid.

‘It looks like the US Treasury is going to be buying back some of these [assets] using a reverse auction system,’ said Herz. ‘But does that establish fair value? We’re going to have to start working with the IASB about this.’

Under the reverse auction plans, the bank that submits the lowest bid for the value of certain assets will be paid that amount by the US government out of its $700bn bailout pot.

Other banks could use the value as a marker for putting a price on similar assets, but concerns have been raised that the size of the winning bid would be greater than the price tag arrived at by mark-to-market accounting.

Politicians appeared this week to have pulled back from a suspension of mark-to-market this week, but IASB insiders fear the danger is not over yet. The suggestion to suspend the rules have been met with condemnation from investors and the profession.

‘Would you have [mark-to-market suspended] just in the US, just in the UK or just in my office? There would be no comparability.’ said Peter Elwin, head of accounting and valuation research at Cazenove Equities. ‘How stupid is that?’

Elwin describes a fair value suspension as ‘cartoon physics’.

He said: ‘It’s the same as running off a cliff, but provided you don’t look down, you can reach the other side.’

Stephen Cooper, managing director and head of accounting at UBS’ global valuation group, said: ‘Investors know what’s going on. Trying to conceal it now is certainly something that’s not going to work. It’s difficult to see what else to do.’

Ian Wright, director of corporate reporting at the FRC, said that current accounting rules were working ‘damn well’.

‘The purpose of accounting standards is not to stop a credit crisis… or ameliorate a credit crisis. Their purpose is to tell people what has happened over a set period,’ he said.

At a KPMG roundtable senior partner John Griffith-Jones said: ‘The accounting rules did not cause the current financial crisis and the accounting rules will not be the solution to it either.’