Fair value shockwaves far from over

Fair value will continue to be the big issue for analysts of company accounts in 2008, according to Fitch ratings agency.

Fitch said that fair value had been the big area to watch in 2007 as the City digested mark-to-market valuations, sometimes of banks derivatives caught up in the sub-prime collapse, and would continue to take centre stage.

City figures have asked questions about the reliability and relevance
of mark-to-market valuations generated by using figures gleaned from a very small number of related market trades. Many have been even more scathing about mark-to-model assumptions.

‘This generated questions as to the reliability and relevance of fair values derived either by direct reference to a handful of market trades or, more opaquely, by inputs into various valuation models employed by the institutions carrying these illiquid mortgage-related assets,’ said Fitch.

One of the report’s authors, Bridget Gandy, has previously flagged-up fair value flaws. Fitch said that moves by some banks to bring off-balance sheet back into plain sight, ‘has left auditors, regulators and the investing public questioning the relevance of both the accounting and the related disclosures’.

The credit ratings giant has said that the most pressing question being raised by stakeholders is whether disclosures for off-balance sheet structures are robust enough for investors and analysts to judge the potential exposure to loss.

During 2007, major financial institutions suffered multi-billion pound write-downs. These write-downs centred primarily around the value of US sub-prime mortgage-related assets on the books of banks and broker dealers. Troubled French bank Société Générale recently announced a £1.5bn impairment.

In response to the turmoil, standard setters and market watchdogs are currently mulling plans to beef up requirements.

The IASB is considering publishing a consultation paper in 2008 to re- evaluate off-balance sheet accounting disclosures.

The US Securities and Exchange Commission has already upped the pressure on banks by sending out an edict ‘reminding’ public companies such as Citigroup, Goldman Sachs and Merrill Lynch, which sponsor SIVs, or issue asset-backed debt of their obligations.

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