US plan to ditch fair value 'shoots the messenger'

Banks have no alternative to fair value accounting, a leading standards expert has said, after US congressmen proposed suspending the controversial ‘mark-to-market’ rules as they struck down the US government’s $700bn (£370bn) bailout.

As the world lurched towards a global financial crisis, experts also claimed that the issues on Wall Street had damaged the chances of IFRS being taken up in the US.
US politicians this week made clear their distaste for the mark-to-market rules.

Republican critics of Hank Paulson’s $700bn bailout for Wall Street said that it would have been better to suspend fair value.

Tory shadow chancellor George Osborne this week echoed the view with a call for a three month suspension of mark-to-market. The Tories say the assets should be valued according to what the banks ‘expect to get out of them over the long term’.

The Republican study committee said it would be better to mark assets to their ‘true economic value’ rather than according to values derived from a ‘short term mania’. The committee, headed up by Texas representative Jeb Hensarling, is trying to push through a bill suspending mark-to-market accounting.

The proposal has brought the contest over fair value accounting to the forefront of global debates on resolving the financial crisis. But experts say there is no alternative.

‘I can’t really see what alternative you’ve got,’ said Ken Wild IFRS leader at Deloitte.

‘Mark-to-market has taken some flak in recent weeks, but there is an element of “shoot the messenger” in all of this. 15 years ago, everything was done at historical cost. Saying, “let’s just use averages” for example strikes me as a bit of a nonsense. Accounts are meant to be objective.’

Peter Wyman of PricewaterhouseCoopers said the move would reduce comparability between banks.

JP Morgan also said this week that the move would entail ‘shooting the messenger’, while Federal Reserve chairman Ben Bernanke has said any such plan would actually damage investor confidence rather than the other way around.

The spectacular events of the last few weeks could have also dealt a blow to IFRS convergence, some are arguing. ‘It was probably not very prudent to think that [IFRS] could be adopted in such a swift way,’ said a research fellow from the Bruegel institute, a Brussels-based think tank.

A source close to the IASB said they understood there were distractions from IFRS in the current climate, but the board has no evidence of a re-evaluation.

If the Republican bill is pushed through, the SEC will also have to submit an exhaustive report on mark-to-market accounting within 90 days of the bill becoming law.