HSBC finance chief rails against US fair value rule

HSBC chief financial officer Douglas Flint has weighed into the accounting debate surrounding US’s fair value proposals, warning the new rules “will weaken the stability of the financial system”.

The London-based CFO believes the proposals, currently being considered by the Financial Accounting Standards Board (FASB) which sets US accounting rules, will add “significant irrelevant volatility” and could destabilise banks’ finances.

The FASB proposal would extend the use of fair value accounting, which ravaged banks balance sheets in the crisis, as asset prices plummeted in falling markets. Banks were forced to measure assets, including volatile loan-books, at depressed market prices which obliterated much of their balance-sheet value.

“The significant extension of fair value accounting to most financial instruments, including those for which fair values are difficult to estimate, would also introduce additional measurement uncertainty into financial statements reducing their reliability and introducing significant irrelevant volatility into the measurement of shareholders equity and capital,” Flint said in his letter.

“This accounting model will weaken the stability of the financial system. There is concrete evidence of such concerns from the recent financial crisis.”

FASB is pushing ahead with its proposals despite fierce opposition form the US banking industry including the influential American Banking Association. FASB’s proposal is seen as a more transparent but tougher accounting model which would force banks to estimate their assets’ market value and report this to investors.

The letter comes as FASB attempts to converge its accounting rules with International accounting standards, despite stark differences in their fair-value proposals.

The international rule, created by the International Accounting Standards Board (IASB) and fast tracked following pressure from Europe, incorporates a mixed-measurement model with those assets held to trade, measured at fair value, while those “held to maturity”, measured at cost.

Flint said while the international approach “is not a perfect solution” it represents “a higher quality converged standard”.

“The IASB has sought to reduce the complexity of accounting for financial instruments in its project in response to user demands for less complex and more understandable information,” he said.

“HSBC is extremely concerned with the significant divergence between the IASB and FASB proposals for financial instruments and that the two boards have been unable to agree on a single view…In our view convergence towards one set of high quality global accounting standards must remain a top priority.”

The proposals come at a time of instability for the five-member FASB board which was rocked by the departure of chairman Bob Herz earlier this month, for unknown reasons. Herz exercised his casting vote to get the proposals through to consultation. The board would now be split 2-2 on the proposals, although plans in place to increase FASB’s membership to seven members.

Further reading:

Tweedie allays EU fair value concerns

FASB in midst of "religious war" on fair value