World Bank backs US fair value proposal

The World Bank has backed the US' controversial fair-value proposal, and has argued the proposed accounting treatment better reflects the risks involved in bank finances.

Charles McDonough, World Bank vice president and controller, said the US fair value proposals were “the best” measure of financial assets, but concedes they may result in “higher volatility”.

“While [the proposal] will result in significantly higher income volatility for many reporting entities, we believe this higher volatility reflects the inherent risks of financial instruments,” he said in a submission.

“Ignoring or smoothing volatility does not mean that it does not exist.”

The Financial Accounting Standards Board (FASB), which sets US accounting rules, is exhibiting proposals which extend the use of fair value – an accounting treatment which forces companies to estimate asset values at market prices.

The accounting treatment 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.

FASB is facing fierce opposition form the US banking sector including the influential American Banking Association.

Meanwhile the board is also converging its accounting rules with international accounting standards, set by the International Accounting Standards Board (IASB), despite stark differences in their fair-value proposals.

The international rule, fast-tracked by the IASB 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.

McDonough said FASB’s proposal is “more comprehensive and sound”, and hopes both boards can arrive at a converged standard.

Further reading:

HSBC finance chief rails against US fair value rule

Tweedie allays EU fair value concerns