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22 Jul 2010
A member of the US accounting standard setter has likened attempts to bring in fair value to a “religious war” in a speech with regulators this week.
Lawrence Smith, board member with the Financial Accounting Standards Board (FASB), made the comment in a panel discussion with US audit regulator, the Public Company Accounting Oversight Board, in the midst of a far ranging consultation on the accounting principle.
FASB is pushing ahead with plans to bring in a full fair value measurement model which would force banks to value their financial assets at market prices. The proposals are being fought by banks who argue the rules would add volatility to balance sheets.
Smith said he is not a "fair value zealot", but was swayed to the model when he saw the effect on deposits.
"That’s what threw me over the edge," he said.
“Some people have advised us that we shouldn’t say this, but I’ll say it – fair value, to some of us, is almost like a religious war out there and we are trying to deal with that as best we can.”
FASB is attempting to harmonise its accounting rules with international standards, despite clear differences in their approach to fair value. Whereas FASB’s proposal measures assets measured at fair value, the international model allows some loans to be valued at amortised cost.
The contentious proposals was passed by a single vote, with the five-member FASB board split 3-2.
Smith’s comment will likely widen the gap between FASB’s proposal and its international counterpart, the International Accounting Standards Board (IASB). Failure to reach agreement on the standard will undermine US attempts to adopt international rules.
The US Securities and Exchange Commission is currently investigating the impact of international accounting rules on US markets. A key part of their final decision will depend on the level of convergence between US and international accounting rules, with fair value being among the most important project on the table.
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Briefings
By looking at the reasons supplier statements became unfashionable, and the reasons why it is different today, this paper delves into the many benefits that can be obtained by automating the process.
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Visitor comments Add your comment
Bankers and Fair Value
To hell with the bankers, They caused more problems than the world can imagine. Simply ignore them .
It is wrong to give them any break when it comes to fair value
Posted by: John M Dagnon, 05 Aug 2010 | 00:00
Importance of article
The reaction to this article is further proof of how much mark to market accounting is so desperately needed.
Posted by: Tony Frank, 06 Aug 2010 | 00:00
Fair Value Accounting
No industry, especially the banking industry, should be able to influence accouting principles. Financial statements which inlcude financial instruments recorded at historic values are misleading, at the very least. All readers of financial statements should have access to current values and accurate disclosures of such.
Posted by: Patricia Montgomery, CPA, 06 Aug 2010 | 00:00
Fair value measurement
I think I remember being taught that one of the main tenents of accounting is conservatism. Based upon that tenent, there is no choice but to measure items at the LOWER value. Besides, it just makes sense especially in today's economy. We all know the banker's want their assets valued as high as possible so it appears their capital position is better than it really is. Give me a break, let's simply return to the foundations of accounting and be sensible. I agree with another commenter than NO industry should influence our principles (GAAP or personal!).
Posted by: JR, CPA, 09 Aug 2010 | 00:00
Let's stay rational
I agree that the imposition of fair-value based accounting is akin to the religious discovery of some convert. In the UK net book amount on the historical cost basis has always been adjusted to a lower value if appropriate, but we seem to have lost sight of the "going concern" basis of preparation of financial statements. Apart from financial instrumenst, where knowledgeable and willing buyers and sellers participate in an active and open market, fair value based accounting on the North American model (let's not forget that Canadian academics originally stirred this up) introduces massive subjectivity in reporting and must almost by definition hamper audit objectivity. Let not fair value theology lie at the root of a destructive religious war, as failed understandin of theiology has so often in the secular past.
Posted by: Professor David Kinnon, 11 Aug 2010 | 00:00
Fair value vs Historical Cost
Irrespective of which GAAP we follow, fair value overall is going to be too subjective. There are too many variables involved and too many factors which are open for interpretation which will decide the fair value of balance sheet item. In the current market fair value of an item might change in a short period, hence making the accounts useless to a reader of the accounts just after a couple of weeks of the financials being prepared. Don?t get me wrong, there are a lot of positives to Fair Value accounting too. And I guess it?s this balance of pros and cons that?s leading to the confusion.
A solution could be that a balance sheet prepared by Fair Value could be presented separately in the financials as a note to assist the user of the accounts to judge the current market value of the business.
Posted by: TD, 27 Aug 2010 | 00:00
Either way, it's hardly the end of the world
Remember this: both systems have been used extensively, and worked.
Both historical cost and mark-to-market make a reasonably fair representation of businesses' capital expenditure over time. Whichever is ultimately picked, we'll be fine.
I prefer historical cost because it's simpler to apply, easier to predict, and a little less subjective. Will I be crying if we're all using mark-to-market in a a few years' time? You've got to be kidding.
Posted by: Alex, 07 Sep 2010 | 00:00