FASB releases fair value proposal

The US accounting standard setter has released it’s fair value standard, which strives to simplify rules surrounding financial instruments, but jars with international accounting rules, used by it’s neighbouring economies.

The Financial Accounting Standards Board (FASB) waited until US markets closed to release its long awaited reforms to financial instrument accounting, which will expand the use of fair value in a bid to increase transparency.

The fair value principle forces financial institutions, to measure the value of their assets at market prices, rather than their original purchase price. The provides greater transparency for investors, but has been criticised by regulators, as increasing volatility.

The issue made headlines as the crisis took hold towards the end of 2008, as asset prices plummeted in illiquid markerts.

Under FASB’s proposal, most financial instruments would be measured at fair value in financial statements, but amortised cost would also be disclosed in some instances.

The rule, however, differs, to the International Accounting Standards Board’s (IASB) mixed-measurement model, which allows some assets to be valued at amortised cost.

The issue represents a challenge as both board move towards a June 2011 deadline to converge their accounting codes.

FASB said it would have ideally preferred to issue the proposal jointly with the IASB.

“However, each Board has faced different imperatives that have resulted in different approaches for accounting for certain types of financial instruments, resulting in different timetables for the project,” FASB said in its exposure draft.

“FASB’s main objective is to develop accounting standards that represent an improvement to U.S. financial reporting. What may be considered an improvement in jurisdictions with less developed financial reporting systems applying International Financial Reporting Standards (IFRS) may not be considered an improvement in the United States.”

The standard comes days after Sir David Tweedie, IASB chairman, told a San Diego audience both the FASB and IASB models could be reconciled.

“Say we both stick to our same positions [on classification and measurement], maybe we need to put out something that would say ‘if you want to get the same other comprehensive income as FASB, you have to add this on, which would be the fair value’” he said.

“FASB would do the opposite. If you want to get the FRS number, you deduct this. There are ways to do it.”

Further reading:

FASB exposure documents

IASB chief claims fair value options can be reconciled