US finance executives voice opposition to fair value model

by Mario Christodoulou

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09 Sep 2010

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A prominent group of US finance executives has joined a chorus of opposition to US fair value proposals, believing they would result in “pervasive and adverse implications to all financial institutions”.

Financial Executives International (FEI) a US trade body for finance professionals, has urged the Financial Accounting Standards Board (FASB), which sets US accounting standards, to reconsider accounting proposals which would see all banks’ assets measured at their market price.

“We do not believe placing such heavy reliance on fair value as the primary measurement attribute is supported by a majority of investors or financial statement users,” the body said in a letter.

The FASB model would extend the use of fair value accounting, which ravaged banks balance sheets in the crisis, to all financial assets including banks’ loan books. In the crisis banks were forced to measure assets at depressed market prices which obliterated much of their balance sheet value.

The FASB model provides a more vigorous accounting treatment which would force banks to estimate and report the fair value of each asset class. Some argue this provides raw and honest accounting information to investors, while others believe it does not properly reflect a banks’ business model and adds unnecessary volatility.

“In its current form, the requirements of the [proposal] will potentially have pervasive and adverse implications to all financial institutions, as well as many other commercial organisations,” the FEI said.

“We strongly urge the FASB to conduct extensive outreach to identify and understand the consequences of the proposed guidance and use the results in a new proposal.”

FASB has faced fierce opposition to the model primarily from the US banking industry led by the influential American Banking Association, which has urged its members to object to the rules.

Major audit firms have also voiced opposition to the rules in their written submissions. Deloitte believes the rules inappropriately extend fair value accounting “to certain financial instruments for which amortised cost is a meaningful measurement”.

KPMG said it did not agree “that fair value is the appropriate measurement attribute for practically all financial assets and the majority of financial liabilities”.

PwC said while it supports “FASB's objective of developing a model that increases the decision-usefulness of the information reported about financial instruments” it believes, “the proposal, taken as a whole, does not contain the most appropriate solutions to achieve that objective”.

The debate 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.

Auditors are frustrated at the lack of convergence on the fair value rule. PwC said it was “disappointed” at the significant divergence between the boards. The firms stand to benefit from US adoption of international accounting rules. Convergence will significantly increase audit fees for the first year as firms help companies switch their accounting codes.

Further Reading:

HSBC finance chief rails against US fair value rule

FEI Comment Letter No. 246

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