Europe should change fair value accounting rules to halt a downward spiral in asset values.
Three advisers to the European Commission – Carsten Zielke, Michael Starkie, Thomas Seeberg, all members of the European Financial Reporting Advisory Group – wrote in the FT this morning that they are concerned accounting practices are playing a role in the current market turmoil.
Measurement of the value of derivatives is more likely to involve using an erratic market price than using a 'fair value'.
Companies should measure values over a six or 12 month period, and not a reporting date value, the trio said.
Banks have plugged the gaps in their balance sheets by going to sovereign wealth funds often, they said: 'These sovereign wealth funds originate from countries most of which are not democratic, that do not practise fair value accounting and are therefore able to rush to the aid of the banks in question.'
There might be concern about such investors' intentions, and a need to impose corporate governance demands on them.
Ken Wild, a partner at Deloitte, said: 'An average can sound superficially attractive, but we are recognizing real economic events here, it is not just market moves. If investors believe the assets are going to go up in value, they can bid up the banks' stock.'
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