A global ratings agency has urged companies to make better disclosures in their accounting for assets at fair value in illiquid markets.
In a report published today, Fitch Ratings said that better disclosure is required as to the rationale, assumptions and sensitivities behind these valuations.
Managing Director in Fitch's Credit Policy Group Bridget Gandy said that the most salient issue is not whether fair value per se should be used to report numbers, but how that fair value should be measured.
'If values are being taken from markets that are not striking a fair balance between buyers and sellers, it is hard to argue that those values are fair,' said Gandy.
Fitch's report comes amidst unstable markets in which several lenders have called for the accounting rule to be relaxed, allowing issuers the option of when to apply fair value measurement and when to apply historical cost.
But the agency argues that the fundamental distortions such unfettered flexibility would permit would not engender greater investor confidence in financial reporting nor would it foster sound capital markets or sound financial institutions.
In the report, 'Fair Value Accounting: Is It Helpful In Illiquid Markets?', the agency notes that while the values obtained through the Fitch notes that fair values are helpful to analysts and investors when they represent realistic and reliable indications of the net present values of future cash flows.
The agency says that more extensive disclosure will help investors understand the limitations around the values reported. These should include indications of market prices versus expected cash flows, amounts companies expect to lose in real cash on assets written down to market values and how such assets will be funded whilst they are held for longer than originally anticipated.
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