International accounting experts have backed fair-value, saying they do not endorse views that the standard be rejected in favour of historical cost values.

The experts – Jean-François Lepetit, a member of France's national accounting board; PWC partner Etienne Boris and Didier Marteau, a professor at ESCP-EAP, the European School of Management - said they strongly opposed the way fair value is applied during a crises.

'In these circumstances, market value is no longer fair value, in large part because of the much reduced volume of transactions. Arbitrageurs – including banks' own trading desks and hedge funds – withdraw from the trades that normally deal with the temporary differences that naturally arise between the market price of an instrument and its intrinsic value.

'Market prices are hence squeezed by a "crisis discount" as investors also avoid all credit assets, regardless of intrinsic quality,' they wrote in the FT.

The three suggested an 'upgraded fair value' which would stop pro-cyclical effects of mark-to-market and to allow trading assets to be measured consistently with their intrinsic values.

'As soon as the accounting regulator in the country concerned considers the "crisis discount" abnormally high, banks would be required to discontinue mark-tom-market measurements of credit assets in their trading books that no longer represented fair value.

'They would switch to a fair value measurement based on a "mark-to-model" approach using initial parameters set by the regulator, chiefly probabilities of default and recovery rates. These data would be established using fundamental analysis of assets' credit quality, eliminating "crisis discount".'

The three experts say the rule could be applied to impaired assets or structured instruments, whose underlying assets were impaired, such as 'subprime' assets.

'This approach obviously creates an accounting gain, equal to the difference between the "upgraded fair value" and the market price. We recommend recording this gain in the income statement and disclosing details of the adjustment in the notes. These gains would correct the negative impact of any losses already recognised. The earlier the regulator acts, the less significant the adjustment to income,' they said.

Further reading:

FRC cautions 'inappropriate' development of IFRS