US watchdog hears fair value is 'much needed'

Thomas Jones, the British vice-chairman of the International Accounting Standards Board (IASB) has told Accountancy Age that the board would be working closely with the US standard setter, FASB, to work toward a cohesive response to concerns over fair value.

His comments came as he attended a panel of financial professionals yesterday before the US Securities and Exchange Commission in Washington DC to discuss fair value accounting, which has become highly contentious after being blamed by some for contributing to the global financial crisis.

'We want to make sure that we and the FASB don’t go in different directions,' said Jones, who did not speak at the meeting but was there as an observer. 'We don’t want competitive accounting.'

He said he hasn't heard of a viable alternative to fair value accounting, although he said: 'That doesn't mean to say we can't improve.' He noted that participants in the roundtable had pointed out that the current standards allow for more flexibility than is commonly known.

Proponents of continuing to use mark-to-market accounting acknowledged in the discussion that fair value rules are not perfect and need 'further work,' but argued that they are better than any existing alternative.

The roundtable meeting was held as part of a study of mark-to-market accounting mandated by the financial bailout bill passed this October in the US Congress.

Some lawmakers, including Republican presidential candidate John McCain, have called for a suspension of the practice because they say it unfairly writes down assets to their current market value and harms already troubled companies. The discussion yesterday centered on whether current American law can be interpreted or amended to find useful asset values in illiquid markets.

Among the supporters of fair value accounting was Scott Evans, of the Teachers Insurance and Annuity Association-College Retirement Equities Fund, who said: 'I think we’re on the right track. To give up now would be counterproductive.' Evans said fair value accounting provides much-needed transparency for investors.

While supporters of the practice said fair value accounting only reflects the reality of the marketplace, critics said the requirements drive distressed companies into a downward spiral. Illiquid markets can cause assets to be sold at fire-sale prices, and the liquidation value should not be confused with the true economic value, they said.

The most prominent American standard dealing with fair value , FAS 157, allows for the use of judgment and mark-to-model accounting in the case of frozen markets and liquidations; but this provision has been under-used, the meeting heard.

Damon Silvers, of the American Federation of Labor and Congress of Industrial Organizations, said that marking-to-market seems to apply when the market is liquid but can be naïve and misleading. He said fair value accounting breaks down when trading slows and there is no market to mark to. The practice leads to mark-to-model, and eventually "mark-to-mush" that you get further down the line,' he said. The SEC will hold a second roundtable discussion on the topic of mark-to-market accounting on November 21.

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