Fair value sparks IFRS fatigue

As companies continue to wrestle with implementing fair value in their
accounts, they will not have been pleased to learn that standards setters are
attempting to push the fair value revolution a step further.

In a rare spat, the Accounting Standards
Board (ASB) and the
International Accounting Standards
Board (IASB) have
locked horns on the latest developments, which propose to extend the scope of
‘market values’ in the controversial valuation method.

Fair value methods replaced historical cost accounting, broadly speaking,
when international financial reporting standards came in in 2005 for large UK
corporates.

Whereas companies had valued assets according to how much they had paid for
them, IFRS made them look at what someone might pay for the assets here and now.

The move has had some bizarre consequences, such as the quarterly $400m
(£207m) fluctuations in asset values of BP, as the oil company has calculated
and recalculated the derivatives that it holds.

Insurance companies and banks have also wrestled with complex valuations of
assets that are traded in barely liquid markets.

The challenge of assessing a fair value in such situations is what lies
behind the ASB-IASB row.

In its latest discussion paper, the ASB said that the IASB was trying to
impose exit values as the single way of measuring fair value.

In markets where no such values could be realistically assessed, fair value
methods should be able to accommodate other ways of calculating an asset or a
liability on the balance sheet, the ASB argued.

In such situations, historical cost accounting was still a practical
alternative, it said.

The ASB is seeking a full debate and some delay rather than an
over-prescriptive definition of what fair value should be.

In its submission, it said: ‘A mixed attribute measurement model may give a
more satisfactory prescription at this moment in time and this too should be
subject to further research.’

With standards setters promising a period of calm following the IFRS storm,
many UK companies will be hoping that the ASB gets its way.