Fair value cannot be blamed

The standard setters have told the business community that fair value cannot
be blamed for exacerbating corporate credit woes and that ‘extra work’ must be
done to obtain ‘fair value’ if a quoted price seems unrealistic.

The comments were made by Financial Accounting Standards Board member Tom
Linsmeier, attending a fair value round table assembled by the Securities and
Exchange Commission.

Linsmeier was responding to Loews Corporation CEO James Tisch, who had
slammed the standard, saying it required reams of nearly incomprehensible
disclosure information and often forced his company to make poor economic
choices, reported.

Tisch also blamed fair value for making valuations difficult, saying brokers
quoted unreliable prices.

‘We have a lot of trouble getting valuationsā€¦ for about 20% of them,’ he

He added that brokers gave prices which were ‘not reflective of anything
other than a number that somebody just happened to throw on the table’ when they
were forced to obtain pricing services from brokers.

Tisch said this resulted in brokers taking advantage of companies seeking
valuations, with the resulting quote reflecting ‘the price from a buyer who
knows he is buying from a reluctant seller.’

But Financial Accounting Standards Board observer Tom Linsmeier said: ‘FAS
157 does state that you need to use a fair value that would be the exchange
price in an orderly market,’ Linsmeier responded.

He added that a company must do extra work and research to make adjustments
to quotes when prices seemed unrealistic.

‘It is not acceptable to just accept a price that you know is not right for
fair value,’ he sternly told Tisch.

Tisch complained further, saying that under fair value accounting, companies
holding securities – hurt by rising interest rates – must be written down,
unless the company states an intent to hold them until maturity. ‘The effect [of
rising interest rates] will be to lock up large portions of insurance company p
ortfolios, forcing companies to make sub-optimal portfolio decisions,’ he said.

He added that his own company’s statement, which is now 250 pages, has become
a document written by lawyers and accountants for lawyers and accountants.

Tisch also said that insurance companies would ‘essentially be out of
business’ with ‘meaningless’ income statements if they had to use mark-to-market

International Accounting Standards Board observer Jim Leisenring responded by
informing Tisch that ‘some parts of the world do what you say would be
disastrous [to do].

‘Moreover, [the] IASB currently has a proposal out for comment that says
insurance liabilities should be at fair value,’ he said.

Panellists said that suspending fair value would risk the market ignoring
real economic problems.

The CFA Institute’s Kurt Schact said that fair value ‘is the most valuable
information, particularly in tough markets, because it tells investors what is
under stress.’

‘Where fair value has not lived up to its full potential is in the level and
quality of accompanying disclosures,’ he said.

Further reading:

FASB board member urges fair value changes

Related reading

Fiona Westwood of Smith and Williamson.