Smoothing asset values isn’t the answer to challenges posed by fair value, a standards expert has warned
Banks, investors and political figures have turned against the method as the
credit crunch bites.
Critics say fair value which means valuing assets at their market price at
the reporting date rather than by how much they cost introduces wild swings
into company accounting, and has decimated the balance sheets of banks and
insurers in particular.
Advisers to the European Commission have suggested banks should use smoothed
asset values, six or 12 month averages, to remove that volatility but critic
have dismissed the idea. ‘It’s a worse answer,’ said Ken Wild, Deloitte’s global
‘Why is it better? Take a pharmaceutical company with some fantastic drug.
People are developing some mystery side effect. A major part of the revenue
stream goes, the share price starts falling. The company admits it will be some
years before they can put it back on the market and the share price collapses.
[Marking the value] down would be because of real economic effects.’
German private banking association, the Bundesverband deutscher Banken, also
called for a review of the fair value rules. ‘There are some indications that
mark-to-market valuation has increased the slide of prices, especially for
investments that were no longer fungible,’ said president Klaus-Peter Mueller,
also a Commerzbank AG chief executive.
UK companies have criticised the method too, with Hundred Group of Finance
Directors chairman Ken Lever and investment group Royal London Asset Management
voicing their concerns.
Bournemouth University professor Stella Fearnley, says in an article in
Accountancy Age this week that the board has been ‘intransigent’ on key