Fair value critics turn on guidance

The American Bankers Association has said fair value rules for illiquid
markets are still not working, despite guidance from standards setters.

The body wants Securities and Exchange Commission should override guidance
from the Financial Accounting Standards Board on hard-to-value assets,
CFO.com
reported.

FASB issued guidance on the controversial accounting method, stressing that
fire sale prices do not constitute fair value. But it has also said that the
risk of a lack of liquidity should be built into cashflow assessments of
derivatives nevertheless, a move that the ABA says makes its guidance
‘circular’.

The guidance says: ‘Regardless of the valuation technique used, an entity
must include appropriate risk adjustments that market participants would make
for non-performance and liquidity risks.’

Edward L Yingling, president and chief executive officer of the ABA, said
that the inclusion of liquidity risk in modelling ‘brings the guidance full
circle back to distressed sale values.’

The body has been a persistent critic of fair value accounting, saying that
the fire sale prices used by banks in their books have accentuated the current
banking crisis.

‘Given the importance of this issue, the impact it has on the crisis in the
financial markets, and the seeming inability of the FASB to address in a
meaningful way the problems of using fair-value in dysfunctional markets, we
believe it is necessary for the SEC to use its statutory authority to step in
and override the guidance issued by FASB,’ Yingling wrote.

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