RegulationAccounting StandardsFair value critics turn on guidance

Fair value critics turn on guidance

Fair value critics say that rules for illiquid markets create fire sale prices, regardless of the intentions of the 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.

Further Reading:

Read the CFO.com
article

Related Articles

FASB publishes US leasing standard

Accounting Standards FASB publishes US leasing standard

2y Calum Fuller, Reporter
IASB calls for one year deferment on IFRS 15 Revenue from Contracts with Customers

Accounting Standards IASB calls for one year deferment on IFRS 15 Revenue from Contracts with Customers

2y Chris Warmoll, Writer
IFRS Foundation calls for delay to revenue recognition

Accounting Standards IFRS Foundation calls for delay to revenue recognition

3y Richard Crump, Writer
IFRS 9 leaves much open to interpretation

Accounting Standards IFRS 9 leaves much open to interpretation

3y Richard Crump, Writer
IASB scraps dual lease accounting model

Accounting Standards IASB scraps dual lease accounting model

3y Richard Crump, Writer
FASB votes to defer revenue recognition standard

Accounting Standards FASB votes to defer revenue recognition standard

3y Richard Crump, Writer
FASB considers delay to revenue recognition rules

Accounting Standards FASB considers delay to revenue recognition rules

3y Richard Crump, Writer
IASB pledges to maintain ‘strong’ bilateral relationship with FASB

Accounting Standards IASB pledges to maintain ‘strong’ bilateral relationship with FASB

3y Richard Crump, Writer