The use of the accounting, which involves valuing complex derivatives at
their market value, creates a dangerous cycle of overvaluation, academics have
The bubble, leading to a collapse of the sub-prime lending markets in the US,
has wiped out billions of pounds in share values on Wall Street and the London
The criticism will renew debate over the complicated accounting and may put
pressure on the IASB, which has been associated with the fair value method.
Stella Fearnley, former ICAEW council member and leading accountancy
academic, said the fair value model, one of the cornerstones of IFRS, promoted
‘bubble blowing’ accounting.
‘Fair value has taken the conservatism out of accounting and made numbers
less reliable. Instead of curbing business excess, fair value accounting has fed
the bubble,’ Fearnley said.
Previously, such derivatives would have been valued at historical cost or
market value, whichever was lower. Fearnley argues that this more conservative
accounting might have helped prevent the US issues.
Standard setters were angered by the suggestion, with one senior figure
describing the attack as ‘idiotic’ and ‘blaming the messenger’.
The IASB said its use of fair value was ‘often overstated’, said IASB
director of research Wayne Upton.
‘It’s worth noting that there is no perfect valuation model and that even
under historical cost, loans that are impaired are required to be written down.’
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