EC advisers urge fair value rethink

Europe should change fair value accounting rules to halt a downward spiral in
asset values.

Three advisers to the European Commission – Carsten Zielke, Michael Starkie,
Thomas Seeberg, all members of the European Financial Reporting Advisory Group –
in the FT
this morning that they are concerned accounting practices are
playing a role in the current market turmoil.

Measurement of the value of derivatives is more likely to involve using an
erratic market price than using a ‘fair value’.

Companies should measure values over a six or 12 month period, and not a
reporting date value, the trio said.

Banks have plugged the gaps in their balance sheets by going to sovereign
wealth funds often, they said: ‘These sovereign wealth funds originate from
countries most of which are not democratic, that do not practise fair value
accounting and are therefore able to rush to the aid of the banks in question.’

There might be concern about such investors’ intentions, and a need to impose
corporate governance demands on them.

Ken Wild, a partner at Deloitte, said: ‘An average can sound superficially
attractive, but we are recognizing real economic events here, it is not just
market moves. If investors believe the assets are going to go up in value, they
can bid up the banks’ stock.’

Further Reading:

Read the FT

Related reading

Fiona Westwood of Smith and Williamson.