Use fair value but disclose more - Fitch

A global ratings agency has urged companies to make better disclosures in
their accounting for assets at fair value in illiquid markets.

In a report published today, Fitch Ratings said that better disclosure is
required as to the rationale, assumptions and sensitivities behind these
valuations.

Managing Director in Fitch’s Credit Policy Group Bridget Gandy said that the
most salient issue is not whether fair value per se should be used to report
numbers, but how that fair value should be measured.

‘If values are being taken from markets that are not striking a fair balance
between buyers and sellers, it is hard to argue that those values are fair,’
said Gandy.

Fitch’s report comes amidst unstable markets in which several lenders have
called for the accounting rule to be relaxed, allowing issuers the option of
when to apply fair value measurement and when to apply historical cost.

But the agency argues that the fundamental distortions such unfettered
flexibility would permit would not engender greater investor confidence in
financial reporting nor would it foster sound capital markets or sound financial
institutions.

In the report, ‘Fair Value Accounting: Is It Helpful In Illiquid Markets?’,
the agency notes that while the values obtained through the Fitch notes that
fair values are helpful to analysts and investors when they represent realistic
and reliable indications of the net present values of future cash flows.

The agency says that more extensive disclosure will help investors understand
the limitations around the values reported. These should include indications of
market prices versus expected cash flows, amounts companies expect to lose in
real cash on assets written down to market values and how such assets will be
funded whilst they are held for longer than originally anticipated.

Further reading:

Accounting: It’s a fair cop

All the fun of the fair!

Fair value: standard scapegoat