Backgrounder: The recurring fair value row

The call by banking groups in the US this week to drop the use of fair value
rules is not the first.

In fact banks in the US began questioning and criticising the rules shortly
after the credit crunch began.

The rules, which apply market values to assets which may be difficult to
value or appear de-valued as their trading floors thin, have been blamed for
exacerbating the issues of hard-to-price assets.

US banking groups, led by the American Bankers
Association are now lobbying to suspend the use of fair value accounting
rules which they because it requires them to record losses they don’t expect to
incur.

In April the UK’s own Hundred Group of Finance
Directors stepped into the fray.

At the time the chairman of the Hundred Group’s financial reporting committee
Ken Lever said: ‘The so-called market prices of sub-prime debt are low due to
the fact that there is no-one willing to buy in reality, much of this debt will
never default. The prices imply a level of default that is unrealistic.

‘The issue is that if you mark assets down, then the bank has a reduced
capability to lend, which impacts liquidity which, in turn, creates further
uncertainty leading to further reductions in market price and so it goes on.’

Companies have taken writedowns of more than £200bn in assets since the
credit crises began in the fourth quarter of last year.

But despite the widespread opposition to fair value, the standard-setters are
so far standing by the rules, saying that companies ought to
do extra work to obtain the ‘fair value’ of assets.

The IASB’s working group
that considered whether the rules needed an overhaul also found that most large
institutions knew how to apply the rules, and issued a paper to
seek ways of overcoming issues when markets thinned.

Some standard setters have also argued that companies who want to suspend the
rule may be seeking ways of covering their poor performances.