Fair value convergence could split transatlantic accounting

Bridget Gandy, head of accounting research at credit ratings agency Fitch,
said that with UK companies already forced to use fair value methods under
international financial reporting standards (IFRS), the planned move by the US
accounting regulator risked making financial performance comparisons of UK and
US companies more difficult.

‘If you have two UK companies theoretically doing exactly the same thing,
they could be reporting similar numbers in totally different ways,’ Gandy said.

The Financial Accounting Standards Board (FASB) is preparing to issue an
optional fair value method after releasing a fair value measurement standard
last year but a Fitch report said: ‘While the fair value measurement standard
attempts to harmonise, the fair value option will result in more diversity of
measurement for the same financial instruments. This will make it more difficult
to compare companies.’

Gandy added: ‘It will be mainly financial institutions taking up the option
because it gets around hedge accounting issues.

‘Banks giving out loans will have the option to basically report on an
instrument by instrument basis. Because hedge accounting is notoriously tricky,
lots of US companies have had to restate their accounts.’

Gandy said that although FASB was due to finalise the changes ‘at any time’,
companies would probably not be allowed to exercise the option until 2008. ‘I
don’t think it will be effective before some time next year and companies may
not be allowed to take up the option early,’ she said.

Companies invoking the option will be required to carry the selected
financial assets and liabilities at fair value from then on.

Gandy said IFRS developer the International Accounting Standards Board and
FASB were trying to go back to basics, ‘working together to establish on a
global scale what will get reported as assets, liabilities, gains and losses and
how these factors are valued’ but harboured reservation about the manner in
which it was being done.

‘Things are changing but they are in a bit of a mess as they are changing,’
Gandy said.

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