US watchdog hears fair value is ‘much needed’

Thomas Jones, the British vice-chairman of the International Accounting
Standards Board (IASB) has told Accountancy Age that the board would be
working closely with the US standard setter, FASB, to work toward a cohesive
response to concerns over fair value.

His comments came as he attended a panel of financial professionals yesterday
before the US Securities and Exchange Commission in Washington DC to discuss
fair value accounting, which has become highly contentious after being blamed by
some for contributing to the global financial crisis.

‘We want to make sure that we and the FASB don’t go in different directions,’
said Jones, who did not speak at the meeting but was there as an observer. ‘We
don’t want competitive accounting.’

He said he hasn’t heard of a viable alternative to fair value accounting,
although he said: ‘That doesn’t mean to say we can’t improve.’ He noted that
participants in the roundtable had pointed out that the current standards allow
for more flexibility than is commonly known.

Proponents of continuing to use mark-to-market accounting acknowledged in the
discussion that fair value rules are not perfect and need ‘further work,’ but
argued that they are better than any existing alternative.

The roundtable meeting was held as part of a study of mark-to-market
accounting mandated by the financial bailout bill passed this October in the US

Some lawmakers, including Republican presidential candidate John McCain, have
called for a suspension of the practice because they say it unfairly writes down
assets to their current market value and harms already troubled companies. The
discussion yesterday centered on whether current American law can be interpreted
or amended to find useful asset values in illiquid markets.

Among the supporters of fair value accounting was Scott Evans, of the
Teachers Insurance and Annuity Association-College Retirement Equities Fund, who
said: ‘I think we’re on the right track. To give up now would be
counterproductive.’ Evans said fair value accounting provides much-needed
transparency for investors.

While supporters of the practice said fair value accounting only reflects the
reality of the marketplace, critics said the requirements drive distressed
companies into a downward spiral. Illiquid markets can cause assets to be sold
at fire-sale prices, and the liquidation value should not be confused with the
true economic value, they said.

The most prominent American standard dealing with fair value , FAS 157,
allows for the use of judgment and mark-to-model accounting in the case of
frozen markets and liquidations; but this provision has been under-used, the
meeting heard.

Damon Silvers, of the American Federation of Labor and Congress of Industrial
Organizations, said that marking-to-market seems to apply when the market is
liquid but can be naïve and misleading. He said fair value accounting breaks
down when trading slows and there is no market to mark to. The practice leads to
mark-to-model, and eventually “mark-to-mush” that you get further down the
line,’ he said. The SEC will hold a second roundtable discussion on the topic of
mark-to-market accounting on November 21.

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