Don’t kill fair value

Nicolas Sarkozy

Nicolas Sarkozy

The balance of power over world accounting is shifting. As global calls for
the suspension of fair value intensify as part of efforts to ease the financial
crisis, it is the politicians who appear to have increased their influence at
the cost of professionals, regulators and standard setters.

Right now the accountancy world is waiting to hear what the politicians will
do. Fair value won a reprieve at the weekend when French president Nicholas
Sarkozy appeared to drop his previously stated preference for suspending fair
value. Gordon Brown may well have been the moderate voice at the table which
tempered the French president’s enthusiasm for change.

But if French bankers renew their long-standing attack on fair value, then
Sarkozy may return to the issue.

No one among the accounting setters believes the issue is settled in Europe.

The situation is even more fluid across the Atlantic. Hank Paulson, the US
Treasury secretary, built into last week’s $700bn rescue bill a clause
reiterating the right of the US financial watchdog to place fair value on ice.
Paulson has, in effect, very publicly given himself a red button to push, if he
feels it is necessary.

The question is will he? Because if Paulson makes his move, the rest of the
world will have to follow in an accounting domino effect, calling a halt to fair
value in a bid to maintain competitive equality with US business.

Losing fair value would, in our view, significantly reduce comparability
between accounts and confuse investors even further. There is also a significant
risk that once removed it could not be retrieved and we have yet to see anything
like a viable alternative from any politician calling for change. That’s why we
say don’t kill fair value.

The International
Accounting Standards Board
and its chairman Sir David Tweedie continue to
stand by fair value. It is not believed that statements from counterparts in the
US have relaxed fair value but, rather, clarified the principle.

These four individuals ­ Brown, Paulson, Sir David and Sarkozy ­ hold the
future of fair value and accountancy in their hands. Sir David remains the main
bulwark against suspension and this may turn into the fight of his life as he
battles on multiple fronts to convince politicians that axing fair value is not
the answer.

Closer work with the US standard setter might well be necessary and not at
all surprising if they are to win the argument.

As EU commissioners indicate they will have no choice but to follow US
changes, it will be the battle across the Atlantic that will prove pivotal.

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Fiona Westwood of Smith and Williamson.