HSBC finance chief rails against US fair value rule

HSBC chief financial officer Douglas Flint has weighed into the accounting
debate surrounding US’s fair value proposals, warning the new rules “will weaken
the stability of the financial system”.

The London-based CFO believes the proposals, currently being considered by
the Financial Accounting Standards Board (FASB) which sets US accounting rules,
will add “significant irrelevant volatility” and could destabilise banks’
finances.

The FASB proposal would extend the use of fair value accounting, which
ravaged banks balance sheets in the crisis, as asset prices plummeted in falling
markets. Banks were forced to measure assets, including volatile loan-books, at
depressed market prices which obliterated much of their balance-sheet value.

“The significant extension of fair value accounting to most financial
instruments, including those for which fair values are difficult to estimate,
would also introduce additional measurement uncertainty into financial
statements reducing their reliability and introducing significant irrelevant
volatility into the measurement of shareholders equity and capital,” Flint said
in his letter.

“This accounting model will weaken the stability of the financial system.
There is concrete evidence of such concerns from the recent financial crisis.”

FASB is pushing ahead with its proposals despite fierce opposition form the
US banking industry including the influential American Banking Association.
FASB’s proposal is seen as a more transparent but tougher accounting model which
would force banks to estimate their assets’ market value and report this to
investors.

The letter comes as FASB attempts to converge its accounting rules with
International accounting standards, despite stark differences in their
fair-value proposals.

The international rule, created by the International Accounting Standards
Board (IASB) and fast tracked following pressure from Europe, incorporates a
mixed-measurement model with those assets held to trade, measured at fair value,
while those “held to maturity”, measured at cost.

Flint said while the international approach “is not a perfect solution” it
represents “a higher quality converged standard”.

“The IASB has sought to reduce the complexity of accounting for financial
instruments in its project in response to user demands for less complex and more
understandable information,” he said.

“HSBC is extremely concerned with the significant divergence between the IASB
and FASB proposals for financial instruments and that the two boards have been
unable to agree on a single view…In our view convergence towards one set of high
quality global accounting standards must remain a top priority.”

The proposals come at a time of instability for the five-member FASB board
which was rocked by the departure of chairman Bob Herz earlier this month, for
unknown reasons. Herz exercised his casting vote to get the proposals through to
consultation. The board would now be split 2-2 on the proposals, although plans
in place to increase FASB’s membership to seven members.

Further reading:

Tweedie
allays EU fair value concerns

FASB
in midst of “religious war” on fair value