World Bank backs US fair value proposal

The World Bank has backed the US’ controversial fair-value proposal, and has
argued the proposed accounting treatment better reflects the risks involved in
bank finances.

Charles McDonough, World Bank vice president and controller, said the US
fair value proposals were “the best” measure of financial assets, but concedes
they may result in “higher volatility”.

“While [the proposal] will result in significantly higher income volatility
for many reporting entities, we believe this higher volatility reflects the
inherent risks of financial instruments,” he said in a submission.

“Ignoring or smoothing volatility does not mean that it does not exist.”

The Financial Accounting Standards Board (FASB), which sets US accounting
rules, is exhibiting proposals which extend the use of fair value – an
accounting treatment which forces companies to estimate asset values at market

The accounting treatment 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.

FASB is facing fierce opposition form the US banking sector including the
influential American Banking Association.

Meanwhile the board is also converging its accounting rules with
international accounting standards, set by the International Accounting
Standards Board (IASB), despite stark differences in their fair-value proposals.

The international rule, fast-tracked by the IASB 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.

McDonough said FASB’s proposal is “more comprehensive and sound”, and hopes
both boards can arrive at a converged standard.

Further reading:

finance chief rails against US fair value rule

allays EU fair value concerns

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