FASB in midst of “religious war” on fair value

A member of the US accounting standard setter has likened attempts to bring
in fair value to a “religious war” in a speech with regulators this week.

Lawrence Smith, board member with the Financial Accounting Standards Board
(FASB), made the comment in a panel discussion with US audit regulator, the
Public Company Accounting Oversight Board, in the midst of a far ranging
consultation on the accounting principle.

FASB is pushing ahead with plans to bring in a full fair value measurement
model which would force banks to value their financial assets at market prices.
The proposals are being fought by banks who argue the rules would add volatility
to balance sheets.

Smith said he is not a “fair value zealot”, but was swayed to the model when
he saw the effect on deposits.

“That’s what threw me over the edge,” he said.

“Some people have advised us that we shouldn’t say this, but I’ll say it –
fair value, to some of us, is almost like a religious war out there and we are
trying to deal with that as best we can.”

FASB is attempting to harmonise its accounting rules with international
standards, despite clear differences in their approach to fair value. Whereas
FASB’s proposal measures assets measured at fair value, the international model
allows some loans to be valued at amortised cost.

The contentious proposals was passed by a single vote, with the five-member
FASB board split 3-2.

Smith’s comment will likely widen the gap between FASB’s proposal and its
international counterpart, the International Accounting Standards Board (IASB).
Failure to reach agreement on the standard will undermine US attempts to adopt
international rules.

The US Securities and Exchange Commission is currently investigating the
impact of international accounting rules on US markets. A key part of their
final decision will depend on the level of convergence between US and
international accounting rules, with fair value being among the most important
project on the table.

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