We not convinced by FASB’s Fair Value reforms: ICAEW

The UK’s largest accounting institute said it is not convinced both the US
and international fair value proposals are compatible.

The US Financial Accounting Standards Board (FASB) this week released its
package of accounting reforms for financial instruments, which is at odds with
international rules.

FASB’s proposals may force companies to carry more items at fair value,
unlike the International Accounting Standards Board (IASB) model, used by most
countries across the world, which uses a mixed-measurement model, with some
assets carried at amortised cost.

The ICAEW said it is not convinced FASB’s model. Fair value refers to the
accounting principle where items are valued and reported at their market price.
It was criticised for increasing volatility in markets during the crisis as
banks’ asset values plummeted in illiquid markets.

Nigel Sleigh-Johnson, head of the ICAEW financial reporting faculty at the
ICAEW, said it would take some time to understand all the “complex implications”
of the proposals.

“We do have some immediate concerns on the FASB classification and
measurement proposals, which introduce more fair value measurement into the
balance sheet and increase the use of Other Comprehensive Income (OCI) in an
attempt to provide both fair value and amortised cost information for financial
instruments held for the receipt or payment of contractual cash flows,” he said.

“Given the differences in classification and measurement between the FASB and
IASB approaches and potential difficulties in maintaining both detailed fair
value and amortised cost data, we are also not convinced that it will be
straightforward to reconcile the differences between the two approaches, which
seem more conceptual than presentational.

FASB and the IASB have until June 2011 to converge their two accounting
codes. The IASB is encouraging its constituents to respond to FASB’s proposal.

Further reading:

releases fair value proposal

exposure documents

Financial Instruments Exposure Draft

Related reading

Fiona Westwood of Smith and Williamson.