PracticeAccounting FirmsFair comment on unfair criticism?

Fair comment on unfair criticism?

'The fair value accounting edifice is built on sand.' Those were the words from UK accounting academic Stella Fearnley and her Yale co-writer Shyam Sunder in an article for the Financial Times

As a result, they said, the convergence project underway at the International
Accounting Standards Board ‘needs a radical rethink’, because it seeks to set in
stone a global fair value system.

These are inflammatory words for the IASB which has suffered a number of
attacks on convergence recently from UK regulators and European politicians ¬
notably the ones that now play a role in giving the green light to new
standards. It’s safe to say IASB officials were unimpressed.

They will disagree with the reasoning. Fearnley and Sunder build a very
attractive critique of fair value based on a spiral argument. Valuation of
assets at market prices, feed into the accounts which are then used to make
investment decisions which bolsters the price which, to complete the circle,
feed back into the accounts. A nasty spiral they claim which perpetuates a
bubble. But what is the value of an asset if it isn’t the market value? That’s a
tricky one to untangle.

But it’s difficult to maintain a critique of fair value while claiming it
contributed significantly to the sub prime mortgage crisis, as Fearnley and
Sunder claim.

Their opponents will argue that the real fault lay with lenders who handed
over money to people who had little hope of paying it back. The crisis is
exacerbated by institutions who bought the debts without interrogating the full
risk, or knowing the history of the asset.

Clearly the debate over IFRS has some mileage ¬ but it is yet to turn wholly
against the new standards. Having said that, the IASB will now have to renew its
efforts at persuasion.

comment@accountancyage.com

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