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A fair fight

14 Oct 08

Fair value accounting is in the crosshairs of criticism from lawmakers in the US and Europe. The proponents of removing fair value argue that it has fuelled the economic crisis. ICAS does not share that view – we strongly believe such a move would represent a move to conceal the truth. On that basis, I thought you would like to see a letter which I have sent to the Prime Minister, the Business Secretary, the leader of the Opposition and the EU Commissioner for Internal Markets and Services

Dear Prime Minister

FAIR VALUE ACCOUNTING

I am writing on behalf of the Institute of Chartered Accountants of Scotland (ICAS), the oldest incorporated professional accountancy body in the world. ICAS operates under a Royal Charter, which requires us to act in the public interest, and to represent the interests of our members.

We are extremely concerned by the recent proposals in the US to permit the suspension of the fair value measurement rules for financial instruments, and the calls suggesting that similar steps should be taken by the European Commission or the IASB. We strongly believe that this suspension would not be in the public interest, and would be detrimental to the capital markets.

As a general point, we believe that transparent, reliable and comparable financial reporting is vital to the smooth functioning of the capital markets, and in the current market turbulence, confidence in financial reporting becomes even more important, since financial reporting can help investors understand recent events. Suspending any of the generally accepted principles of financial reporting would simply have the effect of undermining confidence in the financial reporting model, and therefore could contribute to worsening the current crisis.

More specifically, we strongly support the retention of the existing fair value measurement requirements for financial instruments under IFRS and US GAAP, which results in financial information that is transparent and comparable and is therefore useful to investors. While fair value accounting has been blamed by many as one of the causes of the current financial crisis, we would argue that accounting is merely a language which reports the underlying economics in a transparent and neutral way.

We recognise that the current illiquidity and volatility in the markets makes the determination of fair values for financial instruments more difficult, but fair value measurement still provides the most relevant information to investors. To use any other measurement basis would simply mask the real, current values of financial instruments, and past experience has shown that the absence of this information has in fact contributed to prolonged market turmoil.

There is sufficient guidance and experience of applying fair value accounting so that users of financial reporting have confidence that it is applied uniformly and consistently and are therefore able to understand the underlying economic reality. To suspend the use of fair values would be to abandon the principles of reliable, useful financial reporting and would have a gravely damaging impact on investor confidence.

Please do not hesitate to contact me if you wish to discuss this letter further.

Yours sincerely

ANTON COLELLA
Chief Executive and Secretary
ICAS
 

Have your say





Your comments:


Chris Pettman

Wednesday November 5, 2008, 17:20

You are so wrong, and so is the Institute. The "fair value" rules were never intended to operate in markets such as we have had in the last month. In the case of assets held other than to trade it makes no sense to take a write down to current price levels when there is no intention to sell, but to hold to maturity, provided the business is viewed as a going concern. Otherwise the balance sheet is valued on a liquidation basis. Slavish adherance to a rule book flies in the face of common sense. As Douglas Bader said (repudedly) "Rules are made for the obedience of fools and the guidance of wise men".


John Taylor CA

Thursday December 18, 2008, 17:58

I agree with the contents of the letter - the news is bad but please don't shoot the messenger. However I would have expected it to be signed by the President of the Institute rather than the CE&Sec.


Tags:

fair value | financial instruments | IASB
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