‘Fair value’ defended
3 Nov 08
Recent calls to suspend fair value accounting would deprive investors of the most relevant information on which to take financial decisions, according to the Institute of Chartered Accountants of Scotland
ICAS Chief Executive Anton Colella (right) has written to the Prime Minister, the Business Secretary, the Leader of the Opposition and the EU Commissioner for the Internal Market and Services to express the Institute’s view that “suspending fair value accounting would be detrimental to the capital markets and not in the public interest.”
Last month the US accounting regulator the Financial Accounting Standards Board and the International Accounting Standards Board (IASB) came under pressure over the rules on reporting assets at fair value (effectively, market value) because of the difficulty in assessing a fair value when markets in financial instruments are inactive. The argument is that market conditions are temporary and it would be unrealistic to write down assets as worthless simply because normal trading is suspended.
The two bodies relaxed the rules. The IASB’s statement permits reclassification, in “rare circumstances” of assets from the “trading” category (where fair value must be recorded) to “loan” or “debt” securities to be held to maturity (marked at cost).
ICAS Chief Executive, Anton Colella said: “Suspending fair value accounting is not part of the solution. The Japanese financial crisis of the 1990s illustrates this. It was compounded and prolonged by a sub-standard accounting framework and lax enforcement of that framework.
“Japanese accounting standards at the time allowed financial instruments to be measured at cost. This meant that the accounts of the banks and other financial institutions were able to hide the real impact of the falling markets.”
Colella says suspending any of the principles of financial reporting would undermine confidence in the financial reporting model, and could thus worsen the current crisis.
He adds: “We recognise that the current illiquidity and volatility in the markets make the determination of fair values for financial instruments more difficult, but fair value measurement still provides the most relevant information to investors.”
Details: Auditing and accounting, Page 66.
Colella’s letter is available on his blog by clicking here