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February 15, 2010

European commentators wary of quick fixes to fair value guidance

By Nicholas Moody

UK and European commentators have urged against quick fixes for fair value accounting rules following requests for feedback by the International Accounting Standards Board (IASB) on whether to issue guidance in line with recent US proposals.

The US Financial Accounting Standard Board (FASB) wants comments by 1 April on proposed guidance for fair value measurement and impairment of financial instruments, following political pressure from US lawmakers.

The first proposal provides guidelines for making fair value measurements in inactive or distressed markets. The second looks at other-than-temporary impairments and is designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.

The IASB has subsequently requested comments by 20 April on the two FASB guidance papers before it considers issuing a formal public proposal. UK Accounting Standards Board chairman Ian Mackintosh is concerned that the short FASB deadline, demanded by US Congress, will not be enough time to consider all the ramifications.

“We have to resist these knee-jerk responses because we have just learnt that if you do these things in a hurry, you come up with all sorts of unintended consequences,” he said.

Last November the IASB was heavily criticised when it bypassed its due process to fast-track amendments to IAS 39 and IFRS 7 allowing for the reclassification of some financial instruments. The changes were made amid pressure from Europe to create a level playing field between IFRS and US GAAP.

“The problem is that we now have the idea that we should have a level playing field and what can be done in the US can be done elsewhere. So you are between a rock and hard place. It looks like the FASB will go ahead with this, and if they do what do the IASB do?” Mackintosh asked.

Mackintosh’s initial reactions to the proposals were “very cautious” and he pointed out that two of the five FASB board members, Thomas Linsmeier and Marc Siegel, opposed the second proposal.

European Financial Reporting Advisory Group (EFRAG) technical director Paul Ebling said EFRAG was still formulating its response to the FASB proposals but that the announcements were sending mixed messages.

Ebling said he thought that the IASB and FASB had decided it was important to fix the cause of the perceived problems through a medium-term project rather than focus on quick fixes addressing the symptoms. Yet these proposals, with their very short comment period, had the feeling of yet another quick fix.

PricewaterhouseCoopers (PwC) global IFRS financial instruments team leader Pauline Wallace said the IASB has rightly asked how its constituents felt about the US proposals given that there have been clear calls for a level playing field.

“It is really important to have joint thinking between the IASB and the FASB and not to split and create arbitrage around these issues,” she said.

Wallace said PwC was still trying to formulate its official view on the guidance proposals, but she had a lot of questions about how the fair value guidance would operate in practice.

“It does seem to be inconsistent with the principle of an exit price – you’re moving away from something that has been the fundamental principle of valuation,” she said.

She said this would also involve significant systems changes for banks.

Nicholas Moody


Calls for comment

The US Financial Accounting Standards Board and International Accounting Standards Board want feedback on two guidance proposals regarding fair value measurements and impairments of securities:

• FSP FAS 157-e, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, and

• FSP FAS 115-a, FAS 124-a, and EITF 99-20-b, Recognition and Presentation of Other-Than-Temporary Impairments

FASB comment period closes 1 April; IASB comment period closes 20 April.

Source: FASB, IASB

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