The US Financial Accounting Standards
Board (FASB) is to launch several studies to improve guidance on
fair value accounting and disclosures.
The research is in response to recommendations
from the Securities and Exchange Commission’s (SEC) recent study on
mark-to-market accounting and recommendations from the FASB’s
valuation resource group.
The first project is intended to improve the
guidance used to determine fair values, particularly when a market
for an asset or liability is inactive. The second study will focus
on improving disclosure.
Mark-to-mark, or fair value, accounting
requires companies to value their assets based on their current
market price rather than measuring it to the historical price paid
for it. Banks claim the practice has resulted in massive
write-downs of assets in situations where no market exists.
The American Bankers Association, one of the
most vocal critics of the mark-to-market method, said it welcomed
the FASB’s decision to take a fresh look at mark-to-market values
in illiquid markets. However, another group of stakeholders has
stepped up calls for fair value measurement to be retained.
Profession urges caution
The Center for Audit Quality, CFA
Institute, Consumer Federation of America and Council of
Institutional Investors in the US wrote to federal policymakers to
warn retreating from fair value accounting may further undermine
the confidence of investors.
CFA Institute senior policy analyst Vincent
Papa told The Accountant the letter reinforced the message
that transparency needs to be decoupled from prudential risk
“We advocate for the expansion of fair value,”
Papa said. “We acknowledge there could be some steps taken to
enhance fair value, such as enhanced disclosures.
“There have been challenges people have
mentioned in regards to illiquid instruments and guidance being
required in relation to that and you take cognisance of those
implementation challenges that people face, but we broadly believe
fair value is relevant and the most economically meaningful
The FASB expects to complete the projects on
application guidance by the end of the first half of 2009 and the
project on improving disclosures before the end of the year.