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November 14, 2008

The clash over fair value accounting

The US Securities and Exchange Commission (SEC) held two round tables this month to gather input for a study on mark-to-market accounting, which was mandated in the recent Emergency Economic Stabilization Act.

The first round table saw bankers and accountants conflict over the suitability of fair value accounting measures. The second heard panellists’ views on the independence of the standard-setting process, the effects of Financial Accounting Standards Board (FASB) Statement 157 Fair Value Measurement (FAS 157) on financial institutions’ balance sheets and its impact on 2008 bank failures.

Chairman of financial services consultant Secura Group and former banker William Isaac said in a written statement at the first round table that the FASB and the SEC should immediately withdraw FAS 157.

“I believe it is beyond dispute that mark-to-market accounting has been extremely and needlessly destructive of bank capital in the past year and is a major cause of the current credit crisis and economic downturn,” he wrote.

But PricewaterhouseCoopers US assurance managing partner Vincent Colman said fair value reporting was the best method for providing the level of transparency markets need to function effectively, despite any imperfections that it may have.

“Any fundamental change to fair value reporting runs the risk of reducing confidence among investors and other market participants, which in turn would likely restrict the flow of capital,” he said.

Defending independence

At the second round table, one panellist, University of North Carolina professor of accounting Wayne Landsman, defended the independence of the International Accounting Standards Board and FASB.

He said it was not advisable for any accounting changes to take place because of government intervention in the standard-setting process.

Landsman added that FAS 157 did not cause banks to write down their assets in 2008.

“The role FAS 157 played in contributing to these pro-cyclical effects is, in my view, highly overstated. At most, the contribution is incremental, bank assets became impaired and write-downs had to occur,” he said .

The SEC is due to publish the results of the study in January.

Nicholas Moody and Melanie White

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