Capital Markets

Tweedie: Don’t Blame Fair Value for the Crisis

Accounting did not exacerbate the credit crisis, says the IASB chairman. But the turmoil has pushed the accounting rulemaker to speed up its response.
Marie LeoneSeptember 17, 2008

In response this week’s Wall Street cataclysm — and the “dislocation in the credit markets” in general — the International Accounting Standards Board released an update for its current projects, along with a draft report on fair-value accounting. Both specifically address the question of valuation of financial instruments when markets are no longer active.

The group’s chairman, David Tweedie, pointedly commented on the IASB’s actions, and especially defended its fair-value methodology, which requires companies to mark to market corporate assets and liabilities. Tweedie noted that “accounting is not the cause of the credit crisis, but it is important that market participants should have confidence in the information presented within financial statements.”

Monitoring the performance of international financial reporting standards (IFRS), now being used by more than 100 countries, IASB has “has moved swiftly to deal with issues highlighted by the credit crisis,” he said.

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With regard to fair-value measurement in illiquid markets, IASB set up an expert advisory panel. Illiquidity became the word of the day on Monday when in short order, Lehman Brothers declared bankruptcy, Merrill Lynch sold itself to Bank of America, and insurance giant American International Group put out the word that it needed $40 billion in capital. (AIG since has been the object of an $85-billion federal bailout.)

In addition, IASB has been focused on how parent companies should consolidate entities onto a parent company’s balance sheet. It is particularly focused on the consolidation of special-purpose and structured investment entities. The project also addresses disclosure requirements for consolidated and non-consolidated entities.

IASB has prepared the first draft of a revised standard on off-balance sheet accounting and will discuss it during a series of roundtable events, the first slated for today. Other roundtables will take place in October. An exposure draft is expected out later this year, and IASB intends to issue a new rule in the second half of 2009.

Regarding IASB’s “derecognition” project, a joint effort with the U.S. Financial Accounting Standards Board, IASB is working to improve guidance on when a company may remove financial instruments from its balance sheet using securitization or similar techniques. On Monday, FASB released its new proposed securitization rules — revisions to FAS 140 and FIN 46(R) that eliminate qualified special purpose entities, and requires additional disclosures regarding the transfer and sale of financial assets. The so-called “Q” is the vehicle that many banks and corporations used to keep debt off their balance sheets.

IASB will discuss its reworked securitization rule during its October meeting, and likely will issue an exposure draft on the topic after it publishes the draft on off-balance sheet consolidation.

At its meeting today, IASB will consider a comprehensive package of proposed amendments to IFRS 7, Financial Instruments: Disclosures, as part of a post-implementation review of the standard. In its discussion, IASB is expected to consider papers on disclosures related to off-balance sheet risk, fair value measurement, and financial instrument risk, including disclosures related to liquidity risk. Later this year, the board will published proposed amendments to the disclosure provisions of IFRS 7.

In addition, IASB has started work on replacing IAS 39, Financial Instruments: Recognition and Measurement. The standard is generally considered complex and difficult to understand, according to IASB. Further, it contains several alternative ways of measuring financial instruments, which can lead to reduced levels of comparability among similar companies. Up for discussion — at least until Friday (Sept. 19), when the public comment period ends — is whether IASB can reduce the number of ways of measuring the instruments.

IASB’s target date for converging accounting standards with FASB, as described in the joint memorandum of understanding, has been expedited and now is set for 2011.