Regulation

Is the Fair-value Fix Stalled?

Standard-setters are seeking input on how to tweak the rules in response to the credit crisis. But they don't appear to be getting any quick answers.
Sarah JohnsonNovember 26, 2008

For months now, standard-setters and regulators have been collecting criticisms and warnings about how to deal with fair-value accounting’s role in the credit crisis. The issue has brought their independence and integrity into question, amid intense pressures from politicians worldwide and from outspoken bankers to make changes now.

At the same time, though, rule-makers keep hearing from other constituents they should stick to their charters and conduct due process through thoughtful — if often lengthy — deliberations, and by reaching out for input from preparers of financial statements, auditors and investors. For those reasons, people hankering for any substantial changes to fair-value standards may have a long time to wait, long after the financial turmoil unwinds.

Indeed, during last week’s Securities and Exchange Commission roundtable on fair-value rules, even representatives of financial institutions seemed to have come around to the idea that expedited changes to the rules now will further erode investor confidence. And yesterday, during the second of U.S. and international standard-setters’ roundtables on the financial crisis, there were no new recommendations that standard-setters think could be handled in the near term.

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The participants — including Financial Accounting Standards Board and International Accounting Standards Board members, investor advocates, and representatives of accounting firms and rating agencies — for the most part all support the concept of fair value. But some of them requested technical changes. The requests included such things as making the decision to apply fair value to financial instruments revocable; calling for additional disclosures; and allowing banks to write-down debt securities the same way they record loan losses. There were also recommendations to put pressure on bank regulators to change their capital requirements so that they are no longer in conflict with the consequences of fair value. Banks have sold off assets whose fair value has sharply declined in order to meet keep their capital reserves at the required level.

None of the ideas are quick fixes, however — something that participants lamented during the roundtable. IASB board member Jim Leisenring shot down a proposal regarding the impairment of financial assets, saying it would take six months to two years for the boards to address. “I’m confused as to what comments are things we need to do with immediacy versus we know we got problems…and it’s going to take awhile,” he said.

And there’s also worry about acting too quickly, as critics have accused IASB of doing in response to threats by the European Commission. The board recently softened one of its rules, which resulted in financial institutions reclassifying some loans so that they can be marked to market.

“Fair value and how it is treated in coming months is likely to become a litmus test in the eyes of many — perhaps unfairly — as to the utility of the current standards setting models and governing processes,” said Richard Murray, chairman of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. He said the Center hopes the accounting profession will be the “main drivers” of changes to any rules going forward.

The board members said they are well aware of the controversy. “Clearly we’re cognizant of those kind of forces and pressures,” said FASB Chairman Robert Herz. The boards are working on setting up an advisory group that will help them maintain their independence.

Julie Erhardt, an SEC deputy chief accountant who attended the roundtable as a representative of the International Organization of Securities Commission, said regulators always keep independence of the standard-setters in mind. However, “securities regulators aren’t at the top of the pecking order in public policy and for countries as a whole,” she said. “That would be the heads of state.”

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