Capital Markets

Tempers Flare as IASB Looks to Change Fair-Value Rules

Will the international accounting standard-setter follow its American counterpart's lead, proposing hastily conceived changes to fair-value account...
Jason Karaian and Marie LeoneMarch 17, 2009

The pressure by bankers to suspend fair-value accounting rules is mounting, and now the build-up seems to be spilling over into the standard-setting process.

Last week, the U.S. Financial Accounting Standards Board was at the receiving end of vitriolic accusations made by U.S. lawmakers and bank lobbyists during a congressional hearing on fair- value accounting. Today, tempers flared at an International Accounting Standards Board meeting during a debate about whether to follow FASB’s lead regarding a proposed rule change to fair-value standards.

Sources close to the discussions told that staffers from both accounting boards met after today’s public meeting to discuss the final proposal that FASB is set to release later tonight. That proposal, which was issued after members of the House Financial Services Committee told FASB Chairman Robert Herz last week that the board must fix fair-value rules within three weeks or risk legislative intervention, is expected to change the way U.S. companies apply fair-value standards.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

IASB was getting ready to use the FASB document as a starting point for public comment on its own fair-value rule changes. Indeed, the international standards-setter would have issued a statement to that effect today, had it not been for a terse exchange among IASB members about the quality of the American proposal. As a result, IASB is taking another day to debate the subject during a special session slated for Wednesday.

Although the issue has raised the hackles of some members,  a “majority” of IASB members are expected to vote in favor of using the FASB proposal to kick-start the international comment period, sources familiar with the matter say. The IASB comment period likely will last 30 days.

The new FASB guidance, which is being rushed through the public comment process in 15 days, encourages companies to do more legwork than merely relying on the last traded price when they estimate the fair value of securities that are not actively traded. Specifically, the FASB proposal guides companies in how to gauge whether the market in which a financial instrument is traded is considered not active. It also intructs companies about how to determine if a transaction being used to estimate a financial instrument’s value is not distressed. Under FAS 157, which provides a measurement framework for fair-value accounting, financial instruments’ fair values cannot be based on distressed sales.

At the IASB meeting, board member James Leisenring skewered the U.S. proposal, arguing that FASB is allowing companies to “ignore” the traded price of a financial instrument in favor of using internal models to value the instrument. “It’s going to be the higher of price or model, that will be the measurement,” said Leisenring at the meeting in London today. “What are we going to do when the banks organize a 5000-bank comment letter that says, ‘Right-on baby, our earnings will go up, and we’ll have no more losses’?” he asserted.

Leisenring was responding to a suggestion made by IASB chairman David Tweedie that the board seize the opportunity to converge global and  U.S. standards by releasing the FASB proposal to its international constituents for public comment. Tweedie explained the concept in the following way: The board should “put a wrap-around around it, explaining that this is what FASB is doing … mentioning the longer-term [convergence] project, and asking [constituents] if IASB should do this as well.” Sources close to the board say the wrap-around proposal would likely ask constituents whether IASB should adopt FASB’s proposal verbatim; adopt parts of it; or adopt none of it.

Other IASB members characterized FASB’s proposal as being a compromise with auditors. Fearing lawsuits, some auditors have balked at attesting to securities valuations that were built more on management judgment than such valuations have been in the past, members said. “So you had to change the standard because the auditors [ignored it]?” asked IASB member Mary Barth. “What makes you think [the new FASB guidance] is going to help?” she asked FASB staffer Russell Golden, who was in attendance.

The perceived rush to issue the draft under pressure from U.S. lawmakers left international standard setters questioning whether the proposed rules were well thought out. In addition, the idea of using the FASB proposal as a surrogate for an IASB draft upset other board members. IASB member Warren McGregor rejected the idea, noting that, “I would ask whether the IASB should even consider whether [the FASB proposal] is worthy of mention … Should we even consider doing anything or should we ignore it?”

Philippe Danjou, another IASB member, registered confusion about the wrap-around document. “It’s not a discussion paper, it’s not an exposure draft … what is it?”  Leisenring chimed in: “Because we don’t know what it is, that’s why I wouldn’t do it. If I was going to do anything, it would be to write a paper about why we’re not doing it.”

Near the end of the debate, another board member quipped: “As distasteful as it is, we’ve got to recognize that there is a crisis on and we can’t totally ignore what another standard setter is doing … it would sound as if we were ignoring the rest of the world.”— Additional reporting by Sarah Johnson.