Fair value reporting, long a contentious issue, has become even more controversial now that most companies are required to value illiquid assets at market prices and record them on the balance sheet. The implementation of FAS 157 in the first quarter, coinciding as it did with the lingering effects of the credit crisis, prompted both Standard & Poor's and the International Institute of Finance (IIF) to recommend changes that, at the very least, would lead to clearer guidance and, at most, would relax or suspend the rules.
The subject is so controversial, in fact, that the IIF was forced to rescind its most divisive proposals following angry protests from some members, including Goldman Sachs and Morgan Stanley who oppose wholesale changes to FAS 157. A key area of contention was the global banking lobby's pitch to use historical prices instead of fair market prices in valuing assets, thus softening the blow to balance sheets during times of economic uncertainty.
Lucas van Praag, a Goldman spokesperson, dismissed the IIF's initial recommendations as "Alice-in-Wonderland accounting" that would let companies misrepresent assets by using inaccurate valuation data. So disturbed was Goldman that it severed its relationship with IIF last week, says van Praag. After the squabble among IIF members, the organization basically agreed with S&P that fair value accounting should continue, albeit with clarification of confusing points.
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Still, the debate is not likely to quiet down anytime soon. The SEC acknowledged the scope of the disagreement by announcing plans to hold a round-table discussion in July, even though Chairman Christopher Cox has been quoted as saying not much will likely change. And the International Accounting Standards Board (IASB) plans to bring auditors, regulators and company executives together June 13 in London to discuss the valuation of illiquid securities and related disclosures.
The IIF started the fiery debate in a confidential memorandum to the Financial Accounting Standards Board (FASB) and IASB in April, the details of which were leaked to the press last week. At issue are the larger write-downs required for illiquid assets under FAS 157. Further, IIF charges, as assets lower in value and the market for securities becomes increasingly illiquid, shares would be dumped at fire sale prices. Perhaps not surprisingly, some critics propose reinstating FAS 157 once the economy improves–and assets increase in value, making companies look more profitable.
The IIF and S&P aren't alone in their concerns about the effects of illiquidity on valuations. The Financial Stability Forum (FSF), an organization representing major national financial authorities, recommended in an April report that the IASB and FASB boards develop a single set of accounting and disclosure standards for illiquid securities "on an accelerated basis."
The overriding consensus, however, is that fair value accounting accurately gauges the fiscal health of companies. Attendees at it an S&P conference on May 15 were "broadly supportive" of the concept while recommending clearer guidance–a view that S&P shares, according to Neri Bukspan, managing director of credit market services. At the same time, Bukspan and S&P want to see "more useful, organized and forward-looking valuation information available for analysis"–rather than the boilerplate, scattered and sometimes incomprehensible information, Bukspar, often reported under current fair value accounting rules.
Even as the debate heats up, most parties concede that fair value accounting is here to stay. "We believe that fair value has the best chance of reflecting economic reality, but we also realize some of our clients are uncomfortable with fair value," says Robert J. Kueppers, deputy CEO of Deloitte & Touche USA LLP. "The real question, is, 'Are the values too low or are the markets too low?'"
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