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Do Companies Deserve a Break from Fair Value Accounting?

The recent implementation of new fair value accounting rules and the corresponding crisis in the credit markets have combined to ignite a fiery debate on asset valuations in an illiquid market

By Staff Writer | Updated on June 03, 2008

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.

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