There will be no let-up in the use of fair market values for banks’ holdings, even in illiquid markets, according to international accounting rulemakers.
The stance came in a draft paper published on Tuesday by an expert panel convened by the International Accounting Standards Board.
Although the group, consisting largely of representatives of banks and accountants, cannot mandate changes in the rules, it is likely that the guidance will set a new standard for reporting.
Fair value, or marking holdings to market prices, has become the subject of heated argument as the credit crunch has forced banks and other institutions to write down hundreds of billions in the value of their holdings.
Those against the practice claim that they have been forced into paper losses based on hypothetical sales, while advocates believe the clarity it has produced has helped banks and others face up to and deal with, the crisis.
“The key point is that the paper does stress that you cannot default to some ‘fundamental value’. You are required to find an estimate for the current price. That price might be thought to be irrational, exuberant or completely depressed but this makes it clear that is what you must use,” said Anthony Clifford, partner at Ernst & Young.
“Much of this is no more than a restatement of best practice. But for people who were not already expert, this guidance could be helpful.”
Among the paper’s recommendations is an extremely narrow definition of a “distressed” sale. Auditors have privately reported attempts by clients to widen the definition of distressed, or fire, sales. If they had succeeded, it would have allowed the asset holder to record higher prices than the last traded fire-sale price.
The paper was published alongside an update from the IASB of its response to other crunch-related issues raised by the Financial Stability Forum, a group of regulators and other officials.
Among the topics were proposals on “consolidation” – the accounting decision whereby holdings are put on, or kept off, the balance sheet. The IASB has produced a draft paper for consultation and will hold a series of round-table talks on the matter, beginning in London on Wednesday. It plans to produce a full proposal later this year.
The draft paper is designed to clarify the existing concepts underlying the rules, which are based on determining who controls the assets, and/or assessing who holds the risks and rewards of the vehicles.
“They are seeking high-level linkage of those two points and they’ve had to do it quite quickly. It will benefit from a bit more thinking,” said Ken Wild, a partner at Deloitte.