Bankers: Fair Value Is Like Throwing Gasoline on a Fire

Claiming a "mixed attribute" accounting model provides a better picture of a company's business and earnings engine, bank trade groups blast full fair value.

The bankers’ reaction to full fair value underscores their fervor about an issue that is still up for debate. While FASB released FAS 157, Fair Value Measurement — the rule that tells companies how to fair-value assets and liabilities — in 2007, the board is still discussing fair value proposals — including how to fair value leases and pension obligations. What’s more, the idea of full fair value remains a part of the gargantuan effort by FASB and IASB to shape a conceptual framework that defines fair value for accounting purposes. “Nothing is happening real quickly to change those things,” says FASB chairman Robert Herz.

Nevertheless, Herz thinks bankers may be somewhat off-base about using a mixed-attribute model for financial instruments. He points out that currently, companies are required to take a write-down if asset value falls significantly, and carry whole loans at cost. “If the banking community is arguing that it doesn’t want to take that kind of write down, it is being a little Pollyanna-ish,” Herz tells

The ABA says that while impairment is a different issue, it agrees that items permanently impaired should be written down. However, the group does not believe other assets or liabilites should be written up or down for the purposes of fair value measurement.

Regarding the concept of measuring loans at fair value, Herz points out three counter arguments to the bankers’ claims: loans are a financial instrument and should be covered by any rule that affects those instruments; loans are not always held to maturity; and loans are increasingly parceled out through securitizations, which gives them a short-term feel. “The old originate and hold model has been replaced by the originate and distribute model,” contends Herz.

Meanwhile, investors are calling for more fair value. In a March survey that polled 2,000 investment professionals, the CFA Institute found that 79 percent of the respondents said that fair value requirements for financial institutions improve transparency and contribute to investor understanding of the risk profiles of the institutions. Meanwhile, 74 percent thought fair value requirements “improve” market integrity, in general.

In addition, in its 2007 report, “A Comprehensive Business Reporting Model: Financial Reporting for Investors,” the CFA Institute, argued that fair value accounting was “useful” in calculating whether loans would be repaid, “because fair values are likely to reflect the most up-to-date market assessments of that probability.”

On the flip side, the CFA Institute complained that the mixed-attribute model unduly burdens investors that rely on fair values to make decisions. That’s because reworking historical cost calculations depends on the quality of the reporting company’s disclosures. “Most, if not all, of this effort would be eliminated if the financial reporting standards were to require that companies record assets and liabilities at fair value at the inception with periodic revaluation.”


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