The Global Fair-Value Fight

The International Accounting Standards Board hunkers down into defensive mode as politicians push to suspend mark-to-market accounting.

The political stampede against fair-value accounting is intensifying outside the United States as much as inside it.

The uproar has U.S. and global standard-setters scrambling to come up with new guidance, examples, and meetings to refute the notion that their guidelines for marking assets and liabilities to market have created the credit crisis. It has also prompted the International Accounting Standards Board to revisit its fair-value rules to make sure they don’t stray too far from U.S. generally accepted accounting principles.

“The IASB is closely monitoring developments in the United States and other jurisdictions to avoid unnecessary inconsistencies in accounting treatments under [international financial reporting standards] and U.S. generally accepted accounting principles,” the board said in a statement released on Friday.

IASB and FASB have been working to meld their standards for the better half of this decade. Much of that work has seemed to tilt toward international financial reporting standards, since the majority of countries have adopted part or all of IFRS as their own. In fact, before the credit crunch ballooned to a meltdown on Wall Street and affected the borrowing abilities of nonfinancial companies, the United States was poised to also adopt the international rules. In August, the Securities and Exchange Commission voted to release a timeline for moving all U.S. publicly traded companies to IFRS, starting in 2010. It hasn’t published the roadmap yet, however.

To be sure, the SEC has been involved in other matters, including addressing the criticism of fair value. Last week, as lawmakers negotiated the terms of how the federal government would offload distressed assets from financial institutions’ books, the SEC and the Financial Accounting Standards Board offered clarification on how to apply the controversial fair-value standard that has been getting so much attention this year. In addition, on Friday, FASB’s staff proposed an amendment to FAS 157, that would spell out how to determining the fair value of financial assets in inactive markets. (The deadline for comments on that proposal is Thursday.)

Issued in 2006, FAS 157 tells companies to use a three-step hierarchy, with the levels based on how much market information is available, when they apply fair value to their securities. Last week’s SEC/FASB guidance tried to assure companies that they can use their internal models and assumptions to make their valuations for inactive markets. In other words, companies were given the go-ahead to use more judgment, an allowance that advocates of more principles-based accounting say is inherent in IASB’s rules.

The SEC/FASB statement was not enough to assuage the mark-to-market critics, however. Despite pleas from auditors, Congress still barreled ahead with the language in the bailout legislation that confirms that the SEC that has the power to suspend mark-to-market accounting. The law also calls on the regulator to conduct a study looking into the effect fair value has had on the marketplace.

Moreover, the guidance from the SEC and FASB may have inadvertently made European companies — in a financial crisis of their own — nervous about their global competition.


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