Fair value critics turn on guidance

Fair value critics say that rules for illiquid markets create fire sale prices, regardless of the intentions of the guidance

By AccountancyAge.com 14 Oct 2008

The American Bankers Association has said fair value rules for illiquid markets are still not working, despite guidance from standards setters.

The body wants Securities and Exchange Commission should override guidance from the Financial Accounting Standards Board on hard-to-value assets, CFO.com reported.

FASB issued guidance on the controversial accounting method, stressing that fire sale prices do not constitute fair value. But it has also said that the risk of a lack of liquidity should be built into cashflow assessments of derivatives nevertheless, a move that the ABA says makes its guidance 'circular'.

The guidance says: 'Regardless of the valuation technique used, an entity must include appropriate risk adjustments that market participants would make for non-performance and liquidity risks.'

Edward L Yingling, president and chief executive officer of the ABA, said that the inclusion of liquidity risk in modelling 'brings the guidance full circle back to distressed sale values.'

The body has been a persistent critic of fair value accounting, saying that the fire sale prices used by banks in their books have accentuated the current banking crisis.

'Given the importance of this issue, the impact it has on the crisis in the financial markets, and the seeming inability of the FASB to address in a meaningful way the problems of using fair-value in dysfunctional markets, we believe it is necessary for the SEC to use its statutory authority to step in and override the guidance issued by FASB,' Yingling wrote.