A Mark Overstepped: Never Mind the Debate on Whether Fair-Value Accounting Has Made the Sub-Prime Crisis Worse for Financial Services Firms, Mike Brooks Believes That a Convention Intended to Create Transparency Is Threatening to Do Quite the Opposite

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Back in the days when I was a trainee accountant, I was taught that a balance sheet was not an attempt to value an entity--the market would do that without the help of accountancy. For a long time, until the beauty and symmetry of double-entry bookkeeping finally clicked, I could explain to people what a balance sheet was not, even though I wasn't quite sure what it was.

No one with the kind of education that included a thorough knowledge of Latin conjugation and the leg-before-wicket law could, of course, be fully satisfied with the idea that a balance sheet was simply a list of unexpired cash expenditures waiting to be marched into the P&L account, where they would be snuffed out forever. No--I was sure that there was more to it than that. The exercises that I undertook, described in my workbook as "balance analysis and rationalisation", surely promised that the numbers had some meaning. And so I acquired the necessary understanding of these numbers, although items such as "other deferred items and sundry credits" remained somewhat hard for me to fathom.

Once qualified and in a job where I was required to explain the numbers to my non-accounting colleagues, I found I could do so with the fluency to be expected of a newly hatched ACMA. I also learned to spot the point in the conversation when their eyes glazed over, whereupon I would assure them that, as long as I understood the balance sheet, things would be fine. Everyone else could move on and leave all that stuff to me.

But all that has changed now. It seems that the balance sheet has morphed from being merely the result of a series of arcane arithmetical processes into something quite different. Increasingly, it seems that financial statements must have real meaning. In order to do this, they have to be based on something called fair value.

To a limited extent, of course, fair value has always had a place in the accounts. We know that stock, for example, has to be carried at the lower of cost or realisable value, but that is merely for the sake of prudence. This is a one-way process, and realisable (fair) value is to be used only when it is lower than cost. And, of course, we have always believed in substance over form but, again, the concept was to be brought fully into play only where the balance-sheet values were deemed to be overstated. …