A Quick Fix for the Fair-Value Reporting Problem Would Be Counterproductive in the Long Term
The evaluation of fair value has never been an easy task and the complexities of this issue were highlighted recently in a flurry of articles in the financial pages of the UK press. The catalyst for the debate was concern in the banking industry about the large write-downs caused by marking to market in an increasingly uncertain economic climate. The solution, some writers have suggested, is for Europe to move away from reporting date-based measurements of the market price and instead measure the average market price over a set period.
While a constructive debate is welcome, this proposal is rather short-sighted. It could provide a quick fix for stressed banks but it fails to consider the bigger picture. There's no denying that the international accounting standards relating to fair value are fiendishly complicated. But at the same time the development of existing standards is the only viable option if we are to continue towards the greater goal of international convergence.
Times are changing and the International Accounting Standards Board's recently published discussion paper, "Reducing complexity in reporting financial instruments", is the first step towards a simplified formula. This approach ensures that fair-value reporting continues to give us a snapshot of reality--a requirement that goes to the very heart of transparency and good practice. Average pricing, on the other hand, would lead us to a fudge of the worst kind: there's a good chance that the asset would never have hit the set price, the value recorded would be historic rather than actual and it offers little certainty as a future indicator.
To diverge from the current reporting track would also threaten progress towards the international convergence of reporting standards. A dangerous precedent was set four years ago when the European Commission agreed to a watered-down version of IAS39, the current international accounting standard on the measurement of financial instruments, following vigorous lobbying by the banks. …