'Fair value' accounting, which requires businesses to value financial instruments and derivatives at current market price, has been blamed by some looking for a convenient scapegoat for the banking crisis.
Where markets dive or collapse altogether, fair value does indeed deal mercilessly with the bad news - and the resulting losses obviously impact confidence. However, to blame the messenger is a rather pathetic response to reality. The alternative is to sweep bad news under the carpet in the hope of hoodwinking users of accounts until better times arrive.
That is not to say that there is not considerable room for improvement in the financial reporting standards incorporating fair value. However, I do not see the justification for the intolerable pressure which was put on the International Accounting Standards Board (IASB) by some to suspend fair value until conditions improve.
Rather than ditching fair value, I believe the IASB should use the current crisis to clarify what accounts realistically can and cannot do and develop a definitive conceptual framework for financial reporting, keeping fair value as an important part of the mix.
Any moves to water down fair value also risks the end of convergence between International Financial Reporting Standards and US accounting standards, which will be more damaging in the long run for investors who want to be able to compare markets, particularly as the world economy recovers.
Your views on fair value and possible alternatives are, as ever, most welcome.
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