Thursday, November 13, 2008

IASB Overseer Advises G20 to Work with Standard Setters on Fair Value Accounting

In a letter to the G20 Summit, IASB oversight chair Gerritt Zalm warned against changing fair value accounting standards without going through the IASB and FASB. In his view, the integrity of the entire standard-setting process would be compromised if fair value accounting standards were changed on an ad hoc basis outside of the process set up by the Boards. He also warned that the success in developing international accounting standards would be set back by any action that would weaken the independence of the standard-setting process.

He also noted that the IASB and FASB have established a high level advisory group that will comprise senior leaders with broad international experience with financial markets. The group will consider how improvements in financial reporting could help enhance investor confidence in financial markets in light of the ongoing financial crisis.

Mr. Zalm noted that, in response to the financial crisis, the IASB has issued guidance on the fair value measurement of illiquid securities that is consistent with the guidance issued by the SEC and FASB. The IASB noted that both US GAAP and IFRS will now permit entities to reclassify financial instruments that are in the form of securities from their trading portfolio, measured at fair value, to held to maturity, measured at amortized cost and subject to testing for impairment. But reclassification will not be allowed if the fair value option was previously selected. In addition, reclassification to loan category (cost basis) will be permitted if the intention and ability is to hold for the foreseeable future (loans) or until maturity (debt securities).

The chair endorsed the concept of fair value accounting, noting that the use of fair values has received support from both the regulatory and investor communities. The move to mark-to-market accounting in financial reporting has fostered transparency and a more timely recognition of risk exposures, and has contributed to sharpening market discipline. Investors generally support fair value because it delivers a picture of what is actually happening.

The chair emphasized that any further IASB action on fair value accounting must take into account the views of all stakeholders in order to develop accounting standards that provide transparent financial information to market participants. Stakeholders, particularly investors, have been very clear about this point in representations to the Board. Issues related to fair value accounting are complex, said the senior official, with consequences that demand careful evaluation. The area of fair value accounting is not necessarily conducive to immediate fixes.