Canadian Banking Regulator Examines Fair Value Accounting from Investor Angle

Fair value accounting has been much in the news lately and, in my view, rightly so given the difficulty of valuing illiquid securities during the market turmoil. There is a need to get more clarity around the issue of fair value accounting in light of the ongoing market crisis, in the view of Julie Dickson, Canadian Superintendent of Financial Institutions. Her remarks were delivered at a recent Ontario financial services forum. Her office is the primary federal regulator of Canadian financial institutions.

While there are many reasons to support the concept of fair value, noted the official, there are enough concerns being expressed with fair value when markets are illiquid that the IASB should not just push ahead to adopt full fair value accounting to create so called simplicity, as the Board suggested in a March 2008 discussion paper. In clarifying the issues surrounding fair value, the expert panel being set up by the IASB will be very important before considering a move to full fair value, said the official, who also urged people to comment on the IASB discussion paper by the September 19, 2008 deadline.

According to the senior official, there is general agreement that more disclosure of fair value methodologies is needed when assets are illiquid, the so-called level 3 assets. There is also some understanding that accounting standard setters are not trying to disrupt business, but are instead representing the interests of investors, which is why they are currently not focusing on the unintended consequences of fair value accounting but on its strengths. The fact that the IASB is focused on investors is key to how this issue will evolve.

While the senior banking official is confident that the IASB will likely be more driven by investor interests than by the interests of financial institutions and regulators, she has called for more discussion of what is in the interest of investors. Against this background, Ms. Dickson recognizes the view that, while fair value of a securitized asset represents a point-in-time measure and does not reflect the eventual realizability of the income or loss attributed to the asset, investors, not aware of that, may react in ways that amplify distortions. Financial statements work to give investors confidence in the results that are reported and, when confusion and uncertainty occur, investors may not react rationally.