ACCA Policy Paper on Fair Value
IASB should not abandon fair value accounting under political pressure, says global body
ACCA paper argues that 'mark to market' regime did not cause the banking crisis
A new policy paper from ACCA defends principles-based accounting methods, and calls for fair value to remain a key part of future global accounting standards.
Fair value has come in for more scrutiny and criticism recently than any accounting issue since inflation accounting in the 1970's, after banks and financial institutions placed some of the blame for the current crisis on so-called 'mark-to-market' valuation methods.
ACCA's paper points out that the scale of political disquiet may suggest that fair value affects more businesses than is actually the case in practice.
ACCA argues that the International Accounting Standards Board (IASB) should use the financial turmoil to establish a definitive conceptual framework for financial reporting, with fair value remaining a significant part of the mix.
Richard Aitken-Davies, ACCA President, says, "ACCA supports the concept of fair value and does not believe it was a contributor to the credit crisis. The fact that fair value is the only realistic method of accounting for derivatives and getting them on the balance sheet is evidence enough of its worth"
"The crisis has shown the urgent need for clarification of what accounts can and cannot do so that realistic expectations of different stakeholders can be met. But the IASB should never again be put in the position of having to abandon due process under political pressure."
The paper says the global financial crisis poses many questions for standard-setters, but any watering down of fair value risks spelling the demise of the roadmap towards convergence between International Financial Reporting Standards and US accounting standards. Global standards, which allow easier comparability of markets for investors will be of even more importance as the world economy recovers.
• Fair value accounting has significant advantages, but current
• illiquid markets have highlighted problems of attributing reliable values to financial instruments and derivatives
• Therefore IFRS should continue to employ a mixture of cost and
• current value measurement bases - overall ACCA see no case for the extension of the use of fair values in accounting standards at present, particularly in areas where markets are non-existent
• Historical cost could also be disclosed in the accounts if fair
• value is being used so that users can make up their own mind on the stated values of assets
• Accounts are intended to inform shareholders on the affairs of
• the company, not to provide a financial stability tool for regulators
Ukrainian ACCA members comment on the issues of fair value and economic crisis in Ukraine:
Andrey Tsymbal, ACCA member, Partner, KPMG in Ukraine:
Many benefits and complexities of fair value accounting of financial instruments and assets, as stated in ACCA publication, are, without doubt, relevant for Ukraine as well. For instance, issues of defining fair value of realty and obligations of many emitters are extremely difficult, as currently very few deals are being carried out with these instruments, and market is not liquid. But some aspects, described in ACCA publication, are not very relevant for Ukraine, for instance, complexity of fair value accounting of derivatives and obligations, as this practice is not widespread here. The more pressing issue, connected with fair value, for Ukrainian banks is definition of necessary amount of reserve for depreciation of credits by IFRS, taking into account economic crisis and significant devaluation of national currency.
Yulia Studynska, Assurance Partner and Leader of the Global Financial Services Industry Group with Ernst & Young:
“There is a number of advantages to fair value accounting and one of them is proper recognition of loans issued by Ukrainian banks under lower then market rates. In absence of fair value, the fact of issuing such loans will not be obvious for the users of financial statements and thus, the shareholders might not become aware of this fact. I support ACCA’s position on a need to enhance disclosures on fair values and models and inputs used. Also, provision of historical cost information will give users an opportunity to make their own decision on the value they want to consider.”
Sergey Kulyk, ACCA, Partner, Audit/CIP, Deloitte & Touche USC
«In Ukraine where stock market remained underdeveloped and number of quoted at stock exchange financial instruments was insignificant, a use of fair value accounting was limited to certain industries only (e.g. valuation of investment properties by real estate companies, biological assets by agricultural companies). Under these circumstances, the use of cost based approach (less potential impairment loss) was very extensive even in financial statements of Ukrainian banks and industrial enterprises. Thus, in my opinion, primary reasons for financial crisis in Ukraine were dependence on world economy and specific of macroeconomic situation in the country».
Fair value Accounting
Fair value accounting requires companies to mark their financial instruments at market prices, and can reflect bad news somewhat unmercifully. For example, if current price is much lower than the original cost, than large write-downs can appear on balance sheets.
These apparent losses can lead to a lack of confidence, especially if there is no 'market' to provide a value at all.
However, calls for its suspension are seen by ACCA as attempts to sweep the problems under the carpet. ACCA believes that more now needs to be done to underpin the credibility of fair value before the concept is further extended.
Advantages of fair value accounting:
• More transparent
• Provides clarity for shareholders
• Accounts for derivatives properly
• Provides additional information
• Financial reports less subject to 'earnings management'
For a wider discussion the financial crisis and how best to resolve it, see ACCA's earlier paper, Climbing out of the Credit Crunch, published in October 2008: http://www.accaglobal.com/pdfs/credit_crunch.pdf.