Fair Value Debate In Europe

Proposed fair value rule changes in Europe would have threatened the credibility of European accounting.  The reputation of the International Accounting Standards Board will also be tested during the debate.

 

Government proposals submitted to the European Commission in September would have in effect suspended fair value rules.  The proposals carved out sections of international accounting standards in Europe and would have allowed broad reclassifications of financial assets by European firms, allowing the assets to escape fair value accounting measurements.  The carve-out proposals were more far reaching than recent amendments issued by the IASB.

 

In October, the IASB issued amendments to IAS 39 and IFRS 7, allowing reclassifications of certain non-derivative financial assets to investment categories that are held at cost or amortized cost as opposed to fair value.  The amendments more closely align the international standards with U.S. rules and are more restrictive than the carve-out proposals.  With release of the amendments, the IASB noted concerns of EU leaders and finance ministers that European financial institutions not be disadvantaged to their international competitors in terms of accounting rules.

 

Because of the urgency of the crisis, the IASB was allowed to suspend normal due process and submit the amendments to the EU Commission for approval.  The EU Commission approved the IASB changes and pulled the carve-out proposals off the table.

 

Investor and accounting groups aligned in their disapproval of politicians making changes to the accounting rules in Europe.  If the EU carve-out proposals had been passed, the transparency and comparability of European firms would have been adversely affected. 

 

Some have been critical of the IASB saying their IFRS amendments were not necessary and the IASB was influenced by political pressure.  More importantly, the suspension of due process set a bad precedence.  On the other side, the IASB amendments were seen as justified because the changes narrowed the differences with U.S. GAAP and are consistent with the movement towards convergence.  In addition, proponents of the change believe the credit crisis required quick action making suspension of normal due process acceptable given the circumstances.

In coming weeks, the IASB and FASB will be working together to find long term solutions for accounting and reporting issues associated with financial instruments.

What is your opinion of recent actions taken by the IASB in response to concerns about fair value measurements?

- Paul Parks

Comments

[chartered accountant]

Nice article regarding lifestyle and money. Citizens deserves freedom and wealth. Instead of comparing to different countries people should focus on their own community.

[NannieSALINAS29]

People deserve wealthy life time and loan or student loan would make it much better. Just because freedom relies on money.

[blessing mhizha]

BLESSING MHIZHA TRAINEE ACCOUNATNT

For us to say that we have a sound reporting standards we need to make sure that our standards need not to be casted away because suddenly there is a problem on the market.What i personally i would recomend is to simplify the standard,we need to do away with the assumptions that are unrealistic.if there are any assumptions used to arrive at a value of an instrument then these need to be clearly documented.We need to ensure that there is comparabity on the world market to enhence the levels of investments.

[Paul Parks, IFRS.com]

In response to John’s questions below, Yes, Sir David Tweedie and the IASB have taken a lot of heat for the October rule change and suspension of due process. The fallout from this event is what led to the Chairman’s statement that he considered quitting.

The IASB responded in such a fashion because they felt that if the EU carve-out had been successful, the international accounting convergence movement would have been threatened. In a recent speech, Chairman Tweedie said, “We were trapped and felt we had to do it”.

To my knowledge, this has not happened before. If it happens again, the reputation of the IASB would be severely damaged. Independence and due process have to be the foundation of standard setting.

In a related note, the IASB is now exploring a fast track procedure to respond to future crises.

[Joe Jefferis]

Disclosure of fair values is good for investors who are able to understand that just because a commodity is priced higher one day, there is no assurance that it will sustain its high price.

Global markets needed to learn the definition of speculation. Since the commodity markets collapse over the past six months, global markets have seen the collapse of the myth that oil prices will never materially retreat. They did and now all the like minded investors are confused. Fair value is misleading because making a smart buy is not the same as knowing when to sell and make a profit. just because others sell and make a profit (market) doesn't mean you are smart too. You are still holding and the outcome of your purchase is unknown. No credit for smartness until you sell at a profit or loss. There must actually be an arm's length transaction.

GAAP is designed to account for profits, not manifest smart futures commodity buyers like IFRS seems to reward. IFRS may give you bragging rights at the club, but GAAP will help you pay for your membership by recognizing actual profits, not social gains.

The alternative is lower of cost or market. It eliminates any confusion about when you've made a profit and keeps the priority off "paper" profits that are worthless to the stakeholder.

Those who are interested are encouraged to read The US Department of Treasury's AN OVERVIEW OF ISLAMIC FINANCE Occasional Paper No. 4. from August 2006. It represents a unique perspective and identifyins underlying trends and issues for policy makers. We should not encourage regulatory adjustments to accomodate Islamic (religious) financial practices. US GAAP is non-denominational with regard to its application.

[John Anderson]

Thank you for this very informative article! I have been looking for an explanation for the context of the changes to IAS 39 and IFRS 7 for a couple of weeks and this is the first authoritative document I have found.

I assume that this is the matter which brought Sir David Tweedie to the point of threatening to resign as the head of the IASB; correct?

Not really having a frame of reference here, it would be helpful to know precisely how frequently this has happened to the IASB, or with preceding European, legacy, country-specific GAAPs. Or, as we hope to hear, learn that this is as extremely abnormal as was the US transition from the APB to the FASB in the early 70’s.

Thanks again for your terrific article!

John Anderson CPA, CISA, CITP

[Darla Sycamore (IFRS Exorcist)]

I believe this international coordination is a silver lining in the "credit crisis". Accounting rules on fair value accounting in these market conditions needed clarification and I have been impressed with the ongoing cooperation among SEC,FASB and the IASB on these issues.
There may be people in the USA that believe converting to IFRS will be an obstacle. In a sense it will be an obstacle to unilateral government changes to rules by any individual jurisdiction (without consultation). We are in a global society, much more than in the 1930s. We know what happened in the 30s when the US (and other countries) took a proctectionist attitude. It made things worse.

By the way congratulations to Mr. Obama - I wish him well in meeting all the challenges he faces.

I write a blog on IFRS issues and I am following this debate closely.

"The IFRS Exorcist"

[matthew]

thank u r information

[My Said BEN CHAD]

BEN CHAD
trainee chartered accountant
Morocco

I think that whatever the actions the IASB take in response to the current credit crisis, the problems related to exceptional circumstances such as measuring and disclosing fair value of financial instruments in markets that are no longer active, could not be avoided as long as the IFRS – US GAAP convergence process does not reach an advanced level.

I would like to mention here that even the definition of the fair value concept is not at present the same under IFRS and US GAAP (even though the IASB fair value measurement project forms part of the Memorandum of Understanding between the IASB and the FASB which sets out a Roadmap of Convergence between IFRSs and US GAAP 2006-2008).

My conclusion is this: international comparability will not become a reality till the world capital markets benefit from having one set of global standards that have comparability across the world and till local regulatory rules have less impact on the content and presentation of the financial statements prepared under IFRS.