Friday, June 3, 2011

Shifting Stance on Fair Value?

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Is there a shift in attitudes toward fair value financial reporting?

Financial institutions continue to argue against fair value. But other perspectives are also being advanced.

Researcher Sanders Shaffer from the Boston Fed's Quantitative Analysis Unit reported recently on his analysis of a sample of large banks, undertaken in an attempt to measure the strength of the link between fair value accounting, regulatory capital rules, pro-cyclicality, and financial contagion. His conclusion?

The impact of fair value accounting on regulatory capital during the height of the financial crisis "was quite small and does not appear to be large enough to be considered the driver" of a procyclical dynamic.

In his working paper , Fair Value Accounting: Villain or Innocent Victim--Exploring the Link Between Fair Value Accounting, Bank Regulatory Capital and the Recent Financial Crisis (Working Paper No. QAU10-01), Shaffer concluded that the analysis "did not reveal a clear link for most banks in the sample, but rather suggests that there may have been other, more significant, factors putting stress on bank regulatory capital."

Meanwhile, SEC Chief Accountant James Kroeker continues to articulate the view, as he did in an interview with BNA over the summer, and reportedly did again at the PLI SEC Speaks conference Feb. 5, that it is time for the debate over fair value accounting to be over.

These are just a few threads in a very complex tapestry of issues surrounding fair value accounting. Do they indicate significant change?

---Susan Webster, managing editor, Accounting Policy & Practice Report 

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