Margaret Doyle

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IASB sticks to its fair value guns

July 16, 2009

LONDON, July 15 (Reuters) –David Tweedie, chairman of the International Accounting Standards Board, has responded to demands that he revise the controversial standard on financial instruments by strengthening controversial “mark to market” accounting. He should be careful he does not derail progress towards global accounting standards in the process.

The existing standard, IAS39, allows banks and insurers to classify financial instruments and measure impairment in many ways. Tweedie wants just two measurement bases – amortised cost and fair value -  and one impairment method for amortised cost.

Mark to market (fair value) accounting was sorely tested in the financial fire, because it obliged banks and insurers to take writedowns, shrinking their capital bases and requiring some to dump assets. This depressed values still further, triggering more writedowns and forced sales.

Fair value accounting is based on the premise that markets are efficient. This was an article of faith in the finance industry but since the crisis broke it has been widely questioned, except in the Tweedie Standards factory.

The post-crisis argument against it is that fair value makes financial crises worse, while taking adjustments through the profit and loss has contributed to draining all meaning from the p&l account.

Tweedie’s response is for some gains and losses on equities to be recognised in “comprehensive income” instead, but some accounting firms fear that any step back would allow companies to hide the true position from outside investors. The purpose of accounts, after all, is to inform, not to allow management to “smooth” earnings.

Last year’s experience going into the banking crisis showed that shareholders will ignore management assurances if they don’t believe the numbers, whether audited or not.

The biggest risk is that Tweedie’s purist stance will splinter the fragile convergence of global accounting. The French are already uneasy about his theoretical purity, while the Americans are displaying their habitual reluctance to take dictation from others. Tweedie will need all his new-found diplomatic skills if he is to achieve convergence. We must hope that, should he get there, the result really does reflect economic reality in a way we can understand.

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  • About Margaret

    "Margaret Doyle is a Reuters Breakingviews columnist, based in London. She writes about investment banking. She has been a journalist for over 14 years. She has written for The Daily Telegraph and The Economist and presented various radio programmes for the BBC. She began her career as a consultant at McKinsey & Co. She has an economics degree from Trinity College, Dublin and an MBA from Harvard Business School, which she attended as a Fulbright scholar. She is a Conservative Member of Westminster City Council."
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