When asked if Fair-Value Accounting was a good idea/concept, there was very strong support for it. Nearly 50% "strongly agreed" with the statement, while a further 40% agreed. Just 4% of respondents disagreed that Fair-Value Accounting is a good idea/concept.
Opinions changed a bit when asked if Fair-Value Accounting was a good practice. Nearly 40% strongly agreed that it was a good practice, while the same percentage "agreed". Those that disagreed were 17% of the responses.
We next asked whether the practice of Fair-Value Accounting had exacerbated the current credit contraction In this context, our respondents, even those who strongly support Fair-Value Accounting as a concept and practice, suggested some culpability.
Of respondents to our survey, two-thirds of those who agreed that Fair-Value Accounting was a good practice agreed or strongly agreed that it had contributed to the current credit contraction. Even 40% of those who strongly agreed that Fair-Value Accounting was a good practice, felt that it had exacerbated the current situation. Overall, 58% of respondents felt that Fair-Value Accounting has exacerbated the current credit contraction.
So, if there is a belief that Fair-Value Accounting is culpable, then is there merit to the concept of taking a "holiday" from it? What are the implications of such a move? Here our survey participants held little back. Comments were generally skeptical of a "fair-value holiday" like a "banking holiday". All comments are reported in a separate file (see link below), but some interesting quotes follow.
We asked the following: "In 1933, when US banks experienced runs on their liquid assets, a 'bank holiday' was declared through the Emergency Banking Act. Newly elected President Roosevelt called a special session of Congress which resulted in a mandatory four-day 'bank holiday'. This act provided for the reopening of banks after federal inspectors had declared them to be financially secure.
Should the international accounting bodies consider declaring a 'Fair-Value Accounting Holiday' when market conditions suggest a major displacement between 'value' and 'price' that render mark-to-market accounting reports misleading?
The concept would require that 'reasonable' mark-to-model prices be used for valuation, with some form of penalty for anyone who abused the process. The accountants, following a thorough review, could declare the institution's assets to be fairly valued using mark-to-model methods during such a 'Fair-Value Accounting Holiday'. Once liquidity conditions returned to normal, the holiday could be canceled.
Please share your reactions, comments and suggestions about this concept below. (This is not a recommended action, merely a request for discussion)"
"I don't think a holiday is necessary, just a clear policy statement of a) the difference between mark-to-market and fair-value and b) how fair value should and should not be determined." - Senior executive at one of the largest diversified financial services companies in their industry
"[A] Fair Value Accounting Holiday will be a way of hiding the issue beneath the carpet." - Mid-level manager at one of the largest diversified financial services companies in their industry
"Given the complexity of the m-t-m models a year's holiday would be required. More the mixed earnings/FV concepts cause the problems, not so much the FVs." - Board member from an average sized software/consulting firm
"You are now trying to play with supply and demand -- free markets are free markets -- and dislocations are events that take place for a reason (generally abuse)" - Mid-level technical specialist for one of the largest IT firms in its industry
"A Nobel prize awaits anyone who can provide a definition of "reasonable mark-to-model prices" that avoids arbitrariness and perverse-incentives." - Anonymous respondent
Click here to read all respondent comments, many of which were quite interesting.
The respondents represent diverse industries, of diverse size and are of generally high seniority in their firms:
We received 30 responses from invited participants and 5 additional responses from an open web link to the survey in the risk management section of LinkedIn or from the PRMIA website.
In addition to the above choices, respondents chose the "other" option with the following data: IT (2), Analytics (1), Consulting and Education (1), Consulting and Software (1), Audit (1), Clearing House (1).
Here are some links to recent news stories on the subject:
IASB defends use of 'fair value' accounting (Financial Director)
Accounting rulemakers defend use of 'fair value' (FT)
US SEC working on "fair value" accounting tips (Reuters)
AIG requests rethink on 'fair value' accounting (CNN Money)
The mark to market fiasco (Financial Post)
The FT editorial also asked whether some of the components of Basel II that are feared to be pro-cyclical in their design might also be suspended. Read my past comments on the pro-cyclicality of Basel II and the Social Amplification of Risk and "Pension Fund Animals" as they relate to the current credit contraction.
