10 July 2008

ECMI conference report on “Fair Value and Accounting Standards”

The European Capital Markets Institute issued its report on the conference about fair value accounting. The conference raised more questions than it answered.

Mark Rhys, ICAEW, evidenced the lack of consensus and the controversial nature of accounting methods. He claimed that mark-to-market assumes liquid markets, and when liquidity dries up these rules may not be appropriate because market prices do not reflect fundamental information about risk. Rhys concluded saying that full disclosure is crucial to let users understand underlying assumptions of accounting principles.

Ulf Linder, European Commission, defended fair value saying that it got blamed to be the messenger for bad news but added that accounting standard were not the prime responsible of the crisis. He added that the Commission found no evidence that fair value accounting aggravated the economic cycle. He concluded arguing that alternative models of accounting decrease market transparency, thereby reducing market confidence in the reliability of data.

Paul de Grauwe, University of Leuven, concluded saying that mark to market show excessive confidence in the efficiency of financial markets, and advocated for measures to introduce inertia in market prices.

Fernando Restoy, Chairman of CESR-Fin, expressed concern at the lack of conceptual agreement on what constitute “fair value,” and said there should be limits to restrain excessive volatility in financial statements. He concluded saying that prudential policy should be countercyclical in order to cope with excessive swings in financial markets.

Philippe Danjou, AMF and Member of the IASB, stressed the need for simplicity, and fair value represented a clear step in that direction. The problem is, Danjou argued, that there is no agreement on what exactly is “fair value.”

Full report

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