The IASB under siege

In response to a chorus of critics, regulators on both sides of the pond have taken steps to relax the application of fair value. In the US, the passage of the Emergency Economic Stabilization Act in October gave the Securities and Exchange Commission the authority to suspend mark-to-market accounting anytime the commission sees fit. The Financial Accounting Standards Board also issued clarifications to Statement No. 157 allowing firms to rely more on their own judgment when valuing assets in illiquid markets.
In Europe, the top financial markets regulator in the continent, EU Internal Market commissioner Charlie McCreevy, called for an easing of fair value accounting rules for banks, as a way of allowing them to value toxic assets at historical cost rather than current market prices.
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 firms to avoid marking them to market.
The carve-out proposals were met with fierce resistance. Critics claimed that passing them would severely damage efforts at convergence in international accounting standards, and could make it difficult to compare financial results between companies.
The proposals were ultimately taken off the table, but in October the International Accounting Standards Board 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 amortised cost as opposed to fair value. The amendments more closely align the international standards with US rules and are more restrictive than the carve-out proposals.
IASB chairman Sir David Tweedie emphasised that the amendments were made in response to the requests of politicians across the continent.
“In addressing the rare circumstances of the current credit crisis, the IASB is committed to taking urgent action to ensure that transparency and confidence are restored to financial markets,” he said in a statement. “The IASB has acted quickly to address the concerns raised by EU leaders and others regarding the issue of reclassification.
Our response is consistent with the request made by European leaders and finance ministers; it is important that these amendments are permitted for use rapidly and without modification.”
The IASB also noted that the amendments were an effort to put European firms on equal footing with their US counterparts.
“In responding to the crisis, the IASB notes the concern expressed by EU leaders and finance ministers through the ECOFIN Council to ensure that ‘European financial institutions are not disadvantaged vis-à-vis their international competitors in terms of accounting rules and of their interpretation’,” the IASB said in a statement. GPs in the US say they doubt the SEC will go so far as to override the FASB to suspend fair value. Such a suspension is unlikely to happen in Europe either, for different reasons. In Europe, the transparency directive that instituted fair value accounting came from the European Commission, so any suspension of mark-to-market accounting would need the backing of the EU. There isn’t one equivalent to the SEC in Europe. The UK Listing Authority, for example, France’s Autorité des Marchés Financiers do not have the authority to tell firms in their countries that they don’t need to comply with fair value principles.
“The key is to have the flexibility to exercise judgment and to not be forced to default to a less appropriate measure simply because it has a market component to it,” says Mark Bergman, a partner at Paul, Weiss, Rifkind, Wharton & Garrison.
At this point, it might be difficult to do any more to ease the pain, he adds.
“Actions and reactions are taking place in the context of politics as much as anything else at this point, and it’s very difficult to see how regulators in this environment can say they’re going to lighten up on disclosure standards,” Bergman says.