Fair Value Accounting Is Back -- Was It Here All Along?

04/04/2009 05:12 am ET | Updated May 25, 2011

In an interview with the FT earlier this week Frank-Walter Steinmeier, the Social Democrat candidate to be the next German Chancellor, has a new take on Fair Value Accounting. He criticized it and said it had encouraged risk taking and "pumped up balance sheets in ways that did not reflect a change in the real value of companies." In other words balance sheets are overstated -- and presumably therefore he supports the current write downs.

On the other hand, a posting earlier this month on HuffPo suggested that Fair Value Accounting be suspended for two years so that "banks would not be writing all of these assets down to artificially low levels" -- in other words there is a danger that balance sheets will be understated and that the current write downs are not appropriate.

I find the latter view particularly surprising as did many of the comments on that blog. I liked one in particular -- "So when I want to sell my house in Phoenix I should tell potential buyers that since in the future the price will again rise to some figure, that is how much I should get for it now? Somehow saying let's pretend on values is a good thing only makes sense if you're a lender with huge amounts of ill conceived loans in a down market."

Fortunately the references to Fair Value Accounting in the de Larosiere report were both more considered and more sensible than both of the above. The report, which was generally well received in the Press and will hopefully be well received by the EU and others, calls for a "wider reflection on the mark-to-market principle." It also calls for "the oversight and governance structure of the IASB [to] be strengthened" and for "the IASB and other accounting standard setters..[to]... agree on a common, transparent methodology for the valuation of assets in illiquid markets...." Some may think we have that -- but maybe not a methodology agreed by all accounting standard setters. It is a well balanced report; inevitably there will be areas where there are different views but at least in so far as it comments on Fair Value Accounting it does so in a considered and measured way. If only others do likewise.