Fair-value accounting has been under constant fire by the Financial Services industry since the beginning of the crisis, mostly on the basis that marking accounts at market prices was too conservative when the aforesaid prices were the result of panic selling.

While this embeds some truth, I already argued (G20 - part III, December 17th 2008) that panic prices should already be handled (excluded) appropriately with today's accounting standards, should the auditors, accountants and regulators buy themselves a back bone and exercise judgement rather than tick the boxes. The FASB just suggested the same point of view, with a politically-correct wording, in guidance (called FASB Staff Position) FSP FAS 157-e (March 17th 2009).

Other suggestions might be legitimate and could be a topic during the coming G20. However, one alternative suggestion (now official by the same standard body, that vehemently promoted fair-value until recently) should be clearly excluded: mark to acquisition price. This is in essence what FSP FAS 115-a, FAS 124-a, and EITF 99-20-b (March 17th 2009) proposes: if a company claims it plans to keep an asset for the long-term and claims it is more likely than not that it will be able to do so (i.e. will not have to sell it), then the losses on that asset will suddenly be buried under "impairment related to credit losses" and "impairment related to all other factors" (!). Might as well say goodbye to the transparency that fair-valuation was meant to bring. It is worth praising MM. Linsmeier and Siegel, who did not support the issuance of such FSB (their reasons are mentioned p.8 of the document linked), for good reasons.

Although avoiding the pro-cyclicality of fair-valuation might be desirable, abandoning fair-value is not a solution. An Economic Cycle Reserve, as suggested by the FSA (see previous post), would be explicit and transparent. Even if the computation of such reserve could be debatable, having a specific item in the accounts is quite different from including it into a bunch of "impairments related to all other factors." Let's hope the politicians will not give in the temptation of reassuring populations cheaply by hiding rather than solving the difficulties.