Monday, January 19, 2009

Fair Value, IFRS and Obama

Paul Volcker is the Chair of Obama’s financial advisory team and Chairman of the Trustees of the "Group of Thirty". Recently the Group of Thirty Working Group on Financial Reform published Financial Reform A Framework for Financial Stability. Volcker alsonhas an important history, as Chair of the U.S. Fed and as Chair of the IASB's oversight organization. he is thought to be a propornent of IFRS in the U.S. Below are a few comments by Volcker and an excerpt from the Fair Value section of the report. Fair Value was important enough to comprise one of 17 recommendations in the report.

Quotes from Chariman Volcker:

"The issue posed by the present crisis is crystal clear: How can we restore strong, competitive, innovative financial markets to support global economic growth without once again risking a breakdown in market functioning so severe as to put the world economies at risk? We hope that our proposals, which explicitly relate to the weaknesses that have become evident in the financial system over the last year, will be a useful contribution to the debate about needed reforms both by private financial institutions and by public authorities."

"The pervasive and deep-rooted financial crisis has amply demonstrated that our financial system is broken and it requires thorough-going repair,"

There were no representatives from the accounting community on the group that authored the report.

Excerpt from: FINANCIAL REFORM A Framework for Financial Stability

Fair Value Accounting
Recommendation 12:

a. Fair value accounting principles and standards should be reevaluated with a view to developing more realistic guidelines for dealing with less liquid instruments and distressed markets.

b. The tension between the business purpose served by regulated financial institutions that intermediate credit and liquidity risk and the interests of investors and creditors should be resolved by development of principles-based standards that better reflect the business model of these institutions, apply appropriate rigor to valuation and evaluation of intent, and require improved disclosure and transparency. These standards should also be reviewed by, and coordinated with, prudential regulators to ensure application in a fashion consistent with safe and sound operation of such institutions.

c. Accounting principles should also be made more flexible in regard to the prudential need for regulated institutions to maintain adequate credit loss reserves sufficient to cover expected losses across their portfolios over the life of assets in those portfolios. There should be full transparency of the manner in which reserves are determined and allocated.

d. As emphasized in the third report of the CRMPG, under any and all standards of accounting and under any and all market conditions, individual financial institutions must ensure that wholly adequate resources, insulated by fail-safe independent decision- making authority, are at the center of the valuation and price verification process.

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