FASB in Midst of "Religious War" on Fair Value

This is a posting on a blog called "Finance Director" about a n article by Mario Christodoulou, Accountancy Age, 22 Jul 2010.

Attempts to bring in fair value standard "almost like a religious war" board member claims.

A member of the US accounting standard setter has likened attempts to bring in fair value to a “religious war” in a speech with regulators this week.

Lawrence Smith, board member with the Financial Accounting Standards Board (FASB), made the comment in a panel discussion with US audit regulator, the Public Company Accounting Oversight Board, in the midst of a far ranging consultation on the accounting principle.

FASB is pushing ahead with plans to bring in a full fair value measurement model which would force banks to value their financial assets at market prices. The proposals are being fought by banks who argue the rules would add volatility to balance sheets.

Smith said he is not a "fair value zealot", but was swayed to the model when he saw the effect on deposits.

"That’s what threw me over the edge," he said.

“Some people have advised us that we shouldn’t say this, but I’ll say it – fair value, to some of us, is almost like a religious war out there and we are trying to deal with that as best we can.”

FASB is attempting to harmonise its accounting rules with international standards, despite clear differences in their approach to fair value. Whereas FASB’s proposal measures assets measured at fair value, the international model allows some loans to be valued at amortised cost.

The contentious proposals was passed by a single vote, with the five-member FASB board split 3-2.

Smith’s comment will likely widen the gap between FASB’s proposal and its international counterpart, the International Accounting Standards Board (IASB). Failure to reach agreement on the standard will undermine US attempts to adopt international rules.

The US Securities and Exchange Commission is currently investigating the impact of international accounting rules on US markets. A key part of their final decision will depend on the level of convergence between US and international accounting rules, with fair value being among the most important project on the table.