The FASB vs IASB fight has heated up substantially following comments by Paul Volcker, an advisor to Barack Obama and former chairman of the US. Federal Reserve Board, and former Chairman of the Trustees of the IFRS Foundation. The FASB wants to expand the use of fair-value accounting to all financial assets, including loans and deposits. This concept is opposed byUS bankers and also somewhat by the IASB, which prefers a milder version of fair value accounting. The battle that is shaping up between opposing forces could determine how much capital banks are required to maintain, and accordingly would determine to some extent how much leverage a bank could utilize.
The FASB proposal could result in the largest U.S. banks writing down the value of their loan portfolios.
Volcker said that treatment of financial instruments has not been resolved because of political pressure. Volcker also said “When you have global corporations operating around the world, and analysts looking at them from around the world, you want one accounting standard.”
The two accounting bodies have worked diligently toward convergence of the two different sets of accounting rules for the past five years. Disagreements are most significant around fair value rules for financial instruments, including derivatives, and rules governing what companies have to consolidate on their balance sheets. Many issues are close to being resolved.
The FASB likes a version of fair value accounting that forces loans and bank deposits to be marked to market values as is already done for banks trading books. Theis would not necessarily affect earnings, since some fair-value adjustments can be recorded in other comprehensive income which goes directly to equity.
The IASB prefers an approach that allows financial assets to stay on the books at original cost if the assets are held to maturity, i.e. for the long term. The IASB says it has no plans to re- open discussion of fair-value accounting, however the FASB and the IASB may eventually move to a middle ground.
Volcker prefers the IASB approach on valuing financial instruments. “You can’t have everything at fair value,” Volcker, said--“I’m not in favor of fair valuing bank loans because we don’t know their fair value anyway. It’s not consistent with the basic business model of commercial banks.”
In a similar episode, a few months earlier, IASB bowed to European Union demands to relax its fair-value rules, letting banks move some assets to a different part of the balance sheet so they wouldn’t have to be marked to market values.
Goldman Sachs Group Inc., the most profitable U.S. securities firm, has said that banks hide losses on loans used to generate investment-banking fees. In a Sept. 1 letter to FASB, Goldman Sachs described how banks lend at below-market rates to win equity and debt-underwriting deals, a practice known as “lend to play.” Goldman Sachs executives have argued that the firm’s practice of marking assets to market value helped it prepare for the credit contraction earlier than rivals.