Fair value accounting shouldn’t be blamed for economic crisis: KPMG panel

Fair value accounting (FVA) is the innocent bystander hurt by the current financial crisis, not the villain perpetrating market volatility, panelists at a KPMG seminar said.
“Fair value is not responsible for where we are today,” panelist John Reucassel of BMO Capital Markets said. “To suggest otherwise is ridiculous.
“We are where we are today because people borrowed too much money and we’re going to have to pay that back.”
Reucassel was a member of the breakout panel that kicked off KPMG’s 17th Annual Issues Conference Regulatory Update held at the Metro Toronto Convention Centre.
Fair value accounting obliges companies such as insurers to measure the value of their assets or liabilities according to their “exit value” — that is, the current market price to sell an asset or transfer a liability at the time the value is measured.
Critics of fair value argue that the market values of assets or liabilities are unreliable in unpredictable markets such as this one. Some have argued this leads to a situation in which drops in market value are self-reinforcing, write-downs become common and assets are sold as a result, leading to further unpredictability in the market.
But blaming fair value for causing the current market difficulties is really just shooting the messenger, David A. Thompson of KPMG said in a separate panel on the new financial reporting standards.
Tricia O’Malley, the director of implementation activities at the International Accounting Standards Board, wasn’t impressed with some of the arguments of fair value’s critics. “I don’t think the accounting standards have ever caused anybody to sell something they didn’t want to,” she said.
“I will note in [passing that nobody was objecting to implementing [FVA] when the markets were going up. In fact a whole bunch of those banks [now at the centre of the market volatility] adopted it early.”