Business

Monday April 20, 2009

Panel zeros in on the relevance of fair value accounting

By DANNY YAP


FAIR-VALUE, or mark-to-market, accounting has been the target of political criticism as one of the contributors to the current global economic downturn.

But many accounting experts believe fair-value accounting remains the best viable option in the valuation of assets, although it needs to be tweaked to take account of non-traditional asset classes.

This was the conclusion drawn at the Association of Chartered Certified Accountants (ACCA) talk recently titled: “Fair-value accounting: Boon or bane for business?”

Panellist Ernst & Young executive director Chan Hooi Lam said despite the apparent “weakness” of fair-value accounting, it still represented the most effective method to reflect the economic realities of market conditions.

In discussion from left: Rita Benoy Bushon, ACCA head of financial reporting Richard Martin, Ong Ching Chuan and Chan Hooi Lam.

“Fair-value accounting is still relevant despite the current global economic turmoil, but will require some fine-tuning and regulatory control to allow for the adjustment of certain asset classes, such as illiquid securities and derivatives,” he said.

Some critics have suggested that fair-value accounting should be suspended and replaced by historical cost accounting, which they argue, is more reliable. But Chan contended that if fair value was suspended or replaced with some method based on historical costs, it would be a daunting task for investors to determine the current value of assets and liabilities.

Asked if fair-value accounting was the main cause of the global economic downfall, he said: “We believe fair-value accounting is not the main cause of the economic downfall or increased market volatility.

“Fair-value, in my view, is still relevant in financial reporting. As they say, it is better to be approximately right (by using fair values) than to be precisely wrong (by using the historical cost approach).”

Chan is of the opinion that financial institutions globally, especially those in the United States, had caused the financial crisis due to poor lending practices.

Another panellist, PricewaterhouseCoopers Malaysia senior executive director (financial services group) Ong Ching Chuan, concurred with Chan’s view that fair-value accounting should stay but needed some adjustment to price unconventional financial assets and derivatives. He acknowledged that in some ways, the financial framework created many years ago was “not up to speed” with the complex forms of financial instruments developed in recent years.

“Granted, there needs to be greater regulatory control and risk management of such sophisticated financial instruments or packages offered to investors, but we still believe the current accounting reporting system remains, by and large, robust,” he said.

Ong said accountants and practitioners could debate the mark-to-market ruling as much as they wanted but the current accounting practice and methodology remained the most viable option to-date.

“We just need to tweak the system to suit the current economic environment,” he said.

In view of the criticism levelled at fair-value accounting, the International Accounting Standards Board (IASB) is considering revising its rules and some European countries are even looking for exemptions from the international standards. And on the homefront, the reality of fair-value accounting will set in when Financial Reporting Standard (FRS139) Financial Instruments: Recognition and Measurement comes into effect Jan 1, 2010.

Minority Shareholder Watchdog Group (MSWG) chief executive officer Rita Benoy Bushon, who was another panellist, said while MSWG was not against fair-value accounting, there was a need to establish a valuation process that was more trasparent and fair to investors, especially minority shareholders, going forward.

“The investing public and shareholders of companies have a difficult time assessing the fair-value of their shares,” she said.

Undeniably, this uncertainty will not be favourable to anyone, including listed companies that want to go private as there will be much heated argument over the price of the shares. Overall, the accounting experts at the talk were in favour of maintaining fair-value accounting. They also agreed unanimously that adjustments were required to accommodate the valuation of illiquid assets.

How these assets will be fairly valued is anyone’s guess but much thought is now being given to the matter by world financial experts and regulatory bodies, which are working on a new and more effective financial regulatory framework to boost investors’ confidence.

Hopefully, this will be sufficient to avert another global economic crisis.

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