Fair value needs more thought

Radical plans by the Joint Working Group, a club of English-speaking standard setters, to introduce fair value accounting for such things as loans, swaps and derivatives have been increasingly met with resistance from many sides, not least the banking sector.

But, resistance to move ahead with the proposals has now come from Peter Holgate, senior technical partner at PwC.

Holgate, said: ‘We believe the whole issue of how financial performance is reported requires further thought.

‘The field-testing that we have proposed must be more than just a numerical exercise. The results would provide standard setters with guidance on the application notes that should be incorporated into the standard to ensure its consistent application.’

The JWG has proposed that financial instruments be included in a company’s balance sheet at fair value. The change is significant in that it requires the disclosure of fair value information but does not prescribe the measurement basis. This means that instead of just showing the profit gained when, for example, a derivative is sold, companies will have to book all gains and losses every year, which in turn is expected to greatly affect profits.

In July Ian Mullen, chief executive of the British Bankers Association, wrote to the International Accounting Standards Board to voice his criticism of the draft standard.

‘Short term market movements could have a dramatic impact on the reported profits or losses of a bank and would introduce volatility unrelated to the underlying expected future cash flows,’ said Mullen.

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Call to arms over fair value plan