Robert Herz, Chairman of the Financial Accounting Standards Board (FASB), spoke before a House of Representatives subcommittee on financial services to clarify and defend fair value (mark-to-market) accounting:
In recent months, there have been calls by certain parties to suspend fair value accounting and, specifically, the application of Statement 157. Some commentators have asserted that the fair value standards promote undesirable “procyclical” behavior by requiring write-downs of financial assets that may be exaggerating losses, further driving down asset values, affecting capital ratios, and tightening the availability of credit, thereby causing a further downward spiral in assets prices.
While sound and transparent reporting can have economic consequences, including potentially leading to procyclical behavior, it is not the role of accounting standard setters or general-purpose external reporting to try to dampen or counter such effects.
Highlighting and exposing the deteriorating financial condition of a financial institution can result in investors deciding to sell their stock in the entity, in lenders refusing to lend to it, to the company trying to shed problem assets, and to regulators and the capital markets recognizing that the institution may be in danger of failing and need additional capital.
Indeed, individuals and families may take such procyclical actions when they see falling values of their homes and their 401(k)s and decide to spend less and to sell investments in order to raise cash in troubled times.
But I think few would suggest suspending or modifying the reporting to individual investors of the current values of their investment accounts. Thus, to the extent there are valid concerns with procyclicality, these are more effectively and more appropriately addressed through regulatory mechanisms and via fiscal and monetary policy, than by trying to suppress or alter the financial information reported to investors and the capital markets.
Moreover, in our view, the standards are not the underlying source of the write-downs. Some of the most vocal critics of the standards have come from institutions that subsequently failed and have had to seek financial assistance from or been rescued by the federal government. As discussed in detail below, there is considerable evidence that underlying economic conditions are the fundamental source of those write-downs.
Comments