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 the words of some investors, “Blaming fair value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick."
The fact that fair value measures have been difficult to determine for some illiquid instruments is not a cause of current problems, but rather a symptom of the many problems that have contributed to the global crisis, including lax and fraudulent lending, excess leverage, the creation of complex and risky investments through securitization and derivatives, the global distribution of such investments across rapidly growing unregulated and opaque markets that lack a proper infrastructure for clearing mechanisms and price discovery, faulty ratings, and the absence of appropriate risk management and valuation processes at many financial institutions.
Many of the complaints about fair value also seem to arise in the context of its impact on capital adequacy. As previously noted, while the consideration of the impact of fair value accounting on bank regulatory capital is a very important issue, it is beyond the purview of the FASB.
For accounting standard setters, the fundamental question about fair value accounting is whether it provides investors with the relevant information with which to judge current and potential investments. In developing the fair value measurement and reporting standards, the Board has repeatedly been told by investor organizations and other users that fair values of financial assets and liabilities are more relevant for their decision making than historical cost. Over time, historical prices of financial instruments become increasingly less relevant in assessing an entity’s current financial position.
Many investors have made it clear that, in their view, fair value accounting allows companies to report amounts that are more relevant, timely, and comparable than amounts that would be reported under alternative accounting approaches, even during extreme market conditions.
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