FASB Chairman Robert Herz and AICPA Accounting Standards Executive Committee Chairman Jay Hanson separately acknowledged that many assets and financial instruments do not need to be measured at fair value on the balance sheet.

Robert Herz

Speaking at the AICPA’s National Conference on Current SEC and PCAOB Developments, Herz noted that banking assets might be better listed at historical cost for the purposes of banking regulation.

“While investors might benefit from seeing bank assets such as tradable securities and even loans reported at ‘fair value,’ regulators might deem cost accounting as the proper way of valuing certain assets for the purpose of assigning capital reserve requirements,” he said.

Herz noted that bank regulators and the institutions they regulate may be less enthusiastic about the use of fair value measurements because of concerns over potential procyclical effects, volatility in reporting, and impacts on reported capital, while many investors view such information as very important in understanding and evaluating the financial condition, risks, and performance of these institutions.

“In dire situations, bank regulators may be appropriately concerned that public release of data on severe losses and asset impairments could spark a run on a bank,” he added. “But investors would likely want to know the extent of the problems on a timely basis. Handcuffing regulators to GAAP or distorting GAAP to always fit the needs of regulators is inconsistent with the different purposes of financial reporting and prudential regulation.”

Separately, Hanson wrote in a comment letter to FASB that his committee favors an approach that would measure many, but not all, financial instruments on the balance sheet at fair value.

“AcSEC believes that the nature of a financial instrument, along with its established use in an entity’s business model, should impact the determination of whether that instrument should be measured and recorded on the balance sheet at fair value,” wrote Hanson. “In addition, AcSEC believes that the needs of the primary financial statement users, which may vary by the type of entity (meaning public company, private company, or not-for-profit organization), should be an important factor in determining the most meaningful measurement of financial instruments.”

He cited a 30-year fixed rate mortgage loan held to maturity as an example of a financial instrument that should not be measured and recorded on the balance sheet at fair value. In the case of a not-for-profit entity that receives a donor’s long-term unconditional promise to give cash, the contribution received should be measured at fair value at the time of the promise, but in subsequent reporting periods, the contribution would not be required to be re-measured at fair value under current standards.

Reaction to Herz's comments was positive from at least one observer. “Because of the financial crisis, there has been incredible pressure to water down accounting rules to allow people to put any value they want on their balance sheets,” said Espen Robak, president of Pluris Valuation Advisors, a consultancy that helps financial institutions value their illiquid assets. “What Robert Herz has hit on is a great way to get out of this for once and all. Most of the pressure for watering down the accounting rules has come from the banking industry. A lot of the securities they have been holding on their balance sheets have lost value. Instead of fudging that and changing the valuation rules, giving the impression that their balance sheets are stronger than they are, the banks can have two sets of books: one that is GAAP compliant and one with the valuation set by bank regulators akin to cost accounting. It would decouple the rules and allow the bank regulators to set bank accounting and bank capital requirements based on a different set of accounting requirements that wouldn’t be as procyclical.”