The Institute of International Finance, a global association of financial institutions, has moved to clarify its position on fair value accounting after word leaked out that it wanted to loosen the standards, provoking an outcry.
In a statement, IIF managing director Charles Dallara said his organization has engaged in informal consultations over the last six weeks with market participants, central bank and finance officials, securities and banking regulators, auditing authorities, and accounting standard-setters on the application of fair value accounting in "illiquid conditions."
The IIF discovered that views differ widely on the practice. The organization's Committee on Market Best Practices plans to release a report in July on its findings, but at this juncture the IIF has determined that fair value accounting remains an essential element of the global capital markets, fostering transparency, discipline and accountability.
"Under current fair value accounting, there is already latitude to use mark-to-model approaches where observable market inputs are not available," said Dallara. "Appropriate use of such latitude is fully consistent with fair value accounting and has been embraced by accounting standard-setters."
However, he added that there is a need for clarification in several areas, including pricing inputs in illiquid markets. For some products in particular circumstances, he also sees merit in considering other refinements in valuation methodologies and greater flexibility in the transfer of assets between accounting categories. Still, Dallara acknowledged that applying new techniques, or greater flexibility, in the current circumstances would be fraught with difficulties.
"There is the risk that, however well-framed the proposals, the intentions of those advocating changes could be misunderstood by investors at this stage," he said.
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