After a storm of protest from banking interests against the principle of booking asset values at a forced exit price for fear of a potential downward spiral in asset values, bankers in the European Union have eased their position on the fair value principle.Following a meeting held at the European Parliament Financial Services Forum here, banks are finally warming to the fair value platform with discussions on mark-to-model techniques for evaluating assets in illiquid markets.

“Now everybody is trying to find a magic formula for clear and fair valuations, especially where no market exists,” said parliament member Sharon Bowles.

The fair value implications are trans-Atlantic, as the issue is a central one in the eventual path to convergence and, ultimately, a single global standard covering fair value issues.

In the EU, the debate centers on equivalence between the U.S., with its FAS 157, and the EU, which is championing IAS 39 from the International Accounting Standards Board. The fair value project was added to the convergence agenda between the Financial Accounting Standards Board and the IASB in September 2005, with the IASB issuing a discussion paper on FAS 157 roughly a year later. There has been no date as yet for the release of an exposure draft.

“I think that the debate has moved on. The banks are finally accepting the IASB’s position for dealing with structured products, such as [collateralized debt obligations],” said Charles Cronin of the CFA Institute. “Now [banking] has gone forward to looking for greater guidance on what the model should be for valuations where there is no observable market. “

The IASB and FASB are currently being given input on the matter from such bodies as the Securities and Exchange Commission, the European Parliament, the European Commission, and the Financial Stability Forum — an organization that brings together national authorities to assess vulnerabilities affecting the international financial system.


IASB member John Smith explained that the current part of IAS 39 that deals with fair value measurement of financial instruments dates back some 10 years, when it took in elements from U.S. GAAP.

Smith added that one change came with the issue of gains on non-observable values of financial instruments. European banks view this as a competitive advantage for the U.S. banks, because it allows them de facto to recognize profits up front, while European banks cannot.

Another alteration came with the new 157 identifying three levels for measuring financial assets. This includes coverage for non-observable values of financial instruments, while IAS 39 only makes a distinction between “active” and “inactive” markets.

Smith explained that the credit crisis has dredged up questions on whether the current requirements in IAS 7 are sufficient to ensure that entities disclose information that reflects their exposure to risk, and to any potential losses arising from financial instruments, with the off-balance-sheet entities.

Now, the IASB’s aim over fair value measurement requirements given in IAS 39 is to simplify provisions covering financial instruments.

“In an ideal world, the final outcome would be a joint standard — but whether this will indeed be the case is still up in the air,” said Smith.

The comment deadline is September this year. No date has been set for the final standard.

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