4/2/2008: EU advisers back fair value change

Excerpt from EU advisers back fair value change
Letter opposing mark-to-market accounting in the Financial Times from Carsten Zielke, Michael Starkie and Thomas Seeberg, members of the EFRAG TEG, which advises the European Commission on accountancy matters

Because risk aversion has increased so sharply that there are no longer liquid markets for the assets the banks hold, a representative index, such as the ABX Index, which tracks mortgage-backed securities, is used to measure the values of these assets. However, in these market conditions, this index does not reflect the fair or true value - the practice of marking assets to market prices that has led to billions in writedowns - since realistically, the risk of default is much lower than the index level implies.

Announcements of writedowns cause this index to fall further, which in turn means that other players need to make writedowns. Their share prices continue to fall, and they continue to find it difficult to access the regulated financial markets. There is actually no end in sight to this downward spiral.

Out of necessity, the banks plug the holes by raising fresh capital from the rich sovereign wealth funds. These sovereign wealth funds originate from countries most of which are not democratic, that do not practise fair value accounting and are therefore able to rush to the aid of the banks in question. Only once the shot in the arm has been received, are we suddenly concerned about these investors' intentions and anxious to impose corporate governance demands on them.

Are our current problems self-inflicted? Our view is that if assets are measured at fair value as at the reporting date, even if the requirements for a liquid and orderly financial market are no longer met, then this measurement reflects an erratic market price and not fair value.

This erratic market price is damaging the economy. In order to escape from this vicious circle, and to remain fundamentally self-sufficient in terms of its financial position, Europe must move away from reporting date-based measurement of the market price and start measuring the average market price over a period.

See also, the Financial Times' story on this letter.