Thursday, December 2, 2010

Fair Value Accounting Questions the Purpose of Banking

Via Accounting Web.
The issue of fair value for financial institutions is at the nexus of several issues affecting banking and accounting.  One is the differing views of the accounting profession and the financial industry on how to best measure the performance of a bank.  The second is the difference between the Continental European model of banking and the “Anglo-Saxon” banking model.  This affects International Financial Reporting Standards (IFRS), creating issues with the project to create convergence between GAAP and IFRS.  Finally there is the changed reality of how banks were regulated for most of the 20th century, and the rules they operated under in the first decade of the 21st century.
First, the accounting profession is affected by the relentless push by the FASB for expanding the use of fair value measurements in financial reporting.  The FASB essentially wants almost all bank assets to be measured at fair value.  The logic is simple:  banks are essentially portfolios of financial assets, and investors need to know what those assets are worth on the date of the financial statement.  To put it in football terms, the FASB wants to know what the score of the game is at the end of each quarter.   Sound simple, right? Not so fast…

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