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“Fair value accounting has been accused by some of exacerbating the present financial crisis” IASB Chairman, Sir David Tweedie says in an article discussing the credit crunch. “Perhaps we should get a few points clear”, he added and explained that the crisis has been caused by bad lending which has then been scattered around the world by banking’s ‘originate loans and then distribute them’ policies.
Tweedie opposed to the alleged pro-cyclic effect of mark-to-market accounting. Accounts are supposed to reflect the current situation, he said, not the future one. Complaints that the valuation has been artificially low and will recover in the future therefore are not justified. “Ultimately, it is lack of trust that has caused the present market problems”, he said. “Picking a value that one hopes might be the value in a year or two is hardly likely to increase the trust”, he said. “Leaving these instruments at cost when everyone knows their value is impaired is an equally bad idea”, he added. “Fair value is probably the worst possible measurement system apart from all the others”
The current situation represents an essential lesson for managers in how to manage their risks, IASB board member John Smith added. “In order to manage risk they have to measure it”, he says, “and that is one thing that fair value requires.”
The interview is published in the IASB Insight