Better Disclosure Rather Than Stop Fair Value Accounting in Illiquid Markets
In a recently published special report, Fitch Ratings says that companies should not stop accounting for assets at fair value in illiquid markets. However, better disclosure is required as to the rationale, assumptions and sensitivities behind these valuations. “The most salient issue is not whether fair value per se should be used to report numbers, but how that fair value should be measured,” says Bridget Gandy, Managing Director in Fitch’s Credit Policy Group. “If values are being taken from markets that are not striking a fair balance between buyers and sellers, it is hard to argue that those values are fair.” The report comes at a time when volatile and unstable conditions in the financial markets have caused many reporting financial institutions to call for a relaxation of fair value accounting, allowing issuers the option of when to apply fair value measurement and when to apply historical cost. The ratings agency argues that the fundamental distortions such unfettered flexibility would permit would not engender greater investor confidence in financial reporting nor would it foster sound capital markets or sound financial institutions. More extensive disclosure will help investors to understand the limitations around the values reported. These should include indications of market prices versus expected cash flows, amounts companies expect to lose in real cash on assets written down to market values and how such assets will be funded whilst they are held for longer than originally anticipated.