The American Bankers Association (ABA) is currently engaged in discussions with the Securities and Exchange Commission (SEC) regarding fair value accounting under the current market conditions. The two bodies are conducting the talks during two scheduled roundtable discussions this week.
Aubrey Patterson and Randy Ferrell, both representatives from the ABA, have voiced concerns over the relevance and reliability of fair value accounting. “If an entity’s business model is based on fair value, then fair value may well be the most relevant measurement,” says Patterson, who is a former chairman of the ABA and currently serves as CEO of BancorpSouth. “However, if the business model is not based on fair value, then using it as the basis of accounting can be misleading to users of financial statements.”
Ferrell, who is president and CEO of Fauquier Bankshares, adds: “The business model of most community banks is not based on fair value; instead, our business models are typically traditional commercial and retail banking – designed to fit the needs of our customers. Community bankers are very concerned about the complexity of fair value and about moving any further toward full fair value for all financial instruments.”
Patterson highlights the current market turmoil as an example of why fair value should not be the accounting model for all financial instruments. “The lack of typical buyers and sellers in the market indicates that the sellers believe their values are greater than the values the buyers are willing to pay. Yet, in some cases, those low ‘exit’ prices are being required for use in financial statements, resulting in distressed sale valuations,” says Patterson, who is also concerned about the impact of fair value on business combinations.
“The requirement to use fair value for business combinations (SFAS 141R) is having the effect of preventing mergers and acquisitions from occurring,” adds Patterson.
Patterson believes the SEC should resolve questions about whether “other than temporary impairment” should be recognised for financial instruments that are current, are not in default and are not expected to be in default. “The rules for OTTI must be examined with a fresh look, particularly for instruments that do not have identified credit problems,” she adds.