CFA weighs in on the financial crisis and growing calls to rollback FAS 157

BVWireIssue #73-3
October 15, 2008

It’s no secret that many think that FAS 157 helped fan the flames of the current financial crisis (see: More blame for FAS 157 in current economic crisis?) while others assert that it confuses many valuation issues without sufficient guidance, especially on its seemingly counterintuitive valuation requirements. Indeed, just this week, in a letter to SEC chairman Christopher Cox, The American Bankers Association asked that the “SEC use its statutory authority to step in and override the guidance issued by FASB.” Another take: In a letter recently sent to Congressional leaders and the Securities and Exchange Commission (SEC), the CFA Institute Centre reinstated its position for an end to the calls for rolling back fair value reporting.  In brief, the letter notes that:

1) Ending fair value reporting will only serve to undermine the confidence of investors in our financial institutions and lead to a further crisis of confidence in our government and the regulatory bodies overseeing those institutions.
2) The process of stabilizing the global financial markets and reinvigorating liquidity starts with improving the transparency of financial institutions.
3) The causes of the massive asset write-downs we have observed have nothing to do with financial reporting, but everything to do with the need for effective stewardship.
4) Complaints about fair value arise largely in the context of their impact on capital adequacy. Rather than suspending fair value and thereby the transparency and relevance of financial information, perhaps the focus should instead be on flexibility in capital adequacy requirements in times of distress.

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