Fair value neither ‘fair’ nor ‘value’, says critic at SEC roundtable

BVWireIssue #110-3
November 16, 2011

The SEC wants to “get to the heart of the issues” surrounding the measurement of uncertainty, said its chief accountant, Jim Kroeker,in his remarks to the SEC's November 8 Roundtable on Measurement Uncertainty, the first in the SEC's Financial Reporting Series. “Getting back to what . . . the accountants used to call the tradeoff between relevance and reliability,” Kroeker told investors, preparers, analysts, auditors and other roundtable attendees, “something may be more reliable if I put it on the books at cost, but is that more relevant?” Responses, as reported by the summary FEI blog, included:

  • "I think investors look for certainty in the accounts, and it’s all a question about handling your uncertainty,” said Stephen Penman (Columbia Univ.) “When you accountants do your work, don’t mix speculation with what you know, because I need an anchor in the financial statements to build on, [so] leave the speculation to me."
  • "Putting on a façade of mathematical precision, whether it’s probability-weighted estimates or confidence intervals or anything like that—I am reminded of . . . the founder of fuzzy logic [and] the principle of incompatibility,” said Pinto Suri (Flaherty & Crumrine): “‘As a system’s complexity increases, meaningful statements lose precision and precise statements lose meaning.’. . .  Because as we start putting on all kinds of mathematical constructs on things that are inherently uncertain, you will just open up to more lack of confidence down the road.”
  • “Should disclosure be a substitute for recognition?” asked Gary Kaburek (Xerox Corp.). That is, “maybe something should be perhaps in the footnotes going forward [rather] than actually recognized and measured on the face of the financial statements, maybe that’s something long-term [to consider in standard-setting].” 
  • "Absolutely, I couldn’t agree with you more,” answered Suri. “One of the things we need is truth in labeling—fair value is neither fair, nor value; we need to get that on the table, get comfortable with that, the Earth’s not going to shatter. These items should be moved into disclosure, these are traditional add-ons that are useful to assess what management is doing.”
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