Fair value still maligned by BV experts and other professionals

BVWireIssue #82-2
July 15, 2009

Fifty-eight percent of respondents to a recent survey conducted by Valuation Research Corporation (VRC) believe that market turmoil negates the validity of fair value accounting (FVA). Interestingly, of those who believed FVA was flawed and potentially not valid during market turmoil, some 34% suggested a temporary return to historical cost accounting as an alternative. (For questions on survey results, e-mail Jody Lowe at VRC). Additional findings reveal that:

  • Survey respondents are unsure about the capability of publicly traded banks to reasonably estimate their own level 3 financial assets—assets that are not publicly traded and don’t have easily accessible values. Forty-four percent believed the bank values were within an accuracy of 10% and another 40% thought those values were as much as 30% off. Only 3% believed bank reported values are within 3% of an accurate value, while another 12% thought the accuracy was within 5%.
  • The experts queried said that the accuracy of hedge fund and private equity valuations of level 3 assets, determined by the funds themselves, were even further off the mark. Thirty-six percent believed hedge fund and private equity values were only within an accuracy of 10% and a full 49% thought those values were as much as 30% off.
  • When asked if external auditors had caused them to revise their projections, 30% of respondents said “yes.” Of those who had to revise projections, 9.6% needed to change purchase allocation projections (FAS 141), 19.3% needed to revise goodwill impairment projections (FAS 142), and 14.5% had to revise fair value estimates (FAS 157).

Survey participants also opined on who provides the best valuation of level 3 assets. Sixty-one percent thought the owner/purchaser working together with an external valuation firm provided the best valuation. Only 19% of respondents believed the owner/purchaser working on their own was best and another 19% said an external valuation firm working on their own was best.

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