Big U.S. Banks Go Global in Fair-Value Fight

Perhaps tipping its hand on how the fair-value fight is going, a key trade group is shifting the industry's line of attack.

Having already argued that it's bad for banks and bad for investors, the Financial Services Roundtable is now asserting that a controversial proposal from the Financial Accounting Standards Board is bad for the FASB itself.

Expanding the use of fair-value accounting in the U.S. would not just conflict with convention in other parts of the world — it would jeopardize the FASB's other stated goal of converging U.S. and international accounting standards, the Roundtable wrote in response to the FASB's request for public comment on its proposed rule.

The it's-bad-for-FASB argument "is based on the lack of success of the preceding arguments," which have included entreaties to consider the logistical and financial impact that the proposal would have on the banking system, Scott Talbott, the trade group's senior vice president of government affairs, said in an interview. "So far everything else has fallen on deaf ears."

The letter, one of more than 200 filed since the comment period began three months ago, also flags the group's objections on policy and practicality grounds. But the main thrust of the letter is to hit the FASB where it hurts.

It reminds the FASB that converging its rules with those of its London counterpart, the International Accounting Standards Board, is a goal that has been endorsed by the Group of 20, an increasingly influential forum for central bankers and financial ministers of major economies. And it ends with this flourish below the signature line: "cc. Sir David Tweedie, chairman, IASB."

It's the kind of tactic clever teenagers have been using forever to win the reconsideration of laws laid down by their parents: don't focus on the merits of the argument; just point out that the rule is somehow inconsistent with something the parents have said before.

Of course, the FASB would be the first to acknowledge that its proposal, formally titled "Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities," is at odds with its goal of international convergence of accounting standards.

"Ideally, this proposal would have been issued jointly with the IASB and contain converged guidance," the FASB said on page two of the document outlining the proposed rule changes. "The goal remains for both boards to issue comprehensive improvements to this complex area that will foster international comparability of financial information about financial instruments."

But explanations for how that will be accomplished are less than satisfying.

The FASB and IASB have been considering the question of how to best account for financial instruments since 2005. In March 2006, the two boards issued a memorandum of understanding that clarified their intentions to work together and established a joint research project to study the matter.

But the boards went their separate ways in the past year. The IASB all but settled on a standard that is remarkable in its similarity to current U.S. rules — albeit a more streamlined version. The FASB decided to pursue the possibility of using fair value as the default standard for all kinds of assets and liabilities, rather than relying on the "mixed model" that allows banks to use fair value for loans held for sale, and amortized cost for loans and other assets held to maturity.

"The FASB's main objective is to develop accounting standards that represent an improvement to U.S. financial reporting," the FASB stated in its draft document, as it explained the developing divergence of the two boards. "What may be considered an improvement in jurisdictions with less developed financial reporting systems applying International Financial Reporting Standards may not be considered an improvement in the United States."

And though the FASB said it will consider comment letters and other feedback in concert with the IASB "in an effort to try to reconcile differences in views in ways that foster convergence while meeting project objectives," the boards may wind up too far apart in their thinking to make that plausible.

"Even if you thought neither system was better or ideal, at this moment to come out with this divergence is really kind of shocking," said H. David Sherman, a Northeastern University accounting professor who has written a book on fair-value accounting.

Convergence goals already were putting a stress on corporate executives and statement preparers, who have struggled to keep up with the rapid pace of rule changes made by both boards in their effort to align standards, he said.

"Not only is it a lot of change, it's also very costly for companies at a time when the world economy is in miserable shape and nobody wants to spend more money than they have to," Sherman said.

But the Roundtable remains firmly supportive of convergence.

"If you can show us a very clear reason why the U.S. and its business practices are so different from the rest of the world's, then we're happy to take a look at that — but that's a very high threshold if you start with the premise that we're in a global economy," Talbott said.

Of course it helps that for now, international rulemakers see things the same way the trade group does.