VANCOUVER, Jan. 20 /CNW/ - Much of the controversy surrounding fair value accounting could be abated by the adoption of consistent high-quality global standards concludes a recent paper by the Certified General Accountants Association of Canada (CGA-Canada). Confusion also arises when financial reporting information is extended to purposes for which it was not intended, such as evaluating the capitalization of financial institutions.
The two key accounting standard-setting bodies - the International Accounting Standards Board (IASB) and the U.S. Financial Accounting Standards Board (FASB) - have significantly different standards related to fair value measurement. Those differences lead to uncertainty and scepticism and reduce comparability between financial statements.
"This matter is especially important in Canada where we will transition to International Financial Reporting Standards (set by the IASB) in 2011, yet our economy is heavily integrated with that of the United States which relies on standards set by the FASB," says Anthony Ariganello, President and Chief Executive Officer of CGA-Canada. He notes that a recent recommitment by the two standard-setters to remove differences between their respective interpretations of fair value accounting is a positive and welcome development.
Fair value accounting standards are not new. Essentially, they are used to value a firm's assets and liabilities based on market value rather than historical cost. But their application to the valuation of financial instruments has been debated heatedly since the onset of the financial crisis in 2007. The CGA paper notes that fair value accounting was not a cause of the crisis, but the crisis did illustrate several legitimate concerns - namely that fair value accounting exacerbates pro-cyclicality and increases volatility of financial statements.
"Some continue to scorn fair value accounting for the financial crisis," says Rock Lefebvre, the association's Vice-President of Research and Standards and a co-author of the fair value paper. "But we have to appreciate that the volatility on balance sheets is primarily caused by the risk management framework and investment decision protocols employed rather than the fair value accounting framework itself."
Lefebvre says concerns about fair value measurement are best addressed by converging and simplifying standards rather than resorting to inferior forms of financial measurement such as historical cost. He also notes that financial reporting and prudential reporting have different purposes. But confusion between the two has led national governments and special interest groups to apply heavy pressure on the independent accounting standard setters.
"If accounting standards are going to effectively meet their intended purpose, the standard-setting process must be transparent, independent and free of pressure from political or special interests," says Lefebvre. Fair Value Accounting: The Road to be Most Travelled is available at cga.org/canada.
Founded in 1908, the Certified General Accountants Association of Canada serves 73,000 Certified General Accountants and students in Canada and more than 80 countries. Respected accounting and financial management professionals, CGAs work in industry, finance, government and public practice. CGA-Canada establishes the designation's certification requirements and professional standards, offers professional development, conducts research and advocacy, and represents CGAs nationally and internationally.
For further information: For further information: Taylore Ashlie, Director, Communications, CGA-Canada, Telephone: (604) 605-5055, Cellular: (604) 307-0212, Email: firstname.lastname@example.org; Diana Sorace, Communications Advisor, CGA-Canada, Telephone: (604) 694-6700, Email: email@example.com