A radical shake-up of how banks and insurers report the value of financial instruments has been proposed by the International Accounting Standards Board in an attempt to resolve an intense dispute at the heart of efforts to prevent a repeat of credit crisis. A simple principle is proposed for valuing a financial investment as a long-term holding or as a trading position. The IASB says that if a bank’s investment produces predictable cash flow like a government bond, it can be valued in accounts using an accounting mechanism that smooths out market fluctuations. If the investment’s cash flow is unpredictable, like some derivatives, it should be valued at current market levels. The proposals are a riposte to a transatlantic push to water down “fair value” accounting, valuing assets at market levels. Some banks and policy markers believe the “fair value” creates unnecessary volatility in earnings, contributing to a loss of investor confidence at the height of the credit crisis when plunging asset prices hit balance sheets.

This entry was posted by Paul Murphy on Wednesday, July 15th, 2009 at 3:19 and is filed under Capital markets. Tagged with IASB. Edit this entry.