Turmoil in the financial markets has negated the value of fair value accounting, according to more than half the respondents to a new survey.
The survey of financial professionals’ views on fair value accounting by valuation-related service provider Valuation Research Corp. found that a majority of respondents indicated that they believed that market turmoil and the collapse of active markets for many assets caused implementation issues in fair value accounting.
Of the 58 percent who said that they believed fair value or mark-to-market accounting was flawed and potentially not valid during market turmoil, almost 34 percent suggested a temporary return to historical cost accounting as an alternative.
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Survey respondents seemed 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. A full 44 percent believed that the bank values were within an accuracy of 10 percent, and another 40 percent thought those values were as much as 30 percent off. Only 3 percent believed bank-reported values are within 3 percent of an accurate value, while another 12 percent thought the accuracy was within 5 percent.
Respondents believed 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 said that they believed hedge fund and private equity values were only within an accuracy of 10 percent, and 49 percent thought those values were as much as 30 percent off.
Respondents were split when asked if mark-to-market should be suspended for the purposes of bank regulatory capital, with 50 percent believing it should be and 50 percent believing it should not be.
When asked if external auditors had caused them to revise their projections, 30 percent said yes. Of those who had to revise projections, 9.6 percent needed to change purchase allocation projections (as per FAS 141), 19.3 percent needed to revise goodwill impairment projections (FAS 142), and 14.5 percent had to revise fair value estimates (FAS 157).
Survey participants also gave their opinions 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 percent of respondents believed that the owner/purchaser working on their own was best, and another 19 percent said an external valuation firm working on their own was best.
The survey was completed in May by financial professionals from public
accounting, investment banking, private equity, hedge fund, law, real
estate, consulting, valuation and fund administration firms.
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