Reactions to an EDHEC Study on the Fair Value Controversy

A “call for reaction” was sent by EDHEC to international institutional investors and asset managers to compare investor views of amendments to the IAS39 and IFRS 7 standards not just with the conclusions of an initial EDHEC study, but also with the ambitions of these reforms prepared and adopted in great haste.

Author(s):

Noel Amenc

Professor of finance, director of research and development at EDHEC Business School, and director of the EDHEC Risk and Asset Management Research Centre.

Frederic Ducoulombier

Deputy to the school's director of research and head of EDHEC Asset Management Education.

Philippe Foulquier

Professor of finance at EDHEC and director of the EDHEC Financial Analysis and Accounting Research Centre.

The call for reaction received more than 800 responses and represents the first international survey on the relevance of the reforms carried out by the IASB under pressure from the European Commission. The results of this study - entitled "Reactions to an EDHEC Study on the Fair Value Controversy" - correspond to EDHEC's initial arguments. Fewer than a quarter of the respondents believe that these amendments are necessary and well suited to resolving the problems of bank solvency. Moreover, three-quarters of respondents believe that they are likely to lead to new problems. If many critics are arguing that fair value is partly to blame for the spread of the crisis, especially as a result of its pro-cyclicality, the EDHEC study shows on the contrary that this debate is biased because it is off target. Indeed, when the problem is analysed farther upstream, it becomes clear that the amendments to the standards are counterproductive. By making it possible, under certain conditions, to report at historical cost transactions that had previously been reported at fair value, these amendments reduce the amount of information contained in financial reporting. These changes are likely to hide the real risks to which companies are exposed and to increase the mistrust of the financial community. In addition, only 44.2% of those who respond to the call for reaction think that these amendments are likely to reduce pro-cyclicality. Even if fair value accounting leads to a cyclical weakeningjustified by the crisisof the fair value of the equity of financial institutions, it is not the accounting standard setter's job to estimate the amount of additional capital needed or to call for a curtailment of business activity. That is the role of the prudential regulators.

Type: EDHEC Publication
Date: le 18/12/2008
Research Cluster : Financial Analysis and Accounting

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