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91 Fed. Res. Bull. 26 (2005)
Fair Value Accounting

handle is hein.journals/fedred91 and id is 42 raw text is: Fair Value Accounting

Adapted from remarks by Susan Schmidt Bies,
Member, Board of Governors of the Federal Reserve
System, to the International Association of Credit
Portfolio Managers General Meeting, November 18,
Good morning. I appreciate the opportunity to partici-
pate in your Fall General Meeting. As my colleagues
at the Financial Accounting Standards Board (FASB)
and the International Accounting Standards Board
(IASB) will agree, fair value accounting poses
many challenges and has sparked significant industry
The subject of fair value accounting has been dis-
cussed in the United States for well over a decade.
Advocates of fair value accounting believe that fair
value is the most relevant measure for financial
reporting. Others, however, believe that historical
cost provides a more useful measure because it more
clearly represents the economics of business perfor-
mance and because fair value estimates may not be
reliable or verifiable.
So, which is more appropriate-fair value or his-
torical cost? Let me share with you the Federal
Reserve's long-standing position on this issue. As
a supervisor of the U.S. banking system, we want
to ensure that financial institutions follow sound
accounting policies and practices. We continue to
support improved transparency and enhanced finan-
cial disclosures, which promote market discipline
and provide useful information to decisionmakers.
We also support fair value accounting for assets and
liabilities used in the business of short-term trading
for profit, such as the trading account for banks. And
we support enhanced disclosures of fair-value-based
information as part of broader descriptions of risk
exposures and risk management. However, we
believe that the accounting industry should be very
careful before moving toward a more comprehensive
fair value approach, where all financial assets and
liabilities are recorded on the balance sheet at fair
value and changes in fair value are recorded in earn-
ings, whether realized or not.
The FASB recently issued a proposed standard on
fair value measurements that provides a general
framework for valuing assets and liabilities that are

currently measured or disclosed at fair value.t At this
time, it does not expand the use of fair values in the
primary financial statements. I would like to summa-
rize and share with you the Federal Reserve's views
on the proposed standard, which were provided to
FASB in a comment letter as part of the exposure
process.2 We see the proposal as a good first step
toward enhancing measurement guidance in this area.
However, as I will discuss in a moment, a number
of important issues warrant further consideration,
especially before dramatic moves are made toward
increased fair value accounting.
But before discussing these specific issues, allow
me to emphasize one important point. As a bank
supervisor, the Federal Reserve believes that innova-
tions in risk management are very important to the
continued improvement of our financial system. New
methods and financial instruments allow banking
organizations to improve their risk-management prac-
tices by selecting target levels of risk exposures and
shedding or limiting unwanted positions. Accounting
frameworks should improve transparency around
business decisions and outcomes without providing a
disincentive to better management of risk.
Reliability and Measurement
If markets were liquid and transparent for all assets
and liabilities, fair value accounting clearly would be
reliable information useful in the decisionmaking
process. However, because many assets and liabilities
do not have an active market, the inputs and methods
for estimating their fair value are more subjective
and, therefore, the valuations less reliable.
Research by Federal Reserve staff shows that fair
value estimates for bank loans can vary greatly,
1. The Financial Accounting Standards Board is considering pos-
sible changes to the proposed Fair Value Measurements Standard. The
final standard is scheduled to be issued in the second quarter of 2005.
2. A copy of the Federl Reserve's comment letter can be found
on the Financial Accounting Standards Board's web site at
www.fasb.org/ocl/1201 -100/31186.pdf.

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