A recent survey by VRC of financial professionals’ views on Fair Value
Accounting (FVA) showed little confidence in FVA. A majority believe that market
turmoil and the collapse of active markets for many assets caused implementation
issues in FVA.
Respondents came down hard on Fair Value, with many even supporting a return to
historical accounting. On the question of whether FVA is beneficial, the answer
was, at best, mixed:
FVA has caused more problems than benefits
47.5%
FVA has merit and is about right
52.4%
And when asked if the collapse of active markets for many assets has caused FVA
to essentially become unsupportable, the response was clear:
Yes, market turmoil negates FVA validity
58%
No, market turmoil does not negate FVA
validity 42%
Of those 58% who said that FVA was flawed, many indicated that they would
prefer a return to historical cost accounting; i.e. a two-year moratorium on
fair value:
Yes – Revert to
Historical Cost Accounting 33.8%
No Reversion
37.9%
No Response
28.2%
UNCERTAINTY ABOUT BANK VALUATIONS AND FUND VALUATIONS
Survey respondents are unsure about the capability of publicly traded banks to
reasonably estimate their own level 3 assets - assets that are not publicly
traded and don’t have easily accessible values. A full 44% believed the bank
values were within an accuracy of 10% and another 40% thought those values were
as much as 30% off. Only 3% believed bank reported values are within 3% of an
accurate value, while another 12% thought the accuracy was within 5%.
Respondents believed 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 believed hedge fund and private equity values were only
within an accuracy of 10% and a full 49% thought those values were as much as
30% off.
When asked if mark-to-market should be suspended for the determination of bank
regulatory capital, (regardless of any fair value treatment for public financial
reporting) there was an exact 50-50 split:
FV should be suspended for
regulatory capital 50.0%
FV should not be suspended for
regulatory capital 50.0%
AUDIT REVIEWS
Many have revised their financial projections due to auditor skepticism. Of the
30% who revised projections, 14.5% specified it was for fair value estimates (FAS
157), 9.6% needed to change purchase allocation projections for FAS 141
purposes, and 19.3% needed to revise goodwill impairment (FAS 142) projections.
Respondents were also asked about the fees that their external auditors charged
to review a valuation, versus the valuation fee itself:
Audit review fee is the same as or more than the valuation fee
35.5%
Audit review fee is less than the valuation fee
64.5%
Survey participants also opined on who provides the best valuation of level 3
assets. Nearly 62% thought that the owner/purchaser working together with an
external valuation firm provided the best valuation. The responses broke down as
follows:
The survey was completed by professionals from public accounting, investment
banking, private equity, hedge fund, insurance, law, real estate, consulting,
valuation, and fund administration firms. For more information contact your VRC
representative. VR
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