Black mark
May 15th 2008
From The Economist print edition
An accounting standard comes under the microscope
THIS has been a crisis of firsts. The first major crisis of the securitisation era; the first big test of the European Central Bank; and the first crisis of “fair-value” accounting, the set of standards which requires institutions to mark many of their assets to market value. Many blame fair value for causing the credit crunch, arguing that it can cause a downward spiral in prices by encouraging institutions to sell assets quickly and forcing them to take write-downs that do not reflect the “true” value of the underlying assets.
“Fair value is a big mistake,” says the boss of one big European bank. AIG, an American insurer, has proposed a change to the rulebook so that companies and their auditors would put only their own estimates of maximum losses into the profit-and-loss account.
A lot of the criticism is pure cant. After all, mark-to-market gains were happily accepted by banks before the bubble burst. The regime's more helpful rules are still being applied with gusto: for example, banks are able to reduce the fair value of their own debt issues if the credit spreads on them widen. Barclays, for one, recorded gains of £658m ($1.3 billion) on its own liabilities in fiscal 2007.
The fact that deciding on a fair value has been so tough reflects the complexity of the products as much as the state of the markets. Setting a price for derivatives that have been repeatedly repackaged, overcollateralised and subordinated is difficult in any conditions. “Four thousand pieces of a Porsche are more difficult to value than a Porsche itself and the sum of the parts does not equal the whole,” says Bill Michael of KPMG, an accountancy firm (choosing an appropriate car).
Some banks clearly also underestimated the risks of illiquidity. Industry insiders report that prudent institutions were running internal valuation models even when market prices were clearly observable: those that were not had to scramble to develop such models when markets seized up, causing delays in proper disclosure. Many banks failed to price the chances of illiquidity into the cost of internal funding for traders. And some institutions, bankers allege, were parking illiquid structured products in their trading books to attract a lower capital charge (regulators now plan to beef these charges up). That meant mark-to-market losses immediately showed up in their income statements.
The alternative to fair value—holding assets at historic cost—has few admirers. “Is it really better to keep losses and not to tell shareholders?” asks John Smith of the International Accounting Standards Board (IASB). It is striking that executives at American investment banks, which have long been subject to fair-value rules, largely accept the regime.
There are lessons to be learned. With marking to market, a wobble can quickly become a collapse, illiquidity makes prices harder to set and valuations are more susceptible to sentiment. That increased volatility needs to feature in executives' and risk managers' calculations.
Regulators also need to bear in mind that one of the central assumptions of the fair-value regime has not worked out quite as planned. If prices fall too far, as critics say they now have done, investors should be stepping in to buy the assets. But that is difficult when everyone is reducing their leverage. “Clients invariably say they would like to buy but they cannot because they own too much of it already or they own something else,” says Colm Kelleher, Morgan Stanley's chief financial officer.
Moreover, fair-value accounting appears to play a part in the upswing of a cycle as well as in the downswing. Research by Tobias Adrian of the Federal Reserve Bank of New York and Hyun Song Shin of Princeton University indicates that banks take on more debt when the mark-to-market value of their assets increases. In other words, fair value did not just worsen the bust: it also fuelled the boom.
impossível.
If fair values for a given class of assets or liabilities are reliable enough to let one company use, then everyone should have to use them.
O valor justo ainda é o centro das atenções no meio contábil americano. Os contadores ainda não conseguiram absorver as novas regras impostas pelo FASB (FASB Statement Nº. 157 -Fair Value Measurements) .
De acordo com observadores, em uma reunião ocorrida nos últimos dias no FASB, no intuito de esclarecer os três critérios de avaliação, especialmente em relação aos critérios de avaliação dos passivos, ocorreu que em determinado momento chegou-se ao entendimento que tamanha confusão estava formada que seria necessário a preparação de um resumo para que a norma pudesse ser compreendida. Já se fala em revisão da FAS157.
Aqui no Brasil ainda não sabemos como os órgão reguladores se preparam para "normatizar" o valor justo. Esperamos que a comunidade contábil esteja atenta e assuma uma postura crítica a exemplo do que vem ocorrendo na terra das "normas contábeis"
Em 2005, as autoridades federais concluíram que um consultor da Monsanto visitou a casa de um alto funcionário da Indonésia e, com a aprovação de um executivo sênior da empresa, entregou um envelope recheado de notas de US$ 100. O dinheiro era suborno para obter regulamentos ambientais mais brandos para as safras de algodão da Monsanto, segundo documento judicial. E teria ocultado o suborno com faturas falsas. Alguns anos antes, na era da Enron, acusações dessa natureza resultariam em indiciamento criminal. Em vez disso, a Monsanto foi autorizada a pagar US$ 1 milhão e evitar ação criminal ao entrar num acordo de monitoração com o Departamento de Justiça.
Numa importante mudança de estratégia, o Departamento de Justiça, outrora conhecido por processar grandes corporações, como o Arthur Andersen, adiou o processo de mais de 50 empresas suspeitas de má conduta nos últimos três anos. Em vez disso, muitas empresas, de boutiques a gigantes corporações, evitaram o custo e o estigma de se defenderem contra acusações criminais com os chamados acordos de processo diferido, que permitem ao governo arrecadar multas e indicar um monitor externo para impor reformas internas, sem julgamento.
(...) Os especialistas dizem que a tática pode ter enviado sinais errados para as corporações - a promessa, de fato, de terem um cartão para se livrarem da cadeia. A aplicação crescente de processos diferidos também sugere um roteiro que o Departamento de Justiça pode seguir nas investigações suscitadas pela crise hipotecária subprime. Os acordos de processos diferidos (DPA, na sigla em inglês) são mais controversos por causa do acordo de uma companhia de suplementos médicos para pagar US$ 52 milhões para a consultora de John Ashcroft, ex-promotor geral, como monitora externa para evitar uma ação criminal. Esse acordo suscitou inquéritos no Congresso e pedidos de diretrizes mais rigorosas. (...)
EUA mudam estratégia e fazem acordo com acusados de fraude
Gazeta Mercantil - 16/4/2008
(Gazeta Mercantil/Caderno A - Pág. 9)(The New York Times)
The final conclusion states "There is a need to continue to measure some financial instruments at amortised cost while others may be measured at fair value in order to reflect the underlying economic substance and business strategy of the company."
The paper highlights the difficulties in identifying the fair value of some financial instruments. It spends less time on the difficulties of amortisation both in terms of the ends value and path which reaches that point.
Concept of 'fair value' ignores stench of the real world.
By JENNIFER HUGHES
Financial Times - 14/2/2008 - Asia Ed1 - Page 16
What's in a name? Quite a lot when it comes to fair value accounting, it seems.
The International Accounting Standards Board has this week launched a confidential consultation on whether the rulemaker should drop the words "fair value" and instead use something more specific.
In a nutshell, fair value seeks to value assets and liabilities at their current value, rather than using the more traditional historic cost. Critics warn that the term implies there are willing buyers and sellers and can confuse investors when there is no trading and value is instead calculated using subjective "black box" models.
To many in the accounting world, fair value represents an attempt by ivory tower academics to shoehorn everything into a single neat methodology without regard for the messiness of the real world.
Anyone following the credit crunch will have heard about the struggles to accurately value illiquid instruments. This week AIG, the US insurance giant, announced almost Dollars 5bn of writedowns after it adjusted some of the assumptions it used to value certain securities linked to subprime loans.
Critics take the AIG example and ask just how reliable fair value is when simply changing the assumptions in a model can lead to such swings in value. Advocates claim that the current market value is more relevant to investors when making investment decisions. Leaving aside the trickiness of using historic cost on complex derivatives that have no initial cost, they say the question boils down to whether you'd rather trust management's potentially subjective view of the value, or an independent market price.
It is worth noting, too, that historic cost still allows for writedowns on impaired assets, so it is not unreasonable to assume at least a chunk of the current writedown woes would still be happening under the old basis of "lower of cost or market price".
Back to the IASB. The consultation is a quiet "field test" exercise among a select group of auditors, analysts and companies around the world about their interpretation of "fair value measurement". It is avoiding at all cost the wider debate on whether fair value should be applied in the first place.
Even with this limited scope, could the project defuse some of the current furore?
Part of the problem is that as fair value gets extended beyond assets with clear and liquid markets, what exactly constitutes market price is less clear. The US recently delayed plans to extend FAS 157, its fair value standard, beyond the realm of financial instruments after being warned that many had no idea how it would work in practice.
FAS 157 is based on a single definition - exit price, or the price at which you could sell the asset or liability. There is of course a buyers' view, or entry price, and in some cases the two can produce very different numbers. IFRS has elements of both.
When the IASB consulted on switching to a single US-style exit price interpretation back in 2006, the mere suggestion provoked an uproar. Which in turn suggests that responses to the current consultation will lean towards dropping the single term in favour of defining exactly what is meant.
Would a name change alter this debate?
On one level, it would remove critics' heartfelt complaints that it is implicitly hard to argue against something called "fair". It might also help investors and those outside the profession understand the concept.
But for the critics, I fear that which we call fair value by any other name will still stink as badly. There is a lot of mileage in this debate yet.
A própria viabilidade financeira e comercial do novo sistema é um outro ponto importante. Sistemas sobre trilho são, em regra, deficitários, se contarmos apenas com as receitas tarifárias. Entretanto, esse cálculo está errado, pois tais sistemas viabilizam-se pela receita fiscal acrescida em função da dinamização econômica da área atendida. Eles costumam valorizar terrenos adjacentes, desde que sua implantação seja lastreada em um projeto urbano que agrega valor, prevendo um adensamento controlado. No Distrito Federal, já temos o exemplo do metrô, cujo déficit é uma falácia contábil, pois as receitas com a venda de terreno de Águas Claras e mais a arrecadação fiscal de toda a área uma vez construída asseguraram, em um fluxo de caixa de dez anos, o equilíbrio financeiro do empreendimento (incluindo os déficits operacionais).
O estudo feito pelo BNDES/Coppe para mensurar o ativo intangível das empresas recomenda a elaboração de um relatório de intangíveis a ser incorporado aos relatórios anuais das companhias. No Japão, mais de cem empresas acoplam essas informações ao divulgar seus resultados anuais, apesar de não ser uma medida obrigatória. No Brasil, o grupo Suzano já divulga essa informação.Durval Soledade, diretor da Comissão de Valores Mobiliários (CVM) (...) recebeu bem a idéia, adiantando que a mensuração dos intangíveis vem sendo uma preocupação da autarquia, mesmo sabendo das dificuldades de normatizar a questão.
"A SEC [a comissão de valores mobiliários dos EUA] está gastando milhões de dólares num projeto para tentar fazer isso", lembrou Soledade.Para Soledade, o mercado explodiu com a operação de abertura de capital da Bovespa porque o que estava em jogo era o valor do intangível da bolsa paulista, no caso a marca, credibilidade, capacidade de fazer planejamento, dentre outras. "O que se discutiu foi a visão que cada um tinha do intangível da Bovespa. O tangível da Bovespa é muito pouco, um ativo tangível que não chega perto do valor atribuído a empresa. É a visão holístico do intangível funcionando."Por essa razão, Soledade acredita que as superintendências de registro, de valores contábeis e de empresas da CVM têm que começar a examinar isto. "Em breve será matéria corrente no mercado." Ele destacou que os 19 artigos da Lei das S.A. que falam em avaliação ou em laudo de avaliação não se referem aos intangíveis. O assunto só é mencionado no caso de fechamento de capital. "Para cada empresa o intangível tem uma importância diferente. No caso das companhias abertas, o maior ativo intangível pode ser a governança. Já nas empresas emergentes e de capital semente o principal intangível é a tecnologia", disse Soledade.A CVM lida muito com o capital intangível quando examina os recursos que são encaminhados ao colegiado. A discussão mais recorrente nos laudos de avaliação das empresas é sobre o valor do intangível. Durante o seminário, Natan Szuster, professor da UFRJ e especialista em contabilidade, também apoiou a idéia do relatório de intangíveis. "Ele funcionaria como uma demonstração complementar para o mercado, já que os intangíveis não podem ser contabilizados no patrimônio líquido das companhias", afirmou.
O problema é que o valor justo não é simples. SFAS 157 é baseado da “no preço de saída”: o preço que um terceiro pagaria por um ativo ou por um passivo. Isto cria problemas quando não existe mercados disponíveis. Por exemplo, uma companhia que vende garantia dos seus produtos; na teoria do preço de saída teria que considerar as garantias no preço que alguém pagaria por elas - mas não existe nenhum mercado para esta e, além disso, um terceiro provávelmente iria exigir um prêmio sobre o custo caso existisse.
Um outro exemplo é dívida. Se o rating de crédito de uma companhia caíssem, por exemplo de um valor inicial de 100 para 80, que seria o preço de mercado [a diferença seria resultado]. Mas a companhia é ainda responsável para os 100 que tomou emprestado. (...)
Economics focus
A book-keeping error
Aug 30th 2007
The Economist
The accounting principle that is meant to capture fair value might end up distorting it
AS THE old joke goes, there are three types of accountant: those who can count and those who cannot. What and how they count is often contentious. A long-fermenting issue is how far “fair-value” accounting, which uses up-to-the-minute market information to price assets, should be pushed in banking. The bodies that set accountancy standards believe the more accurate disclosures are, the better. Regulators meanwhile have fretted that market-based accounting would increase fluctuations in banks' earnings and capital, which might increase risks to financial stability. And commercial banks are reluctant to expose the idiosyncrasies of their loan books to the glare of market scrutiny.
The attractions of fair-value accounts are straightforward. By basing values on recent prices (“marking to market”), they paint a truer picture of a firm's financial health than historical-cost measures. These gauge net worth from the arbitrary dates when assets and liabilities were first booked. In principle, fair-value accounting makes a firm's viability plainer and enables shareholders and regulators to spot financial trouble more quickly. Proponents say that market-based accounting would have limited the fallout from America's savings-and-loan crisis and stopped the rot from Japan's non-performing loans much earlier.
An arbitrary past versus a distorted present
New research suggests that the increasing reach of fair-value accounting might be a mixed blessing. A paper* by Guillaume Plantin of the London Business School, Haresh Sapra of the University of Chicago and Hyun Song Shin of Princeton University concludes that fair-value accounting could sometimes generate fluctuations in asset values that distort the very price information that it puts such store by.
The paper examines the incentives of a bank faced with a choice between selling a loan or keeping it on the balance sheet. Because the bank knows its borrower better than anyone else, it has the best idea of what the loan is really worth. Its managers are rewarded according to the accounting profit of the bank.
If loans are valued at historical cost and market values are rising, the loans are likely to be sold if this is the only way of realising profit, even if the market undervalues them. The banks' managers take a profit and get paid accordingly, although shareholders would be better off if the loans were kept. Fair-value accounting gets around this agency problem. Loans do not have to be sold to cash in on their rising value: marking the assets to their market value has the same beneficial effect on profits and on managers' pay.
However, in the wrong circumstances fair-value accounting could also induce wasteful sales—of long-term, illiquid loans. Left on the books and marked to market, a loan will be valued at the price at which others have managed to sell. But when there are only a few potential buyers, that may be especially low. So managers will be tempted to sell in the hope of a better price. Because all banks with similar assets face the same incentives, they will all sell, driving the price down. Their shareholders would have been better off had the loans been kept until they fell due. The temptation to sell is greater for longer-term loans.
In this way, a fair-value regime can itself distort the very prices that are supposed to reflect the true worth of assets. The prospect of lower prices can encourage selling which drives down prices further. The information derived from market prices becomes corrupted, and the result is a growing divergence between reported net worth and true value.
This theoretical model is a challenge to the ideal of fair-value accounting: that more information is always better. Although it is technically feasible to mark to market even idiosyncratic assets such as loans to small businesses, it might not be desirable. The authors point to a well-established principle in economics, that incremental moves towards perfect competition are not always good. Eliminating one market imperfection (such as poor information) need not bring the ideal of a frictionless economy closer, because this may magnify the effect of remaining distortions (such as managerial short-termism or illiquid markets).
The paper also underlines some lessons about market liquidity that have been painfully learned outside of academia in the recent market troubles. There is a fair chance that asset markets will stay liquid (in the sense that willing sellers are matched with willing buyers), as long as the actions of market participants are essentially random. But anything that co-ordinates the actions of sellers—in this case, the disclosure required by fair-value accounting—can easily lead to sharp movements in asset prices.
Is the model of self-defeating co-ordinated selling very realistic? Recently, for example, Bear Stearns, a Wall Street investment bank, held off from selling assets into an illiquid market because the transaction prices would have set a nasty benchmark for its other portfolios. So illiquidity prevented asset sales rather than induced them. Mr Shin replies that in instances like this, where there happens to be a dominant holder of assets, there is less chance of sales into a falling market.
Although more accurate disclosure of balance sheets is desirable, the work of Mr Shin and his colleagues is a reminder that there are always trade-offs to any policy change. These authors put their argument in stark terms: “The choice between these measurement regimes boils down to a dilemma between ignoring price signals, or relying on their degraded versions.” In their advocacy of fair-value accounting, accountants are rightly pursuing the interests of investors. But policymakers have to worry about wider issues. Accountancy may be too important to be left solely to accountants. Even the ones that can count.
* “Marking-to-Market: Panacea or Pandora's Box?” Forthcoming in the Journal of Accounting Research.
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