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Fair value accounting under scanner

The International Accounting Standards Board is to consider adjusting its rules to make it easier for banks to reclassify some of their holdings and at cost rather than at current market value.

Most bank assets are reported at fair or current market value. Plunging markets and the credit freeze have led to banks and insurers writing down billions in the value of their holdings, crushing profits and under­mining capital reserves.

Several European banks have privately lobbied for the IASB to remove some re­classification differences between its International Financial Reporting Standards and US GAAP. They believe they are at a disadvantage to US banks, which can shift their holdings to a cost basis more easily and escape the savaging of asset values in today’s markets.

The fair value of an asset is the amount at which that asset could be bought or sold in a current transaction between willing parties other than in liquidation. Generally a quoted market price is taken as fair price if available or else an estimate has to be made using all the information available.

US GAAP allow banks in “rare circumstances” to reclassify financial instruments reported at current market price, to the “held to maturity” category.

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