HOW FAIR IS FAIR VALUE

The use of fair value has been debated for some time. In the past 12 months major financial firms have recognized more than $150 billion in losses based mostly on the use of market values. At the same time, the Securities and Exchange Commission and federal prosecutors are currently investigating whether some firms may have applied different market values to the same securities. In light of this, no one disputes that the use of market values has potential problems, especially during this time of severe market stress. But advocates say they can also provide a needed reality check, even if imperfect. Some conversations on the use of market values include “I don't like the answer the market is giving me” or “today's write-down could be tomorrow's write-up.” Regardless, the Public Company Accounting Oversight Board states “you can't ignore what the market is telling you.” Lynn Turner, a former SEC chief accountant, has stated “Coming up with realistic market values isn't easy, but is ultimately worth it. If you really do [market] values right, you don't want it too hot or too cold, you want it just right. And when those values are right, it forces management to deal with reality, it forces you to deal with problems sooner rather than later.” Alternatives to market values have their own problems. Basing values on an item's cost alone, under the cost principle approach, wouldn't necessarily give investors an idea of the scope of current problems facing financial institutions. For example, a recent credit downgrade could be captured in a market value.