Market value: the debate rages.

• Position: Corporate Reporting - Panel Discussion

Current value, fair value, market value, mark-to-market all mean one thing: one of the most hotly debated accounting issues of our time.

Securities and Exchange Commission Chairman Richard Breeden lit a new fire under the decades-old debate over market-value accounting when he announced several years ago that the historical cost model is no longer relevant in our volatile world.

The Financial Accounting Standards Board initiated its financial instruments project in 1986. Since that time, the FASB has issued a number of exposure drafts and several statements of accounting standards. The FASB's most recent exposure draft, "Accounting for Certain Investments in Debt and Equity Securities," was issued in September 1992.

The provisions of the new ED have inspired heated discussion. One such debate occurred at Financial Executive Institute's recent conference on financial reporting issues. The participants in that debate were four well-known and outspoken experts on the issue: Thomas E. Jones, executive vice president, Citibank; Patrick W. Kenny, group executive-finance and administration, Aetna; James J. Leisenring, vice chairman, Financial Accounting Standards Board; and Walter Schuetze, chief accountant, Securities and Exchange Commission. Donald J. Kirk, professor of accounting, Columbia University and former FASB chairman, moderated the panel. Reproduced here is the substance of their debate.

DONALD KIRK: Fair-value accounting and the alleged shortcomings of the historical cost accounting model have been on the agenda of practically every professional or regulatory entity in recent years.

Let's start our discussion with the SEC's chief accountant, Walter Schuetze.

WALTER SCHUETZE: The SEC has been urging the Financial Accounting Standards Board to require that marketable debt and equity securities be accounted for at fair value or market value in the face of the financial statements. There are those who argue that footnote disclosure of fair value is enough. They point out that the AICPA's Statement of Position 90-11 and FASB Statements 12 and 60 already require disclosure of the fair value of marketable debt and equity securities. Statement 107 |"Disclosures About Fair Value of Financial Instruments"~, which went into effect in December, requires the disclosure of market value for additional items.

Financial analysts are not clamoring for formal accounting for marketable debt and equity securities at market prices, and some are even opposed to formal mark-to-market accounting. They would, however, oppose eliminating the disclosures of market value.

So why am I pushing so hard for formal mark-to-market for marketable securities? Because historical cost is not useful or relevant for decision-making, especially by retail investors and policymakers. Retail investors use the information published by investor services, which does not include the footnote disclosures. And policymakers look at industry-wide statistics when they set policy; again they don't read the footnote disclosures. Both groups assume that capital based on generally accepted accounting principals is the real amount of capital. But we know that isn't a correct assumption.

During the last year, as more and more financial institutions have reexamined their accounting for securities held for investment, the center of this debate has shifted from whether to mark-to-market to how to mark-to-market. How to identify those liabilities that need to be marked to market if it is decided that liabilities need to be marked to market. How to get a good number for assets that are not traded every day, for example, for foreclosed assets that must be marked to market under current accounting standards at the time of foreclosure, for loans that are going over to a collecting bank to be sold, for disclosures under Statement 107.

The SEC addressed the "how" question for foreclosed assets and for in-substance foreclosed assets in its Financial Reporting Release 28, issued in December 1986. The release specifies that current market prices should be used to value foreclosed assets at the time of foreclosure even if those market prices come from an auction market where the buyers hope to profit by holding the assets for future price increases.

Fair-value accounting will soon be applied to loan impairment. The FASB has proposed that formally restructured loans be remeasured at their fair values. |The FASB exposure draft, "Accounting by Creditors for impairment of a Loan," was issued in June 1992.~ Some commentators on the exposure draft have suggested that all impaired loans should be measured at fair values. Others, of course, believe that no change in practice is necessary.

Fair-value accounting has another application in writing down the carrying amounts of impaired non-monetary assets. When an asset is acquired, the acquisition price is its fair value. That fair value is, at least in theory, the present value of a series of future cash flows. When identifying and measuring impairment, we need to look at the fair value of that asset at subsequent balance-sheet dates. And if fair value is not readily available, we need to estimate that amount by projecting the cash flows from the asset and discount that amount using a risk rate appropriate to those...