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How useful is fair value accounting?

As of this month, certain financial institutions will be required to disclose the fair market values for financial instruments. A recent survey, conducted by KPMG Peat Marwick (on behalf of the Association of Reserve City Bankers) asked both users and preparers of financial statements their opinions of fair value disclosures.

Users, including securities analysts (85% of respondents), investment bankers, investment advisers, pension fund managers and securities broker-dealers, were asked to evaluate the usefulness of fair value accounting, required by Financial Accounting Standards Board Statement no. 107, Disclosures About Fair Value of Financial Instruments, for years ending after December 15, 1992.

Users said the following fair value disclosures required by the statement would be
 Very useful Useful Not useful
Loans 25% 40% 30%
Deposits 25 33 40
Long-term debt 15 50 33
Financial guarantees 23 38 38
Commitments 18 33 45
Letters of credit 23 43 33
Swaps, options, futures 33 53 10
 When asked about the usefulness of fair value disclosures for
the following items, which are not covered by Statement
no. 107, users said:
 Very useful Useful Not useful
Lease receivables 8% 53% 39%
Core deposits intangibles 18 48 34

On the other hand, banks and other financial institutions responsible for preparing financial statements still take a dim view of fair value accounting. When asked if the fair value estimation process is subjective and will not result in reliable and comparable information, 73% of preparers answered yes.

Asked to rate the usefulness of fair value disclosures for the following groups, preparers said:
 Very useful Useful Not useful
Retail depositors 0% 65% 82%
Institutional depositors 0 32 61
Management 3 39 55
Creditors 2 37 55
Stockholders 2 35 53
Analysts 3 50 42
Federal regulators 3 50 42
Investors 2 47 40
Source: KPMG Peal Marwick
COPYRIGHT 1992 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Dec 1, 1992
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