VRC (Valuation Research Corporation), a leading provider of valuations and value-related advisory services, recently completed a survey of financial professionals’ views on Fair Value Accounting (FVA), also known as mark-to-market accounting. The survey found a majority believed that market turmoil and the collapse of active markets for many assets caused implementation issues in Fair Value Accounting.

According to the survey, 58% of respondents believe that market turmoil negates Fair Value Accounting’s validity. Further, of those who believed FVA was flawed and potentially not valid during market turmoil, almost 34% suggested a temporary return to historical cost accounting as an alternative.

"Respondents to this survey came down hard on Fair Value Accounting," said P. J. Patel, CFA, Senior Vice President of Valuation Research Corporation. "While in less volatile times, Fair Value Accounting has improved transparency, in unusual times like we’ve seen, FVA becomes more difficult to implement and understand."

Survey respondents are unsure about the capability of publicly traded banks to reasonably estimate their own level 3 financial assets -assets that are not publicly traded and don’t have easily accessible values. A full 44% believed the bank values were within an accuracy of 10% and another 40% thought those values were as much as 30% off. Only three percent believed bank reported values are within 3% of an accurate value, while another 12% thought the accuracy was within 5%.

Respondents believed the accuracy of hedge fund and private equity valuations of level 3 assets, determined by the funds themselves, were even further off the mark. Thirty-six percent believed hedge fund and private equity values were only within an accuracy of 10% and a full 49% thought those values were as much as 30% off.

"The survey found there is some uncertainty in the ability of banks, private equity firms and hedge funds to accurately report the value of their own level 3 assets," said Patel.

Respondents were split when asked if mark-to-market should be suspended for the purposes of bank regulatory capital with 50% believing it should be and 50% believing it should not be.

When asked if external auditors had caused them to revise their projections, 30% said yes. Of those who had to revise projections, 9.6% needed to change purchase allocation projections (FAS 141), 19.3% needed to revise goodwill impairment projections (FAS 142) and 14.5% had to revise fair value estimates (FAS 157).

Survey participants also opined on who provides the best valuation of level 3 assets. Sixty-one percent thought the owner/purchaser working together with an external valuation firm provided the best valuation. Only 19% of respondents believed the owner/purchaser working on their own was best and another 19% said an external valuation firm working on their own was best.