Academic or Economic Reality?
We sometimes hear criticisms of our position on fair value accounting that suggest we’re taking an academic view of things with dubious relevance to economic reality. Interesting, then, to read Jack Cieselski’s analysis of a pending bank acquisition at a hefty discount to the market price before the acquisition was announced. (Full disclosure: Jack Cieselski has provided consulting services to CFA Institute staff in the past). The acquisition target reports fair value adjustments in the footnotes that reflect “entry” fair value pricing, reflecting the value of a loan if it were to be made at the time of reporting given prevailing conditions. The acquirer, however, looked at “exit” fair value pricing as part of its due diligence, reflecting what a loan would fetch in an orderly market between willing buyers and sellers. Not such an academic exercise given the dramatic difference in valuations, which was clearly reflected in the pricing of the transaction.
Investors might have appreciated the acquirer’s approach. As we highlight on the first page of our comment letter (PDF), markets price such fair values and for that reason we believe financial statements should reflect them.