FEE believes strongly that financial reporting based on IFRS, and notably fair value accounting for financial instruments, has revealed the economic reality of market participants' positions at an earlier stage than otherwise would have been the case under a more cost basis driven model. In our view, the requirement to account for certain financial instruments at fair value has not caused the financial crisis nor has it been a significant contributing factor. Nevertheless, practice has shown that fair value accounting is more difficult to apply in illiquid markets and preparers and auditors have had to use significant judgments to arrive at consistent valuations in difficult market circumstances. Preparers would benefit from additional guidance on fair value measurements when observable market prices are not available.

Financial reporting under IFRS did show that financial institutions were highly geared. The introduction of IFRS 7 further improved risk disclosures on financial instruments. As 2007 was the first year that IFRS 7 was required to be applied and this gave greater scope to risk disclosure, it is expected that risk disclosures will further improve as more experience with the standard is being gained. The Financial Stability Forum disclosure requirements have also enhanced the risk disclosures.

The financial crisis has accelerated the discussion on the need to introduce anti-cyclical measures to the global system of financial regulation and to a certain extent also to financial reporting. Financial reporting has been blamed by some commentators for its pro-cyclical influence, thus aggravating the situation in markets that have become distressed or illiquid. We are of the opinion that the effects of the current market volatility are captured, but not caused by fair value accounting. Fair value provides a timely and relatively objective measure of existing value. Failure to report such values would leave investors and policy decision makers less aware or even unaware of credit and liquidity challenges. The accounting policies need to indicate carefully on which basis the fair values concerned have been determined.