Carles A. Bowsher, U.S. Comptroller General, opened the program by using the problems in the thrift and banking industries as reasons to reexamine, especially for financial institutions, the historical cost financial model. Bowsher referred to a recent General Accounting Office report which said that $7 billion of assets melted off the balance sheets of the 39 failed banks during the process of being taken over by other institutions. According to Bowsher, in a way similar to what his office did with railroad accounting, financial reporting for financial institutions needs to be carefully studied and changes recommended to make financial reporting more relevant.

George H. Diacont, Acting Chief Accountant of the SEC, officially opened the conference by stating the statutory authority of the SEC to set accounting principles, while noting its tradition of not exercising that authority. Instead, the SEC has been acting as a watchdog to see that the private sector standard setters are responsive to the public interest.

Diacont went on to present his view that GAAP for many of the troubled and failed financial institutions have not reflected economic reality. "Financial statements that say all is well when it is not are not useful as the foundation of information available to the investment community. The SEC does not have all the answers," concluded Diacont, but it will continue to be the champion of more relevant financial reporting.

Three panelists of distinguished business leaders, academicians, journalists, economists, international standard setters, and practicing independent accountants presented their views on the merits of market value accounting in one form or another.

Highlights of the remarks of selected panelists follow:

Leland C. Brendsel, Chairman and Chief Executive Officer of Federal Home Loan Mortgage Corporation, spoke out in favor of comprehensive market value accounting of both assets and liabilities. This is the method his Freddie Mac uses in making business decisions and, according to Brendsel, is the appropriate method for measuring performance and the enhancement of shareholders' equity. The method is practical, easy, and a better measure of capital adequacy. And, perhaps most important, in Brendsel's opinion it motivates and promotes the building of long-term values.

Bernard G. Ragland, Assistant Controller and Chief Accountant, AT&T Corporation, stated that he feels birth weights and historical costs have the same usefulness. Initially, they are quite relevant, but as time passes, they offer less and less in evaluating the person or the company. He is the advocate of a comprehensive financial reporting model based on current values, even for non-financial businesses. For operating assets, such as the oven producing Oreo cookies, its value would be the present value of the future net cash flows from the output of the oven.

Ragland called for the establishment of a distinguished panel from members of the various constituent groups--SEC, FAF, FEI, AICPA, and the like--to develop the new financing reporting model. Then everyone would know where financial reporting is headed and standard setters could begin the long journey of getting there.

David C. Damant, Chairman, MAP Fund Management of London, presented his view that there are basically three approaches to applying market value concepts to physical assets--realizable value, current value, and discounted cash flows. Current value receives his vote as the most useful approach, and he completely rejects the discounted cash flows model.

It was during Damant's remarks that the diversity of views began to surface about what value accounting is when you move away from financial instruments.

Edmund L. Jenkins, Managing Director-Accounting Principles, Arthur Andersen & Co., and chair of the AICPA Special Committee on Financial Reporting, is a proponent of fair value accounting. In his opinion and without saying how it is determined, fair value always meets the relevance test and is more useful than historic cost. It solves the following problems: impairment of assets, investment versus trading, financing versus sale, involuntary conversions, business combinations, and many more.

Raymond C. Lauver, former member, Financial Accounting Standards Board, believes that the greater relevance of market values is demonstrated in the progress towards more disclosure of such information. What perplexes him is the slow progress in introducing this more relevant information into the measurement process. Not only do investors and regulators need the information, but so do secured and unsecured creditors, and they need it "on" the financial statements.

George Yungmann, Controller, The Rouse Company, has been presenting market value financial statements in the Rouse's annual report for many years. Rouse, as a holder of cash-producing properties, the value of which has been enhanced by time and successful operations, believes that market values are essential to an evaluation and understanding to his company's financial performance. At historical cost, Rouse's latest financial statements show a deficit in shareholders' equity whereas at current value, such equity is in excess of $1 billion. Without current valued reporting, Rouse's success with its development of properties would be hidden.

Richard C. Breeden, Chairman of the SEC, closed the conference by summarizing some of the matters discussed and issuing a challenge to standard setters and others.

Breeden stated that the SEC's immediate concern is market values for marketable securities, where the concept is easy to apply and the improved relevance is readily apparent. His obvious feelings are that there is no reason to delay in implementing full market value accounting for marketable securities in financial institutions. His long-term view is that market value accounting provides opportunities to eliminate many drawbacks in the present system. Any transition beyond the marketable security issue will involve substantial transition costs. The issues must therefore be understood before change occurs.

Breeden's closing remarks repeated those the acting chief accountant made earlier, that the SEC's non-involvement in accounting principle setting is a voluntary forbearance which could be reversed if matters do not move at a satisfactory pace. As the guardian of full, timely, and accurate financial reporting, the SEC has a responsibility to see that critical matters in the public interest are expeditiously handled.

Observations About the Conference

The conference was an impressive gathering of very important people in the financial reporting community. The conference lived up to its title as all the panelists spoke in favor of some form of market or fair value accounting. There was no attempt to present other views or perspectives on the issues. For that reason, as the day proceeded, the information value to this observer began to decline. But what came through loud and clear was that when you move beyond financial instruments, reaching conclusions on how to determine market value, fair value, current costs, or whatever it is called, will be a long, drawn-out process. There are no easy answers.

Several panelists called for the need to establish what the ultimate goal in financial reporting is. Is it some sort of comprehensive "value" approach? As all would seem to agree, such a goal needs to be properly established and articulated if standard setting is to have any sense of stability and direction.