Is Fair Value Marking Fair When The Price Is Irrational?

As reported in a recent Financial Times article, accounting experts that were brought together by the International Accounting Standards Board have stated in a draft paper that they expect no let-up in the use of fair market values for bank holdings, even in illiquid markets. Of interest is the following quote from a partner at Ernst & Young:

“The key point is that the paper does stress that you cannot default to some ‘fundamental value’. You are required to find an estimate for the current price. That price might be thought to be irrational, exuberant or completely depressed but this makes it clear that is what you must use.”

In other words, the price can be totally wrong and irrational, but you have to use something. I realize that the issue is not clear-cut, that standards must be set and followed, and that any value that is used will be questioned, but there has to be a better way. I am sure the standards board and other groups will continue to examine this issue.