Demand Grows for Experts in Fair Value Accounting
The debate about the worth of fair value accounting is intensifying. Banks are deliberating exactly how to report the value of the derivatives and financial instruments that have been undermined by the credit crunch. Amid the uncertainty, recruiting firm, A.E. Feldman reports that accounting jobs are opening up and demand is growing for accountants with expertise in FAS 157 and FAS 159.
Until recently, there were varying definitions of fair value and limited guidance on exactly how to apply these definitions. As a result, generally accepted accounting principles (GAAP) were applied with inconsistencies. In response, the FASB last year issued Financial Accounting Standard 157, Fair Value Measurements. The rule provides accountants and auditors with methods required to value assets and liabilities at fair or market values.
FAS 157 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Essentially, fair value is no longer based on what you pay for something, it is based on its “exit price” or sale price. Building on FAS 157, FAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, permits companies to elect fair value for certain financial assets and liabilities. In short, it provides the option to report investments at fair value (using FAS 157 as a valuation guide).
But as a recent report in Financial Week explains, despite the fair value accounting standards, uncertainty remains as banks prepared quarterly financials. The article states, “The problem is that the capital markets, seizure virtually froze markets for structured finance products and leveraged loans, which left the banks with inventories of hard-to-value products and commitments.” Essentially, the results provided hard-to-compare numbers.
Moreover, FAS 157 emphasizes that fair value is market-based, requiring the consideration of what other market participants might pay for something. But what if there is no market activity? How do you determine value? Another challenge of the fair value standards is to determine the most advantageous market if there is no principal market for assets, such as a stock that is traded on multiple exchanges.
While the debate on fair value accounting heats up, the existing standards require constantly updating estimates of the market value of assets and liabilities - a difficult and time-consuming process. With huge dollar amounts on balance sheets at stake, companies must staff up with qualified professionals with expertise in how changes to them are reported in income. A.E. Feldman says right now they are seeing increased demand for candidates with experience in FAS 157 and FAS 159.
