FASB Rejects Blanket Deferral of FAS 157, Demand Grows for Expertise in Fair Value Accounting
The Financial Accounting Standards Board (FASB) has rejected the deferral of FAS 157, Fair Value Measurements. According to the news release issued by the FASB, the Statement is effective for fiscal years beginning after November 15th as originally scheduled. Companies are required to implement the standard for financial assets and liabilities, along with any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. The FASB did however provide a one-year deferral for the implementation of FAS 157 for other non-financial assets and liabilities.
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).
The new rules divide bank assets into three “levels.” Level one assets must have quoted prices in active markets such as U.S. government bonds. Level two assets are not as fully marketable as level one, but still sufficiently tradeable to have a definite value. Level three assets, on the other hand, do not have quoted prices in active markets. Mortgage banked securities comprise a significant part of all level-three assets, along with higher-quality mortgages and leveraged bridged loans for buyouts.
Thus, the issue of fair value accounting has come to the forefront as the subprime lending crisis of the past year has raised the question of whether companies are appropriately accounting for the risk in various investment vehicles. Now, 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, executive search 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.
