Fair Value Takes Center Stage
Fitch Ratings says fair value measurement will remain the central accounting focus for analysts and investors, according to its newly released 2008 Accounting and Financial Reporting Global Outlook report. The Financial Accounting Standards Board (FASB) voted in favor of implementing FAS 157, Fair Value Measurement, back in November for financial assets and liabilities like derivatives, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements.
While many of the investment banks have invested in the infrastructure required to comply with FAS 157, a large number of public companies have yet to do so, according to AccountingWeb.com. For those that have not, they will need to comply by the first quarter of 2008. That’s good news for candidates seeking accounting jobs. Looking ahead, executive recruiting firm, A.E. Feldman, says demand will persist for accountants with expertise in fair value measurements.
FAS 157, Fair Value Measurement, 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 backed securities comprise a significant part of all level-three assets, along with higher-quality mortgages and leveraged bridged loans for buyouts.
As a result, the focus on these standards intensified in the second half of 2007 following the subprime meltdown. ”In the midst of a credit market dislocation, one thing became clear: ascertaining fair value under fair-weather conditions may be a walk in the park compared to the level of diligence and scrutiny demanded in a more turbulent environment with limited price transparency, according to Fitch’s Managing Director, Eileen Fahey.
Today, a number of public firms have yet to invest in the infrastructure to comply with FAS 157. These companies must find a solution by the first quarter of this year. A recent report in AccountingWeb.com, firms should pay particular attention to how they will overcome their Level 2 and 3 input requirements.
Meanwhile, other topics that Fitch believes will dominate the accounting debate in 2008:
- Off-balance-sheet accounting
- Financial statement presentation
- Global convergence of accounting standards
- Business combinations
- Insurance accounting
- Defining liabilities vs. equity
