Demand Intensifies For Fair Value Expertise
The focus on fair value accounting standards has intensified since the second half of 2007, following the subprime meltdown. Global banks have already written down more than $150-billion in subprime-related holdings and debt. Financial firms heavily exposed to subprime are now facing increased pressure from auditors to take bigger write-downs, according to WebCPA. Back in December, the Public Company Accounting Oversight Board (PCAOB) sent an alert to auditors on how to calculate subprime losses. In fact, the oversight board says auditors should consider bringing in outside, third-party specialists to help determine the fair value.
A number of public firms, however, have yet to invest in the infrastructure to comply with fair value measurements. These companies must find a solution and comply by the first quarter of this year. As a result, opportunities are opening up for candidates seeking accounting jobs. Executive recruiting firm, A.E. Feldman, says demand persists 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.
According to the PCAOB:
- Fair value is the amount at which an asset or liability could be bought or sold in a current transaction between willing parties.
- Quoted market prices in active markets are the best evidence of fair value and should be used as the basis for the measurement, if available.
- The estimate of fair value should consider prices for similar assets
- Valuation techniques should incorporate assumptions that market participants would use in their estimates of value.
Fair value measurements 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.
Asset values have been hit by falling home prices, loan delinquencies and foreclosures. FAS 157 requires firms to use market data to value assets. Since the market for most mortgage-backed securities has dried up however, there is little active trading to price CDOs or other complex investments. Furthermore, using models, companies may assume that damaged assets will recover - despite mounting pressure to recognize losses based on market prices, according to WebCPA. The report quotes Global Insight Economist, Brian Bethune, as saying, “Auditors have a hard time dealing with a process of uncertainty. They have a freeze-frame view of the world. Regulators and risk managers at financial companies are trying to take a dynamic view, that things are overly stressed right now.”
As a result, accounting professionals must gain critical expertise in fair value accounting. Web CPA quotes Mark Olson, Chairman of the Public Company Accounting Oversight Board, as saying, “determining fair value requires training, and many auditors may not have extensive training in valuation techniques.” Olson goes on to sat that auditors must ensure that preparers have considered some alternative valuation scenarios.
