Demand Persists for Accountants with Fair Value Expertise
The focus on…and criticism of…fair value accounting standards has intensified over the past two years as more than $1 trillion of writedowns and losses have contributed to what as emerged as the worst financial crisis since the 1930s. Also known as FAS 157, fair value accounting forces companies to use complex methods to assign a value to an asset based on what the current market would be willing to pay for it. Critics contend, however, that market prices in the current distressed environment don’t reflect the asset’s true value.
Despite protests that the current market environment makes it difficult or even impossible to measure the worth of assets and liabilities on a fair value basis, the Financial Accounting Standards Board (FASB) expects entities engaged in M&A to do just that. Mark-to-market, or fair value accounting, took full effect last year. Since then a growing number of public firms are investing in the infrastructure to comply with the measurements. In fact, BusinessWeek recently listed “Focusing on fair value and liquidity disclosures and understand the company’s disclosure processes for fair value accounting and liquidity issues—and how the application and impact of fair value accounting is described in the MD&A and other periodic filings,” among its “Ten Must-Do’s” for Audit Committees. As a result, executive search firm, A.E. Feldman, says demand persists for talent with expertise in fair value measurements.
IASB, FASB to Tackle Fair Value
The Financial Crisis Advisory Group is scheduled to continue its discussions about fair-value accounting and other issues at its meeting on March 5th, according to the Journal of Accountancy. The task force, which was assembled by the International Accounting Standards Board (IASB) and the FASB, is expected to debate whether companies should report gains or losses from changes in fair value. The group may also look into whether additional guidance is needed in determining fair value.
The International Accounting Standards Board (IASB) itself announced plans to publish a draft rule later this year aimed at replacing and simplifying its IAS 39 standard on fair value - rules which critics say have forced writedowns, exacerbating the credit crunch, according to Reuters.
The IASB sets accounting rules used in over 100 countries and is mandatory for the 8,000 listed companies in the European Union. More specifically, the IAS 39 standard on fair value obliges banks to mark to market or value assets on a regular basis, a process that has forced writedowns which have panicked investors as asset prices sink.
“We plan to replace it, the whole thing. We want to stop patching up the standard and we want to write a new one,” IASB board member, Philippe Danjou, told Reuters. The report also quotes Danjou as saying, “We are aware that the current model is too complex. We need to simplify… We will move to exposure draft hopefully within the next six months.”
Here in the U.S., the SEC announced results of a congressionally mandated study of fair value measurements back in December 2008. In that report, the SEC rejected calls to repeal the accounting rule that has been blamed for exacerbating the financial crisis, recommending instead for it to be improved in times of distress.
According to the SEC’s Office of the Chief Accountant and Division of Corporation Finance, its 211-page report acknowledged that issuers and auditors “have faced challenges” when applying fair value measurements when markets have dried up (making it hard to determine how much a hypothetical buyer would currently pay for a certain asset). As a result, the SEC recommended improvements to existing practice, including reconsidering the accounting for impairments and the development of additional guidance for determining fair value of investments in inactive markets, including situations where market prices are not readily available.
The SEC’s report noted that investors generally believe fair value accounting increases financial reporting transparency and facilitates better investment decision-making. The report also observed that fair value accounting did not appear to play a meaningful role in the bank failures that occurred in 2008. Rather, the report indicated that bank failures in the U.S. appeared to be the result of growing probable credit losses, concerns about asset quality, and in certain cases, eroding lender and investor confidence.
Thus, while the report did not recommend suspending existing fair value standards, it did make eight recommendations to improve their application, including:
- Development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets
- Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements
- Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates
- Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted
FASB Chairman, Robert Herz, is quoted by GAAPWeb as saying the FASB agrees with advice from the SEC that more guidance is needed to determine fair value in the current market conditions.
The FASB plans to issue new guidance in order to ease accountants’ confusion over how to measure fair value in illiquid markets this year, according to CFO.com. The report states the move comes after the SEC discouraged the lobbying by bankers to suspend mark-to-market accounting in light of the financial crisis.
According to CFO.com, the FASB says the new guidelines will discuss how to determine whether an asset or liability’s market is active or inactive and whether a transaction should be considered distressed. The board also plans to discuss how to apply fair value to stakes in alternative investments, such as hedge funds and private equity funds.
Moreover, CFO.com reports the FASB plans to call on companies to expand their fair-value disclosures related to how they make estimates. Ultimately, the report argues, this mean that companies may need to elaborate on explanations of their reasoning for moving items among the three measurement levels outlined in FAS 157, which provides a framework for fair-value measurement.
The project on application guidance is expected to be complete by the second quarter of this year, while improving disclosures will be ready in time for year-end financial reporting, adds GAAPWeb.
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