Others point out, however, that manipulation of fair-value estimates should be easy to detect if the assumptions that managers use are disclosed. Indeed, Patricia McConnell, a managing director of Bear Stearns, conditions her support for fair value on regulatory requirements that mandate such disclosure.

Meanwhile, Robert Herz, chairman of the Financial Accounting Standards Board, says that valuation practices need to be standardized in the same way accounting rules are. With that in mind, Herz has been making presentations to conferences of valuation experts. — R.F.

Be Careful What You Wish For

While there is almost total consensus in the world of corporate finance that the current reporting system is in dire need of improvement, disagreement abounds as to how such improvement should be achieved. Fair-value measurement, for instance, is generally seen as the most reliable basis for financial accounting, but critics say it can have numerous unintended and unwelcome consequences.

Debate is also starting to rage over whether certain items that aren't currently on corporate balance sheets belong there. For example, do pensions or leases belong on the balance sheet? If so, how should they be counted?

Consider disclosures for leases, the latest item the Financial Accounting Standards Board wants companies to report on their balance sheets instead of relegating to footnotes. Even the industry's chief lobbying group, the Equipment Leasing Association, agrees that many, if not most, leases should be recorded as liabilities on the balance sheet, because they amount to financing. Yet the ELA argues that an exception should be carved out for small, short-term leases for such items as copiers and PCs, because they represent annual operating expenses rather than capital investments. In that case, asks leasing consultant William Bosco, "is capitalization really what you want? We submit no."

Can an exception for those deals be made, however, without replicating the type of bright-line test that even Bosco admits leads to unwelcome complexity — as well as the kind of check-the-box approach that adheres to the letter of GAAP but violates its spirit? Theoretically, a principles-based rule might be developed with that in mind. But the Securities and Exchange Commission's deputy chief accountant, Scott Taub, suggests an alternative: apply the idea of materiality to the question instead. In other words, if the leases are as insignificant as Bosco and the ELA insist, then the items needn't be reported in the first place, says Taub.

Of course, if anything is in the eye of the beholder these days, it's materiality. So CFOs who take Taub's advice may be playing with restatement fire.

Leasing is just the latest of FASB's controversial proposals for rules for recording assets and liabilities on balance sheets at fair value. The chart below lists other rules that have been enacted or proposed in the past few years that have yielded untoward consequences — or threaten to do so — in at least some cases. As such, the box may serve as a scorecard for what is shaping up to be an ongoing battle over "improvements" to GAAP. — R.F.

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