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Responding to requests to delay the implementation date for FAS 157, the board will ponder the issue.
Sarah Johnson, CFO.com | US
October 12, 2007
On Wednesday the Financial Accounting Standards Board will decide whether to delay the date when companies must start using FASB's new fair-value standard.
FAS 157, which provides a framework for making value estimates based on market value rather than historical cost, is slated to go into effect for most companies on November 15. But at least two organizations representing corporate finance executives and accountants, the Institute of Management Accountants (IMA) and Financial Executives International (FEI), have called on the standard-setter to supply a one-year break. The gist of their reasoning: more time is needed to digest the uncertainty and complexity of the standard, particularly in how it applies to assets and liabilities that are thinly traded or have no market with which to gauge their value.
According to the IMA — whose Financial Reporting Committee is one of the groups requesting that FASB delay FAS 157 implementation — the stricture will create a "fundamental shift" in accounting teams' thinking and application of fair value: they will need to measure fair value based on the exit price of an asset and a hypothetical third party's (or market participant's) value placed on that asset. That will force companies to report an asset's value based on the many possibilities of what could happen to it, rather than what they truly intend to do with the asset. A company could, for instance, decide not to even sell it, and thus never realize an actual "exit price." Indeed, "the standard doesn't care what you plan to do with the asset," says Mitch Danaher, an IMA committee member and deputy controller at General Electric.
In its letter sent to FASB earlier this week, the IMA said a one-year deferral "is necessary for both preparers and auditors to be in a position to ensure consistent, high-quality application of the principles in the standard." Its decision came after the IMA met with members of FASB and a week after two FEI members sent a 12-page letter to FASB outlining the many unanswered implementation questions FAS 157 has created.
Without a delay, company resources would be strained, the standard would be largely misunderstood, and confusion over expectations between companies and their auditors would mount, the FEI letter said.
When FASB issued FAS 157, it said that because the standard doesn't expand the use of fair value to new circumstances, "entities, their auditors, and users of financial statements" have "sufficient" time to prepare themselves for the rule. Whether or not the board reneges on that assessment and decides to delay the standard, companies should prepare themselves to comply with it if they haven't already, Danaher told CFO.com.
Consider that the new standard would affect more than 40 of FASB's previous rules, such as the accounting standard for derivatives, and that it affects the definitions included in more than 150 guidelines from FASB's Emerging Issues Task Force and the American Institute of Certified Public Accountants.
Companies should thus collect information about every instance in which they use fair-value measurements on a recurring or nonrecurring basis and then assess how to apply FAS 157 in each case, says Danaher. That will involve categorizing the applicable assets and liabilities into the three levels of measurement outlined in the standard. Level 1 concerns the observable, more obvious markets, in which it's easy to find a quoted price; while Level 2 markets provide some pricing information, guessing is required; and Level 3 markets offer no way to derive prices. Companies should develop their policies and procedures and valuation methods for measurements, maintain appropriate documentation, and record information about their processes in related disclosures.