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Fair-Value Revolution

Historical cost accounting is fading as Corporate America marches into a new era.

David M. Katz, CFO Magazine
September 1, 2008

How Fair is Fair Value ?

Fair Value is based on comparatives.A good way of going forward on Fair value would be to borrow from economic theory concerning Purchasing power parity theory wherby international transactions can be increasingly benchmarked based on the above.What is fair for one economic market would be distinctly unfair in other markets.A lot of skewness in markets arise because of such pricing distortions creating arbitrage opportunities.A public database should be established whereby any CFO or a manager seeking to determine the fairness quotient of a transaction can quickly benchmark the same against information freely made available on the net.The treatment sought to be benchmarked would help avoid cross border and domestic legal wrangles and end a lot of turmoil.Ultimately fair value calls for a lot of sincerity and honesty.The concerned stakeholders have to check that negotiated pricing is not passed off as fair value.

Posted by Anand Subbarathnam | September 08, 2008 02:59 am

Fair Value Renaissance

I wonder if a better title for Mr. Katzı article would have been Fair-Value Renaissance, rather than Revolution. A revolution, according to Websterıs, is a drastic change in the ways of thinking and behaving. Is FAS 157 a drastic change? I donıt think so. The purpose of FAS 157 is to ıfinallyı provide some consistency and level the playing field in addressing the fair value measurement requirements already embodied in accounting standards, most of which have been around for a long time. The article refers to Appendix D of the standard for a list of many other standards affected by FAS 157. That list starts with APB 18. APB 18 was issued in March 1971. Have the accountants been wrong for 37 years? No, theyıve just been all over the place on their methods, valuation techniques and estimates? The reason is that theyıre accountants, not valuation specialists. Accountants understand the standards. Valuation experts, housed at most companies in a separate department or even outsourced, understand the techniques. The renaissance that FAS 157 and FAS 159, The Fair Value Measurement Option, could bring to us accountants is the long overdue integration of accounting and valuation expertise between our ears, rather than between departments.

Posted by William Lougheed | September 03, 2008 05:37 am

Significant Estimates by Management

Even with "fair value", a company will likely not be "fairly valued". Fair value, for all of FASB's pretences of precision is simply another set of "significant estimates by management", like loss reserves and depreciation, although one fraught with deeply irresolvable epistemological limitations. As the article explicity but tepidly points out, there's something rather unsettling about recording a loss on assets based upon a hypothetical sale in a current market when you have no intentions of selling at all. The innate failure of fair value is that it attempts to improve the balance sheet with the idea that that can be the true (or at least most significant) measure of value to investors. But realistically, investors are future-oriented, and would never invest only or even mostly on the basis of past results. The simple reality is that nobody invests in a company simply because of its last balance sheet. An investor may look at the balance sheet, but is more likely concerned with the most recent income statements and statements of cash flows. They may even modify standard statements to obtain EBITDA or some other indicator of value. He/she might also attempt to (subjectively) factor in things like the skill of management, market share, product line, future business plans, general economic conditions and other conditions. I think the old green eyeshade accountants understood the limits of their craft better than all of their Black-Sholes, EVA, Six Sigma trained modern counterparts. FASB is a modern Olympian bureacracy, run and staffed by people who seem to enjoy hurling thunderbolts at mere mortals, rather issuing directions that value simplicity and brevity as inherently valuable to both the investor and the preparer.

Posted by Super Heater | September 02, 2008 10:53 pm

Is the first sentence true?

Does accounting purport to value a company? I never thought so, I can't think of anyone that agrees Historical cost books and reports are only one of the miriad of factors that help to reveal value - and that includes the use of so called "fair value" on those books and reports

Posted by Mike Frindg | September 02, 2008 06:38 pm

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