PwC: CFOs Predict a Fair-Value Headache

Financial services executives say FAS 157 and FAS 159 will put a strain on their industry and their finance departments.
Sarah JohnsonMay 30, 2007

The switch to fair-value reporting is the biggest accounting issue for financial services CFOs this year, according to a PricewaterhouseCoopers survey. More than one quarter of finance executives predict that the new Financial Accounting Standards Board’s rules regarding fair value will have the greatest impact on their business or finance team.

Anticipating that changing how they measure assets and liabilities by using the fair value method of accounting will put a strain on their departments in 2007, these finance executives have outsourced some of their companies’ finance-department work. While nearly half are relying on their internal finance team and 21 percent are using their existing valuation experts, 25 percent are turning to third-party valuation professionals, according to a PwC survey of nearly 400 senior finance executives done during the firm’s Finance Executives Forum held earlier this month.

The executives chose FAS 157, Fair Value Measurements, and FAS 159, The Fair Value Option for Financial Assets and Liabilities, as the two FASB projects that will have the most significant impact on their business in the next 12 months. The standards beat FIN 48 (FASB’s interpretation of how companies should account for uncertain tax positions), business combinations, and convergence with international accounting standards.

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FASB issued FAS 159 in February, making it effective for most companies on November 15, when they can account for certain financial assets and liabilities using the fair-value method of accounting rather than more traditional methodologies like historical cost. In the PwC survey, respondents were split on how they will apply FAS 159: to securities (28 percent), structured liabilities (17 percent), loans held for sale (16 percent), equity-method investments (15 percent), and real estate (8 percent). Eleven percent said they wouldn’t use it.

The polled finance executives from the banking, capital markets, consumer finance, real estate, and asset management firms have plenty of other worries besides changes in accounting standards. Their fifth-ranked overall concern last year for their industry reached the top spot this year: The finance executives rated the decline of U.S. companies’ competitiveness globally as the number one issue for financial services firms.

Unlike the U.S. Chamber of Commerce and other pro-business groups that say that increasing securities regulations are hurting American companies’ competitive edge, financial-services executives are looking beyond just regulatory issues, according to Timothy Ryan, who heads PwC’s Financial Services Industry Group. “There is concern that the United States may be losing its dominance for reasons that are not necessarily due to our regulatory environment,” he said. “It faces new competition that never existed in the global capital markets system. We must work to identify the true root causes of the perceived decline of U.S. competitiveness and propose solutions that do not undermine confidence in the capital markets.”

As for what keeps the finance executives up at night at their own firms, 31 percent blamed the cost and risk of regulatory compliance as their biggest challenge, followed by rising interest rates (15 percent), and increasing activity in mergers and acquisitions (11 percent). Only 3 percent noted competition from non-American firms a top challenge for their own firm.