FEI Pushes for Fair-Value Deadline Delay

Executives say their companies won't be ready to prove that they've complied with FAS 157.
Sarah JohnsonOctober 4, 2007

Financial Executives International has asked the Financial Accounting Standards Board to give companies a one-year break before their deadline to comply with FASB’s new fair-value standard.

In a letter sent to FASB earlier this week, two FEI members said companies won’t be ready by year-end to properly implement FAS 157. The stricture, which gives a framework for making value estimates based on market value rather than historical cost, affects more than 40 existing accounting standards.

“We believe that this one-year deferral is necessary in order to resolve the growing number of implementation issues and to enable companies to be in a position to fully comply with the requirements of the standards,” wrote Arnold Hanish, who chairs FEI’s Committee on Corporate Reporting, and Karen Rasmussen, who chairs the FEI’s Small Public Company Task Force.

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Companies’ increased use of the fair-value method of accounting has long been a concern of Hanish, who is Eli Lilly’s chief accounting officer and a member of the Public Company Accounting Oversight Board’s advisory group. Earlier this year, Hanish warned the PCAOB that the audit industry would need the next two to three decades to master the concepts surrounding fair value.

Hanish’s worries are shared by PCAOB chairman Mark Olson, who has acknowledged that auditors lack the technical expertise needed to grapple with the complex estimates companies will have to calculate for assets and liabilities that are thinly traded or not traded at all.

Indeed, Hanish and Rasmussen worry that estimates based on unobservable, hypothetical market behavior will cause companies problems down the road. Because the values will fluctuate and require constant re-estimations, it would likely strain company resources.

Further, they wrote, auditors will expect their clients to provide thorough documentation of how they understand the standard and apply them: “We understand that is what regulators will expect (an oft-quoted view is that ‘if it isn’t documented, it didn’t happen’).”

The FEI chairs say that there needs to be more time to understand how to comply with the standard, particularly for those assets and liabilities that aren’t traded. “Given the uncertainties … and the lack of available time and capable technical resources, we believe it is unlikely that most companies will be ready by December 31, 2007,” they wrote.

The new fair-value standards recently adopted by FASB — in addition to FAS 157, there’s FAS 159, The Fair Value Option for Financial Assets and Liabilities — go into effect for most companies on November 15. FAS 159 gives companies the choice of accounting for certain financial assets and liabilities using fair value. It applies to measurements of stocks, bonds, loans, warranty obligations, and interest-rate hedges. Companies that adopted the standards early mostly have actively traded assets and liabilities and had experience working with FASB during the standard-setting process, the letter writers claim.

Christine Klimek, a FASB representative, confirmed to that the FEI letter has been received. It will be treated as a “formal agenda request” and will be presented to the board in the near future. When the board issued FAS 157, it said that because the standard does not 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.

In their 12-page letter, Hanish and Rasmussen list the issues involved in complying with FAS 157 to show why a delay is needed. While FASB has said the new standard would affect more than 40 of its previous rules, such as FAS 133, the accounting standard for derivatives, it also affects the definitions included in more than 150 guidelines from FASB’s Emerging Issues Task Force and the American Institute for Certified Public Accountants. “We do not believe that the auditing and valuation professionals have internalized the procedures necessary to apply this approach, and they have only recently begun to deal with the myriad of implementation changes that FAS 157 presents,” they wrote. According to Klimek, FASB has been looking into how the new standards’ implementation is affecting its other initiatives.