Ready or Not, Here Comes Fair Value

The Financial Accounting Standards Board votes thumbs-down on a one-year breather for companies to comply with FAS 157.
Sarah JohnsonOctober 17, 2007

Despite the request of business groups, the Financial Accounting Standards Board has decided not to defer the effective date of its new fair-value rule.

On Wednesday, most board members seemed to feel that a “wholesale” deferral of FAS 157 — which provides a framework for marking value estimates to market rather than historical cost — would overly delay gratification for financial statement users. Investors, after all, largely favor the expanded use of the fair-value method of accounting. A one-year delay wouldn’t necessarily make corporate executives struggling with the standard feel more ready to comply, the board members concluded.

In fact, the board questioned whether companies lack the resources to comply in a timely way, as the preparers of financial statements have claimed. They wondered if instead, managers are simply engaged in a delaying tactic. “I think the goal here is to change the document rather than support it,” said board member G. Michael Crooch of the intent of the comment letters FASB has recently received asking for a delay.

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Under the standard, companies will be required 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.

Indeed, “the standard doesn’t care what you plan to do with the asset,” Mitch Danaher, an Institute of Management Accountants committee member and deputy controller at General Electric, told

While they’re not willing to revisit the board’s decision to use estimated “exit prices” (rather than the price of an asset when a transaction occurred) and a market participant’s (rather than a company’s) view on a value, board members said they’re open to deferring the standard for private companies or smaller public companies.

The question of whether FAS 157 should be deferred was prompted by the request of at least two high-profile associations, the IMA and Financial Executives International, to give companies a one-year break. Both groups believe internal accounting teams, valuation experts, and external auditors need more time to grasp the many aspects of the standard. Particularly hard to determine is how it applies to assets and liabilities that are thinly traded or have no market with which to gauge their value, they say.

The associations worry that estimates based on unobservable, hypothetical market behavior would cause future problems for companies. Because the values will fluctuate and require constant re-estimations, compliance with the standard would likely strain company resources, they contend.

But the final, split vote from the FASB board dictates that companies will have to work through the uncertainties in FAS 157 for the greater good of investors. “This is the most important thing we’ve done as far as investors’ input [we’ve received], and I’d hate to see this delayed,” said board member Leslie Seidman. However, Seidman was one of the three board members who supported the deferral. She said it’s important for the board to balance investors’ input with an assessment of companies’ readiness so that the disclosures would actually provide better information.

The FASB staff, working with the board’s newly formed valuation resource group, plans to come up with guidance on some implementation issues. But the staff said they would not provide answers to every question that arises. The valuation group had its first meeting earlier this month and was unable to address all of its agenda topics that day — another reason cited by FEI for a need to delay the standard.

If FASB had voted for a deferral, the board would have also likely agreed to delay the sister standard, FAS 159, The Fair Value Option for Financial Assets and Liabilities. Both standards go into effect for most companies on November 15.