User Views On Fair Value, More

I recently interviewed two users of financial reporting -Vinny Catalano and Randy Schostag - on the topic of fair value (mark-to-market) accounting. Both support some modification of FAS 157, Fair Value Measurement. The interviews were conducted on February 12, 2009. Read more in User Views on Fair Value: Vinny Catalano, CFA, Randy Schostag, CFA.

Separately, on the subject of user views on fair value, a joint comment letter was filed on February 13 by the Center for Audit Quality, CFA Institute, Council of Institutional Investors and Consumer Federation of America, cautioning against a retreat from fair value accounting. (I'll call this group the Four C's; as I noted in a post last summer if they add three more like-named groups, they'd be the Seven C's- apropos in this age of discussions about liquidity.) Here are links to the Four C's Feb. 13 letter to Treasury Secretary Geithner, Federal Reserve Board Chairman Bernanke, and SEC Chairman Schapiro, and the Four C's Feb. 13 letter to the Chairs and Ranking Members of the Senate Banking Committee and the House Financial Services Committee (Dodd, Shelby, Frank and Bachus, respectively).

More articles on this subject
Additional articles of interest on this topic include articles by FEI and IMA member Al King, published in FEI’s Financial Executive Magazine (Dec. 2008 Financial Reporting column, see “GAAP vs. IFRS: Will the Real Fair Value Please Stand Up,”) and King's article in the January 2008 issue of IMA’s Strategic Finance Magazine, “Determining Fair Value.”

Also of interest is David Reilly's Commentary published in Bloomberg News on Feb. 19: "Sexing Up the Books Isn't the Answer for Banking Woes."

Another view is taken by Brian Wesbury, Chief Economist of First Trust Portfolios L.P., published in the National Review online Feb. 16 entitled, “Untouchable Accounting Rules? Really?”

See also Elizabeth MacDonald's Feb. 17 post, "Post Dramatic Press Disorder," in her EMac StockWatch Blog on FoxBusiness.com, in which she comments on various accounting and regulatory issues in connection with the credit crisis.

Still More
As noted in previous posts, FEI's Committee on Corporate Reporting (CCR) and the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness (CCMC) sent a joint comment letter to FASB on Nov. 25, 2008. The FEI CCR-US Chamber CCMC letter "support[ed] a reexamination of FAS 157 to address deficiencies that have come to light under the stress of the present market conditions ... [and] formally request[ed] a reconsideration of the standard as contemplated under the FASB’s Rules of Procedure."

Also as previously noted, FASB announced last week (see FASB press release) that it will embark on a new short-term project to provide application guidance for applying the fair value accounting rules in inactive or distressed markets.

Technically - and it's important to read the fine print - the upcoming application guidance (apparently reflective of the approach taken in FASB's earlier guidance issued last fall, FSP FAS 157-3, which was said to follow FAS 157) as specified in last week's press release, will pertain to: "determining when a market for an asset or a liability is active or inactive; determining when a transaction is distressed." This approach would appear to continue to focus on a more granular level for determining if, e.g. the market for a particular asset, liability or transaction is inactive or distressed - even if the markets are generally distressed in the macro sense - although macro factors may presumably be among indicators that would be considered in making this deterimination.

Another matter of note is that FASB used the term 'application guidance' in its press release to describe this project, rather than using the term 'modify.' I had to go back to read the SEC's Dec. 30 report to Congress on mark-to-market accounting (referenced in FASB's press release) to see how the terms 'modify' (modification) vs. 'application guidance' were used.

As noted in the SEC's report and on SEC's Spotlight page on Fair Value, Section 133 of the Emergency Economic Stabiliation Act of 2008 required that the SEC study, among other things: "the advisability and feasibility of modifications to [the fair value] standards; and alternative accounting standards to those provided in such Statement Number 157. "

Recommendation #3 in the SEC's report stated: "While the Staff does not recommend a suspension of existing fair value standards, additional measures should be taken to improve the application and practice related to existing fair value requirements (particularly as they relate to both Level 2 and Level 3 estimates)."

It will be interesting to see how the project evolves, particularly given that the SEC's and FASB's wording in aiming for 'application guidance' vs. a modification would seem to imply that whatever guidance is issued may still be hinged on the marketplace participants-exit price value notion in FAS 157 which some have raised questions about, as noted in some of the items linked above.

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