Friday, April 3, 2009

FASB Releases 'Plain English' Statement On Fair Value Actions

This afternoon, FASB released a 'plain English' statement to journalists - supplementing its formal Summary of Board Decisions published on yesterday's FASB actions to finalize guidance on fair value in inactive markets, other-than-temporary-impairment (OTTI), and fair value disclosures. See FASB's 'plain English' summary. See also our coverage of yesterday's FASB board meeting and press conference. Broc Romanek gathered some links to recent coverage of FASB's action in his blog post today in blog, including a link to Jack Ciesielski's AAOWeblog. Ciesielski is a member of FASB's Investors Technical Advisory Committee (ITAC).

My two cents (these are my personal views, I remind you of the disclaimer which appears in the right margin of this blog): I think some corners of the financial press (print, TV, bloggers and the rest) have unfairly characterized the mark-to-market (fair value) debate into one of good and evil, where some observers view one or the other side of the debate as right or wrong, pushing or being pushed, good or evil.

That kind of coverage may generate 'buzz' but it over-politicizes the reality of what happened in terms of the action taken yesterday by FASB: actions which followed almost a year of public hearings around the world (as noted in FASB's press conference yesterday) including in relation to the financial crisis, as well as SEC's roundtables on mark-to-market, the recommendation that FASB act on fair value and inactive markets and OTTI which was included in SEC's Dec. 30, 2008 report to Congress, and the recommendation of FASB's own Valuation Resource Group at VRG's Feb. 5 meeting. This is not to say whether or not the FSPs are the be-all and end-all of the mark-to-market debate, but just that the actions taken by FASB were moving on a track toward releasing further guidance, but the nature of the push by members of Congress at the March 12 hearing on mark-to-market accounting may have replaced the train with a faster version, an Acela if you will.

I believe it is helpful that FASB put out a 'plain English' explanation of its actions taken, given news reports up to now have taken polar opposite views (and to some extent, probably still will, as people parse and apply the words in the new guidance) as to whether FASB Eases Fair-Value Rules Amid Lawmaker Pressure (Ian Katz, in Bloomberg, April 2) , or whether there will be Little Impact From FASB Fair Value Change: Analyst (Dan Wilchins, Reuters, April 2).

UPDATE: Those of you interested in chapter and verse, I posted a comment on Floyd Norris of the New York Times' Notions on High and Low Finance blog, in response to his post entitled, 'Integrity' and Standard Setting, in which I cite some specific paragraphs from FAS 157, Fair Value Measurement, which can be tied directly to the present projects to provide fair value guidance for inactive markets, and the linkage between FASB's words in the original standard, and their actions this week, would appear (to me, at least) to deflect those who say or imply that FASB 'caved' to political pressure (at least on the 157-e fair value guidance, if not the OTTI guidance). I started thinking about this when I read Suspending Mark-to-Market: Bad Policy, Bad Time in Andrew Ross Sorkin's Dealbook blog in the NYT earlier this week, which picks up an article by Richard Beales, U.S. Backtrack on Mark-to-Market Ill Timed, which appeared in on March 31; that article accused FASB of 'caving' to political pressure. I posted a similar comment on Larry Doyle's Sense on Cents blog, in response to his post Putting Perfume on a Pig, and he posted an interesting comment in response. Other blogs that have been following the fair value issue closely include Bill Sheridan in the Maryland Association of CPAs (MACPA) CPA Success blog. MORE: See also Laura Hay's post in the Ohio Society of CPAs Blog on April 3 entitled, The Politization of Accounting Standard-Setting.

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Jim said...

First, your two cents are diamonds to the rest of us.
I am trying to be optimistic about what I see as the FASB's apparent knuckling under to Congress while simultaneously thwarting the Fed and Administrations toxic asset schemes. The optimistic view is that the IASB, who resisted the rush to judgment, is now seen as more independent than the FASB. Think about that and the SEC IFRS roadmap requirements. You just have to like the IASB and IFRS to be an optimist.

Michael Cangemi said...

I agree your comments are very valuable - As to FASB - the plain English version is a GREAT idea, and they have held up relatively well under GREAT pressure from Congress.
As to IASB they had their issues with EU political pressure in the fall – these are trying times for all and we all hope the standard setters remain independent of politics!

Edith Orenstein said...

Thank you to all commenters, we invite and appreciate comments, everyone has a particular point of view and set of experience and that enhances the dialogue.

I'd like to note that I added an UPDATE to the end of today's blog post, linking to some other blogs, including some in which I laid out a more detailed argument (citing specific paragraphs from FAS 157) for why I do not believe - as some writers have suggested - that FASB 'caved' to political pressure, at least not in terms of their trying to provide guidance on how to apply judgment in inactive markets, recognizing there is some role for valuation methodologies other than mark-to-market, as stated in FAS 157 itself.

The IFRS Exorcist © said...

Yes I agree that your two cents are diamonds for all of us. I recommended your blog to a number of my CCR colleagues at FEIC yesterday. I will continue to recommend your blog. I am still digesting this - it's a question of the good the bad the ugly there is truth on all sides.
I like the "Plain English" idea we need more of this everwhere in the business world - in annual reports also.

Alfred M. King said...

As a valuation professional with 40 years of experience all the new FASB move does is to put the FV determination on a correct basis. Nobody ever should have considered forced liquidation prices to be Fair Value. All the Board has done is reiterate what common sense should have told everyone before. This is a non-issue from the perspective of economic reality. It's just that too many people were viewing a price, any price, as an 'exit value' among 'market participants'. It was their mistake in interpretation that FASB has now cleared up.

Edith Orenstein said...

I also highly recommend Laura Hay's post in the Ohio Society of CPAs OSCPA Blog, April 3, on "The Politization of Accounting Standard-Setting" (I added a comment there myself.) The link to the post (copy link in your web browser) is:

Neil said...

As always, Edith, your posts are informative, reasonable, and insightful. Made me reconsider much of my criticism of FASB's recent actions on fair value. I haven't changed my mind, but I did reconsider. Bottom line, the recent actions appear to have been rushed. That rush appears to have been driven by political pressure. And the pressure seems to have come from the banking industry and their lobbyists.

Appearances do matter.

Not at all a good foundation for setting accounting standards, nor for encouraging good corporate governance and reporting.

If the SEC were not itself even more deeply compromised, this episode should have spelled the end of the setting of accounting standards by FASB or any other private entity. I look forward to the adoption of IFRS and, hopefully, the dismembering of the FASB.

Walter L. Zweifler, ASA said...

As a 40 year valuation professional I agree with those who see the recent FASB action as knuckling under - and strongly disagree with anyone who maintains that fair value is what a portfolio manager "feels" an asset is worth. The harsh economic reality that an asset is worth ONLY what someone will pay for it will emerge. The longer the reality delay the harsher the pain - Walter L. Zweifler, ASA