The debate on fair value and how can business on the valuation models

The concept of fair value accounting was driven by the Financial Accounting Standards Board (FASB) and Securities and Exchange Commission (SEC) in an effort to provide greater information, transparency and consistency in financial statements. The objective was to improve the quality, consistency and comparability of financial information to provide greater depth and to the investment community. Codification of Accounting Standard 820, "Fair Value Measurements", formerly known as Statement of Financial Accounting Standards (SFAS) No. 157, ASC 820, provided a uniform definition of fair value and an emphasis on the use of market inputs when valuing an asset or liability. This is also called "mark-to-market" accounting as the budget is now required to clearly indicate which of the three-level hierarchy of inputs that underlie the reported values.

Definition of fair value using market inputs

Although ASC 820 was introduced in 2006, entered into force for the balance sheets of companies classified as "investment company" with a period from 1 January 2008. As the economy began to spiral downward in 2008, and companies were required to start the adjustment of asset values ​​in accordance with ASC 820, some financial institutions began to write down the underlying value of some assets. This called into question the ability of institutions to meet capital requirements and has led to a boost of emergency remedies - in particular the suspension of the ASC 820.

The debate between opponents and proponents of fair value has continued through the rest of 2008, with opponents accusing mark-to-market accounting for the struggling economy, with supporters who favor greater transparency. In response, Congress directed the SEC to research the issue as part of the Economic Emergency Stabilization Act, which created the Troubled Assets Relief Program (TARP). The SEC has published its report in December 2008, concluding that the credit crisis was not caused by fair value accounting and that should not be discontinued or significantly modified. Ultimately, the first debate swung in favor of FASB ASC and 820, resulting in fewer changes being implemented in April 2009 with the issuance of FASB staff positions, including No. 115-2 and 124-2, " The recognition and presentation of other-than-temporary impairment and "157-4", determine the fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not ordered . "

Expanding the Fair Value of Loans

The FASB recently met in August 2009 to discuss further changes to the rules of fair value, in parallel with the International Accounting Standards Board (IASB), to expand the Guidelines. The FASB proposal would require that all financial instruments, including loans, present financial statements at fair value. Any changes in value would then be recognized in net income or other comprehensive income. It is anticipated that the revised standard would go into force in 2011. This could require banks to accelerate the recognition of losses, triggering lower earnings and book values. Financial institutions are already beginning to protest, in particular through the American Bankers Association. At the heart of the debate is mark-to-market. Financial institutions are pushing to reduce the use of mark-to-market accounting for assets that are difficult to be priced due to a lack of comparison and the FASB and IASB now want to extend the mark-to-market to all financial instruments .

This round of debate on the expansion of fair value accounting is further complicated as the U.S. continues to transition from Generally Accepted Accounting Principles (GAAP) to International Financial Reporting Standards (IFRS). The FASB is working with the IASB, but the two groups have presented different models and deadlines for the completion of the relevance of the proposed rule. It is feared that the differences between the FASB and the IASB will result in a lack of due process by the FASB or a divergence between IFRS and GAAP. And then there is the involvement of the SEC, who has worked with both the FASB and IASB on the transition to international standards, and is under pressure from members of Congress, in response to the initial.

Bottom Line: Companies need to assess exposure

Every company must make an assessment of its exposure as it relates to the measurement at fair value. For many, these measures are an integral part of their budget and can affect performance. The process is complex and the management should have a thorough understanding of what inputs are used in the evaluation of business models and how to interpret the output so as to ensure the reliability of its financial statements. Management should be informed and have a basic understanding for what amounts were determined by the party providing the information on prices. Addressing the changing landscape of value and learn a lot about how these potential changes will benefit companies, agencies and consultants .......