Accounting & Auditing | Corporate Finance & Governance | Financial Planning | Legislative / Regulatory

Is comparison the answer to the fair-value question?

Apples The debate over the merits of fair-value accounting is getting interesting.

While the SEC continues its federally mandated study of the role (if any) that fair value played in the financial crisis, SEC Chairman Christopher Cox has hinted that fair value is here to stay. "(M)ost investors, and many others, agree that fair value is a meaningful and transparent measure of an investment for financial reporting purposes," Cox told the AICPA in December.

That's not stopping the Financial Accounting Standards Board from proposing a few fair value-related changes of its own, though.

The FASB has issued a pair of proposed staff positions that address issues related to the accounting of financial instruments. One of those proposals — FAS 107-a, "Disclosures about Certain Financial Assets: An Amendment of FASB Statement No. 107" — seeks to "increase the comparability of information about certain financial assets that have related economic characteristics but have different measurement attributes."

In plain English, according to's Sarah Johnson, the proposal would, if enacted, require companies to include in their financial reports a comparison of their assets under three measurements — the reported carrying amount, fair value and incurred loss amount.

"The changes would allow companies to consider — and highlight for investors — the future cash flows of securities that will be held to maturity and are available for sale," Johnson writes, citing tax and accounting analyst Robert Willens. "While in the short-term, the creditworthiness of these instruments appear dim, the majority of these assets will likely pay off when they mature. As a result, firms will look financially healthier under the newly provided 'incurred loss amount' column, Willens notes."

On its surface, that sounds like a reasonable compromise, although you know what they say about trying to make everyone happy.

On a related note, Francine McKenna over at Re: The Auditors alerted me to a Reuters article in which a representative from the Office of the Comptroller of the Currency blamed fair-value accounting for inflated third-quarter revenue reports from U.S. commercial banks.

“I don’t think they had a really strong quarter; they had a good quarter,” Kathryn Dick told Reuters in reference to the banks' revenue. “(The gain) was largely due to accounting purposes, not necessarily due to client flow or customer demand.”

So let me get this straight: Companies are blaming fair-value accounting for underestimating the value of their assets, and regulators are blaming fair value for overestimating the revenue reports for commercial banks.

Maybe I'm crazy, but it sounds like fair value isn't the problem at all. Of course, that's nothing that hasn't been said before.

What's your take on fair value — culprit or scapegoat?


Bill Sheridan