Fair value issues

On February 14, 2008, the SEC Advisory Committee on Improvements to Financial Reporting sent a Progress Report to Christopher Cox, SEC Chairman. I found particularly interesting in the report some comments the Committee made concerning fair value measurements.

The Committee indicated it might suggest that FASB be "judicious" (my emphasis) about expanding the application of fair value measurements. Keep in mind that FASB’s new FAS 157, Fair Value Measurements, is effective this calendar year (technically, for fiscal years after November 15, 2007), except for application to asset retirement obligations, which begins in calendar year 2009. Remember also that FASB put on its agenda in September 2007 a project to reconsider the valuation of loss contingencies. Keep mind, as well, that FASB’s new FAS 141R, Business Combinations, effective in calendar year 2009, requires that loss contingencies for mergers and acquisitions be measured at fair value. This is not how loss contingencies outside of mergers and acquisitions are measured under FAS 5, Accounting for Contingencies.

The Committee acknowledged that if fair value was the only measurement method used in financial reporting, then comparing and evaluating the data would be less complicated. That is, the requirement to employ a particular measurement method would eliminate the complexity of interpreting data from various measurement methods.

The Committee expressed concern, however, that fair value had its own complexities from issues of relevance and reliability. For example, it worried that values determined verifiably from historic cost could become less reliable when calculated using fair value procedures. It worried further that reliability could suffer from the lack of “generally accepted valuation standards” and from the use of valuation inputs “that vary from one company to the next.”

Most interestingly, perhaps, the Committee recognized the view that the burden of measurement complexity (if fair value was required for all measurements) would shift from investors to preparers and auditors. That is, the greater effort would be among preparers and auditors applying the fair value methodology, as compared with investors having an opportunity to interpret data from a single valuation method.

Well, I have to say, I think the right place for resolving complexities is in the preparation effort, not in the interpretation effort, i.e., with those reporting, not those interpreting the reports. I do not think the credibility of this Committee would be well-served by complaining otherwise.