Another take on Fair Value: Does the FAS 157 emperor have no clothes?

BVWireIssue #78-1
March 4, 2009

User Views On Fair Value: Vinny Catalano, CFA, Randy Schostag, CFA,” is a recent interview conducted by Edith Orenstein, director of Accounting Policy Analysis with Financial Executives International, that yielded comments and insights that may sound familiar to BV experts who follow the views offered by Aswath Damodaran, Professor of Finance at the Stern School of Business at New York University. When asked if he believed Fair Value should be modified and, if so, how, Schostag offered this response:

I do not believe FAS 157 (Fair Value Measurement) as it currently exists provides a reasonable basis to determine what the fair value of a security holding is, based on the methodology set forth in that standard. Of course that depends on how you define fair value. But it’s disingenuous to set forth a term like fair value and then expect financial statement users to not have strong expectations as to what it means. I suspect that by using that term and requiring its application in an audit that the financial statement users will rely on the values reported as indicative of what can be expected in the market place. Perhaps, if some of the comments I’ve read from various people, including from some regulatory groups, are true–that FAS 157 is not as restrictive as the language would appear to make it–then maybe FAS 157 as it exists today might actually be acceptable. However, those of us in the field, who actually have to live with FAS 157, do not and have not interpreted the language to be anything other than restrictive and counter intuitive. FAS 157 makes it very difficult to use any method or approach other than a very simple mark-to-market model. That’s because the standard requires mark-to-market with little requirement to justify its use and with no requirement to spell out any weaknesses or shortcomings, but then mandates that if any other method is used, it must be accompanied by strong documentation.

The complete interview—“conducted prior to the Financial Accounting Standards Board’s Feb. 18, 2009 announcement that it will embark on a short-term project to improve the ‘application guidance’ for determining fair value in inactive markets and fair value disclosures”—is a definite must-read.  

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