Earlier this month, the Financial Accounting Standards Board’s Valuation Resource Group asked for additional guidance on Fair Value. Aswath Damodaran—the always candid Professor of Finance at the Stern School of Business at New York University and David Margolis Teaching Fellow—said he spent some time reading FAS 157, Fair Value Measurements and concluded that it is “a painful document to get through. No wonder you spend so much time reading it. It changes every time,” he told over 200 attendees at BVR’s recent 2nd Annual Fair Value for Financial Reporting Summit in New York City. Among the many problems with FAS 157: It does not say which among possible valuation perspectives—intrinsic values versus relative values, investment versus asset values—to apply in any given situation. “It gives no particular description of the ubiquitous market participant,” he said. “It says to consider liquidity, but not too much.”
If Damodaran were made ‘accounting czar’ for one day—and “assuming I lived through that day,” he quipped—the Professor would operate the fair value for reporting system along these four points:
- First, do no harm. Financial statements should answer these basic questions: How much did you earn last year? What did you own and how much did you invest to get it? What do you owe?
- Do not overreach. Accept the proposition that an accounting statement cannot be all things to all people; they will never replace market values.
- Keep it simple. “Life is complicated enough,” Damodaran said. Stick with the easy assets. “Look at the cash balance, and let someone else worry about complex assets.”
- Remember, less is more. “Data are not information, and not all information is important.” Form 10Ks are becoming “data dumps” and “devices for companies to protect themselves.”
For those folks who, like the good Professor, may first want to take a fresh look at Statement No. 157 (or who may want their CFO and auditor clients to grasp its basic points), we’ve put together a free download, Summary of FAS 157, Fair Value Measurements, now available at BVResources. If you want a full report on Damodaran’s address on fair value—its flaws and possible fixes—make sure to read the next (April 2009) Business Valuation Update™.
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