FASB asks for ‘light’ (not heat) from BV

BVWireIssue #63-2
December 11, 2007

Following up his comments in last week’s BVWire™, Michael Mard offered his unique perspective as a member of the FASB’s Valuation Resource Group (VRG) on the critical and continuing dynamic between the Board and the BV profession.  “The VRG reports to the staff of the FASB,” he explains.  “We identify and address (pros and cons) interpretation issues on SFAS 157, with emphasis on those assets and liabilities creating the most diversity in reporting earnings per share (EPS).”   The FASB and the VRG seek communication in all forms.  “VRG is an orderly group trying to digest and report (to the Staff) input from the valuation community.  We welcome input leading to ‘consistency’ and ‘transparency,’ though Bob Herz (FASB chair) has said ‘please send light, don’t send heat!’”

Mard also sheds light on the recent discussions surrounding the deferral of 157.  “Preparers (management) and auditors complained, perhaps understandably, about the difficulty to accurately comply with FV for financial instruments.  They didn’t want their rush to comply to create imprecision or diversity impacting EPS.”  On the other hand, “investors and users want this information now,” to the best of the preparers’ ability.  In the end, the FASB chose to serve the latter, and declined to defer 157 implementation pertaining to financial instruments.

This episode—as well as much of the controversy rising from fair value for financial reporting—might best be seen through the FASB’s overall mission, “to serve the investing public through transparent information resulting from high-quality financial reporting standards,” Mard says, “developed in an independent, private-sector, open, due process.”   In its reporting responsibility to the SEC and the U.S. Congress, the FASB believes the users of financial data, both bankers and direct investors, want more relevant ‘mark to market’ information presented on companies’ balance sheets, which historically captured only 30% of assets.  “So now the goal—and hopefully the result—of 157 will be to reflect most of the other 70%.”  The goal is also to accomplish this in a predictable and consistent way that minimizes diversity and earnings volatility.

“Unfortunately, this information is very difficult and expensive to develop for preparers of financials (companies) and even more difficult to audit consistently,” Mard says.  “The FASB, however, has been steadfast in believing the benefit of the information to the public is worth the cost of the information to the preparers.”  Mard’s comments and opinions are his own (and not those of the FASB or the VRG).  Look for more from Mard—on standard of value, hierarchy of value, effect of BV standards and other issues confronting the VRG—in an upcoming issue of Business Valuation Update

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