Is Fair Value Really Fair?
By Theresa Hickman-Oracle on Feb 04, 2010
Question: If I were the original purchaser of the empire state building that cost about $41m to build 40 years ago, what's the fair value of that asset on my balance sheet?
Answer: Whatever the empire state building is worth today or the exit price of that asset. (It's probably at least 10 times that even in this real estate market).
Fair value measurement has been one of the more controversial issues between FASB and IASB because some blame it for helping exacerbate the financial crisis. Last week, they tentatively decided to define fair value as an exit price (also referred to as mark-to-market).
According to CFO.com, FASB recently released a reworked version of Subtopic 820-10 (formerly FAS 157), that dictates how companies should measure the fair value of assets and liabilities under generally accepted accounting principles. Essentially, companies must provide more details when disclosing their assets and liabilities. They must disaggregate their reported numbers and measure the value of their assets and liabilities using a 3-tiered approach using "observable" transaction prices.
For more information, see http://Fair Value: Eyes Wide Open.
Many folks are not happy with this. EU finance ministers were especially critical of its potential impact to their banks' credit crunch.
David Tweedie, the IASB Chairman's response to the EU finance ministers was, "We can't keep changing (the accounting rules) for one particular part of the world... We cannot always allow Europe to tell us what to do. This is global. We are the IASB, not the European accounting standard board. ... The market is probably the best assessment of what the present value of those instruments are. That's the new standard. Some in Europe say, 'We think it's too much for fair value.' Our assessments throughout the world say that it is what the people want us to do."
To read the entire article, see IASB plans no fair value changes for EU-chairman.
Fair value along with revenue recognition, leases and consolidation, are all controversial topics in the move to converge FASB and IASB standards. With FASB and IASB now meeting monthly, hopefully there will be some conclusions soon.