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Ideal for self-study or on-site training!
Gain insights into the conceptual and practical reasons for using fair value as the required (or optional) measurement attribute for new and existing accounting guidance. The course covers the conceptual and practical issues which arise when fair value measurement is implemented under existing FASB guidance and provides examples of these issues. In addition, the measurement and estimation challenges that confront preparers and auditors in making fair value measurements are presented and related guidance is provided.
Objectives:Prerequisite: Basic understanding of accounting principles
Video moderator Lawrence J. Gramling, Ph.D., CPA, Professor of Accounting at the University of Connecticut in Storrs, CT, discusses the required (and permitted) use of fair value accounting under FASB standards with Mark A. Alimena, CPA, CFE, Partner, Financial Services Industry Practice at Marden, Harrison & Kreuter, CPAs, PC, a division of J.H. Cohn, LLP, in White Plains, NY; Teresa D. Thamer, CPA, CFE, Associate Professor at Brenau University in Gainesville, GA; and Mark L. Zyla, CPA/ABV, CFA, ASA, Managing Director at Acuitas, Inc. in Atlanta, GA.
*(146-min. video) The DVD disk contains the video presentation and a viewable copy of the Manual.
**The Additional Manual is for group study training only. Unlike other formats, it has no exam
answer sheet and cannot be used to earn self-study credit.
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Chapter 1 - Why Fair Value Accounting?
Learning Objectives
After studying this chapter participants should
• Understand the impact the changing economic environment is having on financial accounting standards worldwide and fair value accounting requirements in particular.
• Become familiar with the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) Convergence Project
• Review the impact the Securities and Exchange Commission's (SEC) Roadmap for transition to International Financial Reporting Standards (IFRS) will have on existing and future financial accounting standards.
• Identify challenges facing organizations, auditors, and others in developing guidelines for financial reporting, including the implementation and disclosures on fair value measurements as required by accounting standards.
• Identify the current standards which require the use of fair value measurements and other projects of the FASB.
Introduction
Over the past several years, there has been what seems to be a proliferation of exposure drafts, changes in both standard-setting bodies and the processes and membership of those bodies as well as a shift in the focus of financial statements to include transparency and management's acceptance of responsibility for those financial statements. These changes are indicative of the ongoing changes facing both business and the accounting profession. Recent economic events such as the financial "meltdown" and credit crisis facing organizations worldwide have added to the debate surrounding fair value measurements and its application.
There are a variety of reasons for these changes, many of which are interrelated. This chapter will address five of these reasons: • The changing economic and regulatory environments facing business today
• The FASB and IASB Convergence Project and the SEC's Roadmap for transition to IFRS
• The continuing emphasis by various bodies on the characteristics of financial reporting and the needs of users
• The implementation of fair value accounting in U.S. Generally Accepted Accounting Principles (U.S. GAAP)
• Other projects by the FASB focusing on fair value measurements
The Changing Economic and Regulatory Environment
Welcome to the 21st century! Just as the Industrial Revolution hailed the arrival of the 20th century, certainly the 21st century could be called the Information Revolution. The speed at which information is generated and communicated continues to escalate, and that has had a tremendous impact on both the economy and society of not only the United States but of the world in general.
Information is at everyone's "fingertips." This access to information has changed the way people view the world as well as make decisions. Financial information is immediately available. The focus of the SEC on Management Decision and Analysis (MD&A) as well as transparency of financial data, including projections, has served to increase the expectations of investors and Wall Street analysts. This, in turn, has served to influence stock prices. Many feel this has also exerted pressure on companies to manipulate earnings. Certainly some of the accounting and management scandals of the 1990s are the result of this pressure.
The traditional economics of the 20th century no longer seem relevant in the 21st century. The fast-paced global environment of business continues to escalate, creating new and continuing challenges for management, investors, and government.
Competition has also changed dramatically. Companies now trade and do business globally whereas, in the past, this was left only to the largest Fortune 500 companies. Global competition has also changed. Not only are domestic companies doing business outside the United States but foreign companies are actively doing business within the United States. New markets in former third-world countries continue to emerge. Foreign companies eagerly seek to trade their stock on United States stock exchanges. This has resulted in trade deficits for the United States as well as increased competition in investor markets.
The SEC's approval of rule amendments in November 2007 allowed financial statements from foreign private issuers in the U.S. to be accepted without the reconciliation to U.S. GAAP if they were prepared using IFRS as promulgated by the IASB. This was a significant pronouncement both practically and politically as it was the first time the SEC agreed that a comprehensive set of accounting standards other than U.S. GAAP was acceptable. Additionally, in August 2007, the SEC issued a Concept Release and Request for Comment that sought comment as to whether public U.S. issuers should be permitted to prepare financial statements in accordance with IFRS. The increased complexity of financial transactions has also played a significant role in effecting changes in business reporting in recent years. Variable Interest Entities (VIEs) and Special Purpose Entities (SPEs) were virtually unheard of until the late 1990s. The banking and investment arenas have generated a myriad of complex financial instruments which have resulted in a variety of rules and interpretations not originally considered in accounting pronouncements. What was once a simple matter of reporting is now a maze of interpretations and complex standards.
Recent events in the third and fourth quarters of 2008 serve as reminders that complexity can create difficulty in determining appropriate financial reporting of the underlying transactions. Many argue that fair value accounting exacerbated the credit crisis. Because of mark-to-market losses, companies had to raise capital for meeting capital adequacy requirements. This began a "downward spiral" resulting in credit rating agencies downgrading the company's credit ratings, making borrowings to meet capital requirements more difficult. In some instances, this eventually led to the collapse of the company.
Groups such as the American Bankers Association and the Financial Services Roundtable have requested suspension of the mark-to-market accounting rules, claiming that such standards are causing financial firms to continually lower the value of assets such as mortgage-backed securities for which there is no market. Both the FASB and SEC have provided interpretive guidance that allows management to use internal assumptions about expected cash flows to measure fair value when the relevant market evidence does not exist. U.S. Federal Reserve research however, shows that fair value estimates for bank loans can vary greatly depending on the valuation inputs and methodology used. Thus, many have suggested that, instead of abandoning fair valuation, governments and various users should consider other measures such as reducing capital adequacy norms. While a suspension of fair value accounting standards would no doubt improve the balance sheets of financial institutions, such actions may also lead to further suspicions about the underlying value of difficult-to-price assets by these banks.
In response to the credit crisis, a study on mark-to-market accounting was authorized when President Bush signed into law the Emergency Economic Stabilization Act of 2008 (EESA). Section 133 of the EESA authorized the SEC to conduct a study on "mark-to-market" accounting. Under the terms of the EESA, the research will include
• The effects of such accounting standards on a financial institution's balance sheet;
• The impacts of such accounting on bank failures in 2008;
• The impact of such standards on the quality of financial information available to investors;
• The process used by the Financial Accounting Standards Board in developing accounting standards;
• The advisability and feasibility of modifications to such standards; and
• Alternative accounting standards to those provided in FASB Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures (SFAS No. 157).
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