FASB 157 — Delayed, or Not?

On Monday, a rumor was circulating that FASB Rule 157 was going to be delayed. This helped to power markets higher.

  We will save the discussion of why markets would rally on the idea that
publicly traded financial firms would be allowed to conceal large and ill-defined losses from shareholders for another time.

It appears the Day of Reckoning is here. FASB Rule 157  (mostly) takes effect today.

What that accounting change requires is that all of the crappy paper on  the balance sheets of various funds, banks and brokers — RMBS, CDOs, CDS, etc. — must be "carried at fair value on a recurring basis in financial statements."

In a news release at 12:05 am this morning, the Financial Accounting Standards Board:

"Reaffirmed its vote against a blanket deferral of Statement 157, Fair Value Measurements. For fiscal years beginning after November 15, 2007, companies will be required to implement the standard for financial assets and liabilities, as well as for any other assets and liabilities that are carried at fair value on a recurring basis in financial statements. As a result, Statement 157 becomes effective as originally scheduled in accounting for the financial assets and liabilities of financial institutions.

The Board did, however, provide a one year deferral for the implementation of Statement 157 for other nonfinancial assets and liabilities. An exposure draft will be issued for comment in the near future on this partial deferral. The audiocast of the November 14th meeting is currently available at www.fasb.org. More information about topics discussed and decisions reached at the meeting will also be posted on the FASB website in the coming days."

In other words, no more mark-to-model or other accounting fantasy. I have some questions as to what exactly "nonfinancial assets and nonfinancial liabilities" are, but there will be further clarifications coming from FASB over the next few days. Since they are dribbling this news out in little spurts, my assumption is that its its more shareholder than corporate friendly.

UBS’ noted that even this partial delay is not a positive. Their derivative department noted that the
implementation of the full FASB 157 being partially delayed "suggests that banks’ balance sheets
are not sufficiently strong to cope with that shock at the moment.
Whilst this undoubtedly gives banks more time to work out their
problems, that is actually bad news as it will mean the financial
markets remain in a state of closure for longer, and the process of
removing capacity will take longer to materialise."



Before you applaud FASB for requiring fair and transparent disclosure of holdings by Financial institutions — something that most reasonable folks would describe as a no-brainer — allow me to point out that a total deferral for a full year nearly passed. After various lobbying efforts by groups like Financial Executives
International, the seven-member FASB rejected such a proposal by a
four-to-three vote. 

That is a reminder of exactly how pathetic and shareholder unfriendly the corporate infrastructure remains. When I get the names of the members who voted against this rule, I will be sure to post it for public shaming.


Summary of Statement No. 157
Fair Value Measurements   

FASB Rejects Deferral of Statement 157 for Financial Assets and Liabilities
Business Wire, 2007-11-15 00:05:07 –

Macro Derivatives Sales Daily
Thursday 15/11//07

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What's been said:

Discussions found on the web:
  1. Ross commented on Nov 15

    The three who voted against should be put in the stocks.
    It is rumered that City foreclosed their interests on certain banana boat derivitives. They have taken possession and will not value these assets til next year.

  2. Philippe commented on Nov 15

    The main issue remaining is what is the market value of assets that banks and funds have by all means tried to neutralised when avoiding liquidation.?
    Not to worry at below 50 PCT Net Assets Value few funds will have to liquidate and provide for a market price benchmark.
    What will trigger the downsizing of the NAV? liquidity drying up.
    UBS had 18 Billion USD sub prime loans in its books and announced today that it will write off 6 billion USD (around 33Pct)
    This should help few banks still waiting for Godot at Level 3/2

  3. Boom2Bust.com commented on Nov 15

    “When I get the names of the members who voted against this rule, I will be sure to post it for public shaming.”

    Not sure if they really care…

  4. Jas commented on Nov 15

    The deferral or not of SFAS 157 is a non-event. Most, if not all, financial firms have already early adopted the standard. For example, for the most recent Merrill Lynch 10-Q:

    “We early adopted SFAS No. 157 in the first quarter of 2007.”

    From Citi:

    “The Company elected to early-adopt SFAS 157, “Fair Value Measurements” (SFAS 157), as of January 1, 2007.”

    In fact, I would like to know of a financial firm that has not early adopted. 157 is also where the distinction of level 3 assets and their required disclosure came from.

  5. Matt commented on Nov 15

    As I understand it, all of the big brokers early adopted this rule, which is what led to the hierarchy of valuations. They must still utilize models for many instruments because this doesn’t instantly create market prices for thinly traded products.

  6. UrbanDigs commented on Nov 15

    Most large corporations already began adopting to this rule, so it is mostly a non event. Plus there were rumors that a portion of this rule would be delayed.

    However, this does NOT solve the problem of valuations themselves! Only what assets are classified as tier 3, or untradable to the point that valuation is not true market value.

    We still have a significant adjustment of the value of these assets to market valuations over model methods to come.

  7. michael schumacher commented on Nov 15

    until you actually assign a real valuation to these (what i loosely call assets) then you can make all the changes you want and it will still have zero effect on what the Goldman’s of the world do.

    I love how the banks say that the assets are fully valued in Level 3………(Homer Simpson moment) D’oh……..


  8. Francois Theberge commented on Nov 15

    “allow me to point out that a total deferral for a full year nearly passed. After various lobbying efforts by groups like Financial Executives International, the seven-member FASB rejected such a proposal by a four-to-three vote.”

    4 to 3 votes is a strong indication of how screwed up our regulatory/political system has become.

    To paraphrase slightly out of context Sen. McCain, our times have become the “No lobbyist left behind” era.

    I will say it again: There will be no real remedy to all those ills until political campaigns are financed by the people.

    I know it is a very unpopular idea in certain quarters. To that, I say that popularity bears little correlation to truth.

    Ask yourself this simple question: Who will a politician work for?

    My take? Like anyone else, politicians will work for those who pay them. I’d rather pay and have them for me than some special interest group that does not give a heck about my well-being.

    What say you?


  9. Mark Feldman commented on Nov 15

    I was wondering how they would get around telling the truth.

    I had no doubt that they WOULD get around it — I was just wondering how.

    I suppose if the rule were kept as is, then the next plan of action would be to just ignore it, followed by lying.

    As if the truth will ever come out of Merrill, GS and the rest…

  10. Estragon commented on Nov 15

    Defining “fair” value is easier said than done. The FASB was probably struggling with whether the rules, as currently written and with implementation experience to date, served to advance the transparency and fairness to which they aspire.

    It’s quite likely that a large number of conflicting interpretations and unintended consequences came to light as real world implementation moved forward, and that’s why a delay was considered.

  11. Pat Gorup commented on Nov 15

    “Since they are dribbling this news out in little spurts, my assumption is that its its more shareholder than corporate friendly.”

    Actually, I’ll take the other side of that bet.

  12. Will T commented on Nov 15

    Leslie Seidman was one of the three board members to vote for the one year extension.

    From cfo.com:

    “There is no way to hardwire [FAS 157 guidance],” asserted FASB member Leslie Seidman at the meeting, who said that fair value estimates should be considered from the perspective of the reporting entity, and therefore will likely be different for each company. “I’m afraid that if we write a lot of ‘shoulds’ it will give us a cookbook approach, but if we leave the hierarchy in place, people will consider the rule principles.”

    Another article from cfo.com:

    But the final, split vote from the FASB board dictates that companies will have to work through the uncertainties in FAS 157 for the greater good of investors. “This is the most important thing we’ve done as far as investors’ input [we’ve received], and I’d hate to see this delayed,” said board member Leslie Seidman. However, Seidman was one of the three board members who supported the deferral. She said it’s important for the board to balance investors’ input with an assessment of companies’ readiness so that the disclosures would actually provide better information.

    When is everyone going to stop drinking the Kool-Aid?

  13. Harry commented on Nov 15

    But what is specifically for liabilities fair value means? In what example is the liabilities carried at fair value on a recurring basis means? If i have banks liabilities as an asset in my book mark to market below par is that means the bank itself overstated their liabilities if it is still booked at cost? anyone can help me?

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