Archive for the ‘Accounting Theory’ Category

Tell FASB the FMV Emporer Has No Clothes

Friday, January 16th, 2009

I shared the following comments in response to Jason Mendelson’s Guest Blog at Venture Beat Blog on FAS 157: It is good discussion with real examples of the fallacies of reporting all assets at “fair market value” in the face and moved accounting, and the many uses of financial statements, back to some sense of sanity.

We had far less hubris about valuation before some people confused numbers that would have been automatically suspect on the back of an envelope with true precision because “its in the computer.” FASB signing off on this nonsense without really, really thinking about the potential behavioral, practical, economic implications, in deference to political pressure, is much like the statement at the Baltimore CFA Society meeting in which it was suggested that “before we repeal anymore Depression ERA securities legislation, we should find out why they wrote it.”

Now that we have opened this Pandora’s FMV Box, the bigger question is how to undo the present state of fear that is crippling markets.

I think we all would be better served by getting off our collective post-Enron high horses. We should only adjust market values for assets regularly traded in transparent markets (listed stocks, Treasuries, rated corporate bonds, etc.) and not do it where the valuation is merely an estimate unsupported by trading activity or other real evidence of impairment, e.g., the building burned to the ground. At the same time, more effort must be made to disclose all of the information we know about illiquid assets (the information used as inputs into the so-called “valuation models”) so that other participants in the market can make their own reasoned conclusions about the prices they are willing to pay in an arms length exchange. We need to get back to the understanding that what someone else is willing pay, not the guesstimate of the present owner, is the correct measure of value.