A post-implementation review of the Financial Accounting Standards Board’s fair value measurement standard by FASB’s parent organization found the standard generally met its objectives, even though some investors have difficulty understanding fair value information provided in the financial statements, and their level of satisfaction with the information varies.
The Financial Accounting Foundation has been conducting post-implementation reviews of older FASB standards, and the review of Statement No. 157, Fair Value Measurements, is the latest. The standard was originally issued in 2006 and amended in 2010 after the financial crisis prompted calls for changes in fair value and mark-to-market accounting for financial instruments.
Statement 157 provides a single definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. However, FAS 157 does not change existing U.S. GAAP requirements that specify which items organizations should measure and report at fair value.
The post-implementation review team limited its review to Statement 157 and how fair value is measured and did not include other standards that require the use of fair value either for measurement or disclosure purposes. The PIR team received input from investors and other financial statement users, as well as from preparers, auditors, and academics. Based on its research the review team concluded that Statement 157 adequately resolved the issues underlying its stated need to provide a single definition of fair value, establish a framework for measuring fair value, expand disclosures about fair value measurement, and simplify and codify the fair value measurement guidance.
Information from the application of Statement 157 generally provides investors with decision-useful information, the team found, especially the description of the inputs and valuation techniques used to measure fair value.
“The post-implementation review report on Statement 157 identified many positive aspects of the fair value standard, most importantly that it met its objectives and did not result in any unanticipated consequences,” FASB chairman Russell G. Golden said in a statement. “We are eager to consider the PIR team’s findings and anticipate providing our initial response in the coming weeks.”
Not all of the findings were positive, however. The team acknowledged that some investors have difficulty understanding fair value information provided in the financial statements, and their level of satisfaction with that information varies. There are also varying views about the volume and extent of the fair value disclosures—some stakeholders think they are excessive, others ask for more.
In addition, while Statement 157’s requirements are understandable, can be applied as intended, and allow information to be reported reliably, the team acknowledged that certain requirements are difficult for employee benefit plans, not-for-profit organizations, and private companies to apply, and those difficulties can be magnified if the organization is small.
In addition, some stakeholders believe the changes made to financial reporting and operating practices to implement Statement 157 were significant. Some of these changes may be attributable to changes in the regulatory and economic environment such as increased audit requirements. The global financial crisis of 2008 also may have amplified the implementation challenges.
The review team said that Statement 157 did not result in any significant unanticipated consequences.
However, some stakeholders, such as preparers from smaller organizations and private equity firms, believe the ongoing costs to comply with Statement 157 are significant—especially the incremental increase in audit fees, audit requirements, and in the use of third-party pricing services and valuation specialists. Some of the costs relate to regulatory environment factors arising after the issuance of Statement 157, such as the requirements associated with the Sarbanes-Oxley Act of 2002, Securities and Exchange Commission reviews, and Public Company Accounting Oversight Board inspections.
With regard to standard-setting process recommendations, the PIR team recommended that FASB continue its efforts to summarize and clearly document its cost-benefit considerations in the project files. The PIR team also recommended that FASB continue its efforts to broaden its outreach activities, identify the most effective means of employing the variety of available outreach methods, and clearly document in the project files the level of stakeholder outreach performed.
The review of Statement 157 was undertaken by an independent team of the FAF, the parent organization of FASB and the Governmental Accounting Standards Board.
“On behalf of the FAF and the FASB, I’d like to thank the stakeholders who helped the PIR team assess the application, usefulness and effectiveness of the fair value accounting and financial reporting standard for public and private companies and not-for-profit organizations,” FAF president and CEO Teresa S. Polley said in a statement.
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