During conference calls with auditors this week, Securities and Exchange Commission staff said that accountants should be on the lookout for improper selling strategies designed to take advantage of FAS 159, “Fair Value Option.”
The Financial Accounting Standards Board intended the rule to increase transparency for financial businesses, particularly by forcing banks to show the market value of the assets they hold. The standard allows companies to irrevocably choose to record the value of a financial instrument on its balance sheet, based on the price the instrument could bring in a market transaction.
The SEC’s concern is that the rule may allow financial companies to avoid recognizing investment losses in their earnings, giving them a chance to run losses through retained earnings on their balance sheets, as opposed to their income statements.
The Center for Audit Quality, which is affiliated with the American Institute of CPAs, issued an alert this week, warning auditors to be skeptical about the way companies adopt the new standard. Similarly, in an alert on the McGladrey & Pullen LLP Web site, accountants warned about the regulator’s concerns, writing that, “[The SEC staff is] very skeptical of a strategy that lacks substance or that would involve electing the fair value option for a financial asset or liability with an intention of disposing of the asset or settling the liability."
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