In partial deference to corporate appeals, the Financial Accounting Standards Board has agreed to allow a one-year deferral for part of the implementation of Financial Accounting Statement 157, Fair Value Measurements.Investors have long called for financial statements that report market values - observable or calculated - and FASB constituents in the corporate sector have generally supported the concept. But after a year of preparing to implement FAS 157, corporations went to the board to complain that implementation had turned out to be prohibitively difficult.

In a letter to the board, Derek DiRisio, vice president and controller of Public Service Enterprise Group, a New Jersey-based utilities concern, said that his company had intended to adopt early implementation of Statement 157, but after months of industry-wide meetings and training sessions with auditors, he realized that early implementation would be impossible, and timely implementation would be difficult at best.

"We ultimately decided not to go forward because we encountered significant implementation issues," DiRisio wrote. "The objective of this pronouncement is 'to establish a framework for measuring fair value,' which, for most financial services firms, is relatively straightforward. For an energy company carrying significant assets and liabilities at fair value where active, liquid and transparent markets do not exist, the exercise of applying the required framework is significantly more complex and much more subjective."

Despite similar expressions of frustration from several major corporations and advocates for corporate accountants, FASB decided to re-affirm that for fiscal years starting after Nov. 15, 2007, companies would be required to implement the standard for financial assets and liabilities and any other assets and liabilities that are carried at fair value on a recurring basis.

However, in an acknowledgement of the complexity of implementing the standard, the board tentatively granted a one-year deferral for reporting on non-financial assets and liabilities. At press time, the FASB staff was scheduled to issue an exposure draft of a statement of position proposing the deferral before year's end.

The comment period was expected to last 30 days.


Pascal Desroches, vice president and deputy controller of media conglomerate Time Warner and a member of the Institute of Management Accountants' Financial Reporting Committee, applauded the deferral. "While the [committee] would have preferred a full deferral of FAS 157, we believe the deferral provided by FASB for non-financial instruments represents a step in the right direction and will allow some key implementation issues to be addressed in a thoughtful manner," he said.

Financial Executives International, a 15,000-member trade group, also requested a deferral because of two intersecting problems: documentation and compliance with Section 404 of the Sarbanes-Oxley Act.

"One must first understand the model in order to document how to comply - and as a group we have concluded that we do not (at least as it relates to non-traded assets and liabilities)," the group wrote in a letter to FASB, "and ... in order to have a control framework that is compliant under Section 404 [of SOX], we must document the procedure and have our auditors review and opine on it. Given the uncertainties related to the first problem and the lack of available time and capable technical resources, we believe it is unlikely that most companies will be ready by Dec. 31, 2007."

Alfred King, vice chair at valuation consulting specialist Marshall & Stevens, on the other hand, does not believe that deferral solves the problem. In fact, he says, the deferral creates yet another problem, and the option of early implementation only complicates it. "The problem with the postponement is that for a year now we're going to have confusion because we'll have two separate definitions of fair value," King said. "One definition is for the kinds of assets that now require fair value measurement - financial assets and those that are measured periodically - and the old definition for other kinds of assets, the ones most often involved in mergers and acquisitions."

King disagreed with the new definition of fair value, which is based on the notion of a value determined by what an open market, as opposed to an actual buyer, would pay for an asset. He foresees problems as companies try to calculate the market value of intangibles for which there are no observable market values.

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