The Financial Accounting Standards Board has begun to deliberate again on one of its most far-reaching and controversial projects - that of fair value measurement.
The board will have to grapple with several tough issues as it assesses public comments on the exposure draft that it issued earlier this year. It will also have to consider where to go next to ease and extend the application of the eventual standard.
One place that it will have to go is back - back to the conceptual framework on which the proposed standard is based.
"There is a strong question hanging over all of this, that all of the trouble we have in accounting today is because we have so many different ways of measuring things, sometimes recognizing change in fair value, [and] sometimes not," said FASB senior project manager Halsey Bullen, who is overseeing the work on the conceptual framework. "That's something that is on a lot of people's personal agendas, if not on the board's technical agenda. A lot of people think it's a good objective but an impossible dream, and a lot think it's just a bad idea."
The proposed statement clarifies and incorporates the present value guidance of FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. The board has not, however, revised that concepts statement to reflect the proposed clarifications.
Many of the 80 comment letters on the proposed statement recommended revising the concepts statement before issuing a fair value measurement statement. Some letters, in fact, expressed a hope that modification of the concepts statement would preclude the need for the proposed statement.
It's a big decision. Though the proposal doesn't require any changes to what must be measured and reported at fair value, it reaches into many other standards that require such measurement but do not include guidance on how precisely to do it.
Many preparers of financial reports - the people who will have to determine the fair value of assets and liabilities, some of which have no easily determinable market value - are critical of the proposal. One reason, according to Alfred King, vice chairman of the valuation company Marshall & Stevens, is that the setting of rules on measuring fair value will encourage the board to set more standards that require recognition of fair value.
"This exposure draft tells you how to do it, not when to do it," King said. "If they pass the proposal, then it will be that much easier for the board to say, 'Now that we've shown how to do it, here's an example of when you should do it.'"
King said that the proposal pretty much reflects the way assets are valued today, but that its application to certain new areas, such as revenue recognition, will need to be better justified.
Revenue recognition is one of a few ongoing projects that will be affected by new rules on measurement. Business combinations and share-based payments - the controversial options compensation project - will also be heavily affected by how fair value is determined.
As FASB project manager Linda MacDonald put it, "We have an awful lot of moving parts around here these days, and they all relate to each other."
The work on the conceptual framework will be in tandem with the International Accounting Standards Board. The two boards will move step by step to try to develop identical or very similar frameworks. Both boards have had conceptual frameworks for many years, but now, after the development of dozens of new standards and much water under the bridge, the concepts need improvement and, in some cases, completion.
The framework project, which was added to the boards' agendas in October, could well take five or 10 years, Bullen said. The boards plan to look first at concepts that are poorly developed yet cut across several standards. Measurement is just one of those concepts.
"We certainly will be addressing measurement as an important part of this effort. It's not the first thing we're going to do, but it will be part of our initial effort," Bullen said. "In concept, the question is, should there be, as some view it, a single measurement attribute that's used across the board, or not? If so, what is it and how will it work? Some will advocate using fair value in accordance with the current proposal. Others will have other ideas."
Raymond J. Bromark, a partner with PricewaterhouseCoopers, is among those who see more of a solution in the CFW than in the proposed standard. "My very strong personal view is that standards should not have bright-line tests, but should be more principles-based, with examples that allow those principles to be applied consistently," he said.
Recently, FASB has been striving to write standards that are based more on general principles than on specific rules.
The projects on fair value measurement and its conceptual framework will determine, to a considerable extent, how the two approaches balance out.
