FASB’s Fair-Value Choice; Private Co. Rules

The Financial Accounting Standards Board has published the latest chapter in the book on fair value accounting, a new standard giving public entities the choice of whether to report certain financial assets and liabilities at fair value.

FASB says its objective with Financial Accounting Standard No. 159, Fair Value Option for Financial Assets and Liabilities, is to reduce complexity in accounting for financial instruments and to allow companies to reduce the volatility that may exist where they currently are required to measure assets and liabilities differently. The statement also prescribes presentation and disclosure requirements to enable comparisons among companies that elect different measurement approaches for otherwise similar assets and liabilities.

The fair-value option also achieves convergence of U.S. Generally Accepted Accounting Principles with international standards, as the International Accounting Standards Board already has added such a standard to International Financial Reporting Standards, FASB says.

John Horan, a partner with PricewaterhouseCoopers, says that as a result of other rulemaking activity over the past few years, public companies may have some assets on their balance sheets measured at historical cost, while other assets and liabilities might be measured at fair value. “In certain cases, they may end up with underlying transaction economics that are not being completely and fairly reflected in the financial statements,” he says. “You may have one transaction reported at historical cost and another at fair value.”

FASB says the new standard also requires companies to provide additional information that will help investors and other users of financial statements more easily to understand the effect of the company’s choice to use fair value on its earnings. In addition, it requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the balance sheet.

Hepp

“The underlying driver for this is different measurement bases that can be used for different kinds of assets under different standards in GAAP,” says John Hepp, a senior manager at Grant Thornton. In addition, preparers of financial statements are looking for some relief in applying the complex rules surrounding hedging, and the fair-value option provides such relief, Hepp says.

While FASB has said its mission is to make rules less complex and financial reports more comparable, Hepp contends that the new standard seems to achieve just the opposite effect. “It’s an unprecedented standard” in giving companies the option to choose which measurement attribute to use, instrument by instrument, he explains.

“You can have a financial instrument and you can choose whether to measure it at fair value through earnings or not,” he says. “What’s so odd about this is you could buy 100 shares of stock, elect to account for half at fair value, and the other half not. In the past the guiding thought, if not the principle, was that similar transactions should be accounted for in same way. This standard walks away from that. You can elect even within the same lot of financial instruments whether accounting for some one way and some another.”

Hepp says the fair-value option takes effect in tandem with FASB’s earlier approval of Statement No. 157, Fair Value Measurements, creating what he predicts will be a significant learning curve in the market for preparers, auditors and readers of financial statements. “They’re turning an awful lot of dials at the same time by doing that,” he says. “I’m concerned that’s going to be a huge education issue at companies that wish to adopt. It’s substituting a lot of disclosure for comparability, and that’s not helping the complexity of financial statements.”

IASB: Simpler Accounting For Smaller, Private Companies

While U.S. accounting experts continue the debate over whether there should be simpler accounting rules for smaller or privately held companies, the International Accounting Standards Board is proposing a new set of accounting standards for small to medium-sized private companies.

IASB has published an exposure draft, “International Financial Reporting Standard for Small and Medium-sized Entities” (IFRS for SMEs), to provide a simplified, self-contained set of accounting principles appropriate for smaller, non-listed companies. The SME rules would be based on International Financial Reporting Standards, which have been developed primarily for listed companies.

IASB said the proposed rules for smaller companies remove choices for accounting treatment, eliminate topics that are not generally relevant to SMEs, and simplify methods for recognition and measurement. As a result, the volume of the plain-English accounting rulebook for SMEs is reduced by more than 85 percent compared with the full set of IFRSs, according to IASB.

Noll

Dan Noll, director of accounting standards for the American Institute of Certified Public Accountants, said the AICPA and FASB are launching a committee to study the question of whether there should be different accounting standards for private companies compared with the full book of GAAP applied to public companies.

The committee’s objective will be to pour through GAAP one rule at a time and make recommendations to FASB for changes as they are identified and prioritized. The IASB exposure draft “is a one-stop-shopping document for SMEs,” Noll says. “The effort in the U.S. is more on a piecemeal basis.”

“The question of big GAAP/little GAAP has been debated in the United States literally for decades,” says Ray Krause, a partner at accounting firm McGladrey & Pullen. Proponents for “little GAAP,” or a different rulebook for smaller or private companies, say financial reports under current GAAP are unnecessarily complex and detailed to suit the needs of smaller or private companies, which typically have a far more limited readership for their financial reports, Krause says.

That IASB is writing a new rulebook for smaller companies won’t necessarily accelerate the process in the United States, Krause says, “but it might help sharpen the focus.”