Terry Corbell, The Biz Coach
By Terry Corbell
Business Consultant

Look for Significant New Fair-Value Accounting Standards



 Aug. 4, 2010


As a company shareholder, you will see more transparency as the result of new fair-value accounting standards proposed by the Financial Accounting Standards Board (FASB). But the transparency means substantially more work to prepare financials, according to Daniel Figueredo, manager of San Francisco Bay Area accounting firm, Burr Pilger Mayer.

He was interviewed by Sue Ostrowski at the Smart Business Network.

“The new standards in the exposure draft will help converge the U.S. generally accepted accounting principles (GAAP) with international financial reporting standards (IFRS),” says Mr. Figueredo. “It’s a pretty robust draft with many new disclosure requirements. If it’s issued as is, it will be challenging for businesses.”

Mr. Figueredo says companies will be required to divulge how they arrive at conclusions when presenting fair-value financials based on changed assumptions.

“One of the most significant disclosure requirements that could affect businesses is the need to disclose a sensitivity analysis that attempts to measure the uncertainty in your fair value measurements categorized as level 3, which are the items that require the most management judgment to value,” Mr. Figueredo tells Ms. Ostrowski. “You will have to disclose the range of that price change, thus giving a reader a sense of the degree of possible swings to your balance sheet for other likely fair values that one could have arrived to.”

As an example, he cites banks with mortgage-backed securities.

“These instruments require a fair amount of judgment by management to value, and would likely be categorized as level 3,” he explains. “Factors considered in measuring the value of a mortgage-backed security could include pre-payment assumptions, default rates, loss severities and discount rates, to name a few.”

He says banks will have to establish the most-salient valuation assumptions. Then, they will have to ascertain other sums that were possible to consider in determining a different conjectural fair value.

Another significant change:

“As part of the new provisions, the exposure draft indicates that you should not consider blockage factors for level 2 or 3 fair value measurements,” he explains. “That essentially means that you should not take further discounts to fair value just because you own a large chunk of shares, such as with large investors like Warren Buffet’s Berkshire Hathaway or hedge funds.”

He explains the difference if a company should have to liquidate:

“…that sale will affect the price of the stock (typically downward),” he says. “But you could very easily sell smaller chunks of stock over longer periods of time. Blockage discounts are viewed as transaction costs, and the effects should be recognized when the decision to sell a block is carried out, rather than as period to period fair values.”

The article also explains more on how the changes will affect companies, what types of firms will be impacted and how they can prepare. For more details, here’s the link to the article:

From the Coach’s Corner, if you’re like a lot of companies in a financial turnaround situation, here’s a resource: Step-by-Step Solutions for a Company Turnaround. 

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Seattle business consultant Terry Corbell provides high-performance management services and strategies.