Best of 2008: Fair Value

The crisis may have trumped the bankers' crusade against mark-to-market financial reporting.

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By year’s end, the fair-value war that had raged throughout 2008 seemed to have fizzled out. With the financial services industry’s seeming crash-dive in public favor to a spot below journalists and lawyers, few bankers had the stomach to continue claiming that their troubles stemmed from mark-to-market financial reporting. And while CFOs outside the banking sector couldn’t be expected to love a wide-scale change to fair value, many finance chiefs seemed to feel the effect on their organizations wasn’t that big a deal.

During the bulk of 2008, however, many organizations struggled to adjust to the new fair-value regime introduced by FAS 157, the controversial Financial Accounting Standards Board standard that specified how to measure corporate assets and liabilities at market rates. With assets on bank balance sheets getting walloped by the subprime crisis, financial services executives spoke out against the stricture that, they contended, made their financials look worse than they were. Their rallying cry: By making the banks look so valueless in the middle of a credit crunch, mark-to-market accounting was “procyclical” in that it accelerated the downturn.

Indeed, when Congress was enacting the Emergency Economic Stabilization Act in late September and early October, the bankers’ claims were so high on the agenda that lawmakers felt the need to put a reminder in the act that Securities and Exchange Commission could eliminate fair-value accounting at a stroke if it so chose. Congress also inserted a requirement that the SEC do a formal study of the effects of mark-to-market on the financial crisis and report to legislators on the results very early in the New Year.

For a few weeks, that seemed a crucial date in terms of fair value’s fate. More recent comments by outgoing SEC Chairman Christopher Cox and other commission officials suggest, however, that the report will come out siding with the auditors and investors who argue that it would be a disaster to change the valuation system in the middle of a crisis.

That’s not to say fair value is dropping off the hot-issues map anytime soon. A plethora of thorny matters have yet to be resolved, including how goodwill should be valued in a merger, whether mark-to-market accounting can be made to be apply to corporate legal liabilities, and whether “smoothing” techniques and fair value are a lethal cocktail for defined-benefit plans. For now, however, here, in reverse chronological order, is our list of ten top fair-value stories for 2008.

Has the Crisis Ended the Fair-Value War?

Because of the current fragility of investor confidence, regulators should hold steady on current mark-to-market standards, many feel.

Former FDIC Chief: Fair Value Caused the Crisis

Things were fine before the accounting standards-setters barged in and “destroyed hundreds of billions of dollars of capital,” he contends.

How Bailout Loosens Accounting, Tax Rules

While the new law works to ease the credit crisis, it lets banks sidestep tax and accounting rules.

Tweedie: Don’t Blame Fair Value for the Crisis

Accounting did not exacerbate the credit crisis, says the IASB chairman. But the turmoil has pushed the accounting rulemaker to speed up its response.

Fair Value: The Q2 Profit Vulture

Mark-to-market adjustments have cut into energy companies’ second-quarter results.

You’ll Need a Fair Value “Mindset”

The chief accountant at Xerox debates why corporates may not be ready to use fair value on non-financial assets.

How Fair Value Rewards Deadbeats

Opponents of mark-to-market accounting complain that some companies are making silk purses out of sows’ ears.

It’s Your Loss. (Maybe.) Now Explain It.

Companies will have to disclose more detail about potential future losses — notably from lawsuits — under a proposed new accounting rule.

Fair-Value Accounting’s “Atmosphere of Fear”

Scared stiff by auditors, banks have been operating in a “lockdown” in the use of individual judgment, senior finance executives say.

Fair-Value Liability: A “Parallel Universe”?

How do you gauge the fair value of a liability that couldn’t be sold in any market?

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