On November 15th a new accounting rule went into effect. It's called FAS 157. It regulates how investments are valued by mandating that they be valued "fairly." And the whining and complaints have begun…
"Fair" is such a nebulous concept. Fortunately (I suppose), the new rule sets out pretty detailed guidelines for arriving at fair market value. What does the investment world think of the new rule and its guidelines for arriving at fair market value? Jason Mendelson says this:
What I do know is this: I have no clue what any of my companies are worth at a given point in time and all the calculations in the world won't help. I know that in the old days at least I could ground the valuation by some third-party market action. Now, I get to do busy work and come up with falsely precise numbers.
A couple of sources I looked at actually blamed FAS 157 for the size of recent bank losses. They said that FAS 157 made the investment institutions raise the book value of investments they had to write off.
One consistent theme seems to be that no one (except accountants) are happy about FAS 157. Here's a few pieces, some new and some old, on the new rule:
- The Valuation Blues (aka How FAS157 Is Tortuous)
- FAS 157 is Stupid
- A FAS 157 Primer
- Summary of Statement No. 157, from the Financial Accountant Standards Board
- Did an Accounting Rule Fuel a Financial Crisis?
Photo courtesy of iStockphoto, Image# 6001673