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A Pain in the FAS

Few finance executives would argue that there is anything fair about FASB's new fair value rule, and once investors get a taste of its volatility potential, they may not sing its praises either

By John Labate | Updated on December 28, 2007

For only the second time in its four-year history, the Public Company Accounting Oversight Board (PCAOB) issued an “audit alert” in December, telling auditors to be on guard for the double whammy of Financial Accounting Standard (FAS) 157–the so-called fair value rule–and the collapse of the subprime mortgage market, which when absorbed together may generate new worries for those companies with the biggest exposures to each. “When the credit markets headed south, the investment companies and commercial banks became the ones that will be most affected by FAS 157,” notes Barry E. Smith, a managing director at Smart Business Advisory and Consulting LLC of Devon, Pa.

Many companies were hoping for–and even banking on–a delay in 157′s implementation. These new guidelines, issued by the Financial Accounting Standards Board (FASB), call for measuring and disclosing assets and liabilities at values markets would currently assign. In November, however, FASB agreed only to a one-year deferral for nonfinancial assets and liabilities and refused a postponement for others. So, for filers with fiscal years beginning after Nov. 15, FAS 157 is already a reality.

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