FASB Statements
This paper seeks to analyze and discuss Statement of Financial Accounting Standards Number (SFAS) 159 issued by the Financial Accounting Standards Board (FASB) which will include an analysis of the purpose usefulness in today’s accounting environment and possible examples of its practical application. 2. 1 Analysis of the purpose 2. 1 Why Is the FASB Issuing This Statement?
FASB (2007) claims SFAS 159 to permit entities to choose to measure many financial instruments and certain other items at fair value, with the objective of improving financial reporting by giving companies the chance to lessen volatility in reported earnings caused by calculating related assets and liabilities differently without having to apply complex hedge accounting provisions. Although FASB found the issuance to be consistent with its long-term measurement objectives for accounting for financial instruments the issuance of the statement nevertheless encountered criticism and oppositions from various quarters.
In explaining the manner and the reason for the Fair Value option under the new standard, Cataldo and McInnes, (2007) brought the many concerns about the practicality and reliability of the issue of fair value measurement under SFAS 157, Fair Value Measurements, that have come out both before and since its enactment in September 2006. They cited an account of SFAS 157 and its broader ramifications from the work of Haldeman, Jr. (2006) .
There was already a prior standard that was issued by board regarding the option to use fair value which is SFAS 157 which up to this time has not yet answered some of the issues raised by analyst Cataldo and McInnes (2007) explained the unresolved issues under SFAS 157 for the “how” of valuation, the gaps in the “why” of FASB’s fair value measurement which according to the authors are perhaps even more arresting. The noted SFAS 157’s preamble to have taken pains to disassociate it from anything beyond improving measurement methods, hence they would like to deduce that SFAS 159 could not be achieving more than SFAS 157.
They thus emphasized that since the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute, the SFAS necessarily does not require any new fair value measurements. They are attaching therefore the lack of policy goals before the fair value proponents do consider further codification of fair value practices as essential to the transition to a full fair-value accounting system.
Sensing an evasion of a needed debate to resolve the issues, the author could only have their many reservations of what could SFAS 159 really accomplish since and earlier SFAS 157 has not yet fully realized its objectives. Cataldo and McInnes, (2007) the lack of explanation as to how and why in SFAS 157 which are also applicable in SFAS 159. They cited the comment of Pfizer that separating the ‘how’ and the ‘why’ of fair value without cause limits the improvement of old and the expansion of new accounting standards.
They explained that the usefulness and validity of income based on fair value hinge upon capturing all significant sources of enterprise value. They were in effect attributing to the FASB the inconsistency of declared purpose of SFAS 157 that explicitly excludes measurement of value elements arising from the enterprises’ creative marshalling of productive resources. They believed otherwise that that marshalling of productive resources should instead be the most significant components of value in the modern enterprise under the new economy. Cataldo and McInnes, (2007) noted the problem in SFAS 157 which could be applied with SFAS 159.
The maintained that the problem is beyond the purely technical challenges since allowing companies to estimate value based on the hypothetical price of groups of assets and liabilities to prospective buyers, could actually be confusing. They emphasized the unclear guidelines for applying the standard and the fact and the standard’s fair value hierarchy indicates bias in favor of the valuation of individual items in traded markets. This prompted them to wonder why an estimate of a company’s hypothetical sales price should now be the aim of financial accounting (Meigs and Meigs, 1995; Van Horne, 1992).
They therefore wonder whether the standard could still add useful information in the presence of direct evidence to the contrary) Cataldo and McInnes, 2007). Cataldo and McInnes, (2007) are worried that SFAS 159 will bring the accounting profession “to the point of no return” toward the adoption of full fair-value accounting system. They would therefore want a broader professional involvement to show that the cumulative knowledge and experience embodied in current U. S. GAAP under SFAS 159 cannot be readily dismissed.
Fearing that SFAS 159 will discard current system of accounting, they instead take the side that that the “profession will find new, effective methods for communicating value-relevant information while safeguarding the integrity and consistency of the transaction-based accounting model (Cataldo and McInnes, 2007). 2. Usefulness in today’s accounting environment Accounting information are said to be the language of business and anything that would improve the quality of information should be found or considered to be useful in the accounting environment.
In arguing for the irrelevancy of SFAS 159 to the ‘New Economy’? , Cataldo and McInnes, (2007) said that proponents of radical change under new standard tried to convince the authors that ideas drive value in an unprecedented manner and have ushered in a new era. This they cannot accept since they question that recent events do not really depart so radically from past history. They argued instead that value has long been created in basically intangible ways as found in franchise building a franchise through strong brands in the market.
Value they believe are also found in patents, superior technology and even in supremacy over channels of distribution and supporting the by creating barriers to entry. Cataldo and McInnes (2007) were saying that there are other ways of creating value other than the issuance of standards on fair value accounting and the main point of their arguments is that value should be function performance by improving market capitalization a number of time more that the book value of its equity. They were of course referring to results of strategy as in the case of a novel distribution, marketing strategy and excellent execution.
The authors in effect saying the creating value by adjusting figures using a higher value would not serve a good purpose (Cataldo and McInnes, 2007). Thus Cataldo and McInnes, (2007) suggested instead that need for the conservatism and professional skepticism of the accounting profession which are more valuable to modern economy. They argued that structural limitations of traditional accrual accounting are well understood by sophisticated financial statement users, and, far from being irrelevant, since the same have served well over a prolonged period of economic dynamism and value creation.
The reiterated earlier commentaries on the SFAS 157 exposure draft which deals with the same issue of fair value measurement as in SFAS 159 where it was found by earlier critics that investors are served at best the limits of the accounting model are recognized by standards-setters under the assumption that said model measures, records, and summarizes past transactions and events. They therefore fear the increased inadequacy in case of further departure from the baseline of recording past transaction (Cataldo and McInnes, 2007).
As to how will this statement change current accounting practices, Cataldo and McInnes, (2007) maintained that the fair value option asserted by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates and that a business entity will be required to l report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Even a not-for-profit organization must report unrealized gains and losses in its statement of activities or similar statement.
One could now clearly imagine how companies would be adjusting their financial statements and the same would clearly violated the rules on the principle of conservatism that has long been there. 2. 3 Examples of its practical application. To apply this principle a company whose assets were acquired at the cost of $50 million a year ago may be revalued today at its market value of say $ 75 million if that is the current market value of the same asset.
The practical effect of this is that it will increase the assets of the business making the revaluation and will in effect make the good the financial position of the company even in the absence of corresponding improvement in its financial performance as may be evidenced in the balance sheet. 2. 4 Evaluation of attainment of its purpose There is clear evidence of contradiction of the statements avowed purpose of issuing the new standard the very purpose for which accounting has been practiced and done through the years.
Unless the board is planning to demolish the foundations of the accounting profession which is based on conservatism, there seems to be no good reason to uphold the relevancy and validity of SFAS 159 under the present requirement of the business entities and allowing constant revaluation would not speak much of accounting for the past for may more on management accounting that is akin to flexible budgeting and which will lead to no recognizable standard because the market could really be volatile.
The purpose of reducing volatility in reported earnings caused by calculating related assets and liabilities differently without having to apply complex hedge accounting provisions will not be attained. It is submitted that the problem could even be aggravated because no body can really anticipate changes in the market. Companies would be looking more profitable (Brigham and Houston, 2002; Helfert, Erich, 1994) than they actually will be. 3. Conclusion:
This paper has analyzed SFAS159 issued by the Financial Accounting Standards Board (FASB) and found its purpose of giving an option for companies to revalue their assets according to fair value of assets of the business. Its designed purpose was also found to be redundant as stated in an earlier SFAS was already issue. Necessarily the usefulness of the SFAS 159 in today’s accounting environment may not be fully appreciated considering the unresolved issues of making a connection of how and why of fair value accounting under an older standard under SFAS 157.
An example of its practical application was made where the paper found the possibility of producing misleading financial statement for those companies who have the intension of window dressing their financial statement in order to make good in the eyes of the investing public. This paper is expressing concern that FASB might be leaving the traditional accounting without realizing the same and this would causing more problems because companies would be tempted to window dressed financial statement.
4. References: Brigham and Houston (2002) Fundamentals of Financial Management, Thomson South-Western, US Cataldo and McInnes, (2007) SFAS 159: The Fair Value Option. CPAs at a Crossroad? {WWW document} URL , Accessed November 23,2007, http://www. nysscpa. org/cpajournal/2007/807/perspectives/p6. htm FASB (2007) Statement of Financial Accounting Standards No. 159; The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115, NO. 289-A FEBRUARY 2007
Financial Accounting Series Haldeman, Jr. , (2006) “Fact, Fiction, and Fair Value Accounting at Enron,” The CPA Journal, November 2006). ” Helfert, Erich (1994), Techniques for Financial Analysis, IRWIN, Sydney, Australia Meigs and Meigs (1995) Financial Accounting, McGraw-Hill, London, UK Van Horne (1992) Financial Management Policy, Prentice-Hall, Inc. , London, UK
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