AFP Annual Conference – Los Angeles, October 21, 2008, – Reval, a global leader in financial risk management and hedge accounting solutions and services delivered under the Software-as-a-Service (SaaS) model, presented today at the annual Association for Financial Professionals (AFP) meeting in Los Angeles on the contentious topic of FAS 157, the Financial Accounting Standard Board’s pronouncement on Fair Value Measurement.
FAS 157 came into effect for fiscal years starting after November 15, 2007 for companies complying with US GAAP. The standard provides guidance on how to fair value, not what to fair value. It also includes guidance on how to present fair value in 3 different Levels, with Level 3 being fair values deemed least transparent. FAS 157 is a principles based standard not rules based and should allow for more flexibility of interpretation of the standard for preparers.
Recently FAS 157 has been blamed for the financial crisis where many banks have been saying that the standard forces banks to mark to market their positions in an inactive market where the fair values are not representative of the true value of the asset. In his speech, Reval CEO Jiro Okochi noted, "I don’t think bank lobbyists and others get it. FAS 157 is not the cause of the financial crisis today and you can’t blame the blood test for the disease. The FSP issued on Oct 3rd addresses how to fair value transactions in an inactive market. It reiterate the principles behind it and says you can use cash flow type models in the event there is no observable market, you just have to have supporting documentation that supports your assumption as best you can."
FASB Staff Position (FSP) October 3, 2008 reiterated its fair value principles with a specific CDO example and how internal assumptions can be used in an inactive market and how broker quotes can be used to support the assumptions. Many of the comment letters submitted by the Oct 8th deadline indicated concerns that while the example was beneficial, the end result was that fair values in an inactive market will still be Level 3 and the broker quotes they obtain are still below actual values since they are distressed prices. "Abolishing FAS 157 doesn’t mean you do not fair value, but just how you fair value. What they should focus on is changing the qualifications for what you fair value and allow for exemptions to put securities in available for sale or trading portfolios into held to maturity portfolios and allow them to be amortized over the life. Again it’s not going to fool any investor, but at least it removes the volatility component," noted Mr. Okochi. The EU and IASB has come out with relaxing the ability to re-classify back to held to maturity, but the US has not indicated following this path yet.
Reval is consistently viewed as the leader in treasury compliance and helps its Global 2000 clients with the complexities of accounting regulations as they relate to derivatives. In recent months, Reval has seen an increased interest in its FAS 157 module, which is fully integrated into Reval’s flagship derivative solution, HedgeRx.
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